20150716 – DOLLAR BULL MODE..

High Low High Low
EUR/USD 1.0964 1.0911 USD/ZAR 12.4533 12.3998
GBP/USD 1.5645 1.5607 GBP/ZAR 19.46 19.38
EUR/GBP 0.7012 0.6989 USD/RUB 57.99 56.42
USD/JPY 123.98 123.71 USD/ILS 3.7940 3.7640
GBP/CHF 1.4923 1.4876 S&P 500 2,120 2,107
GBP/AUD 2.1248 2.1142 Oil (Brent) 57.76 56.91

The pound sterling has been mighty over the last 36 hours. Even as other major currencies, and emerging market currencies have ceded ground to the US dollar, sterling has remained resolute, and for good reason. Comments made by Bank of England Governor Carney yesterday made it clear that normalisation needs to start soon, even if inflation remains low. I couldn’t agree more, but I must confess to some surprise at the statement. Now I should be clear, he gave no indication about timing, only making a reference to the months ahead, and the fact that any rate rises will be gradual but limited. It’s a good start! All other boats were sinking in a sea of green, but GBP was like an inflatable raft yesterday. If dollar strength persists, it is highly unlikely that the pound sterling will be able to buck the trend, I don’t recall that ever happening, the lead weight of it’s bigger cousin, the euro, will do its work and GBP will surely depreciate against the dollar, albeit while still continuing to outperform the euro. This is the normal way of things in a dollar bullish paradigm.

 

It would be wrong to cite the Bank of England Governor’s comments without also noting that Federal Reserve chief, Janet Yellen also made comments that have been strongly positive for her own domestic currency, the US dollar. Her comments came in front of Congress, in an amusing parallel to the venue where the Bank of England Governor spoke. Ms Yellen opined that there is every reason to have increasing confidence in the strength of the US economy despite the recovery having been ‘painstakingly slow’. Her focus is rightly on the US domestic economy and the tightening labour markets, and she seemed perhaps less concerned about the Greek crisis, or indeed a slowing China than maybe in the recent past. But similar to the Bank of England, one gets the impression that interest rate rises are close, in fact sometime in 2015 for the United States. So no surprise that the greenback has been looking perky in recent days.

 

Back to Greece (I do hope you didn’t think we could escape it just yet!) the Greek parliament has voted to back the bailout agreement. Not surprisingly European stocks are flying today, and Southern Eurozone country debt is rallying. Quite a success for Prime Minister Tsipras despite his rather unenthusiastic advocacy of his own agreement, and even if 38 of his own MP’s didn’t back the agreement there were more than enough opposition MP’s to see the vote through with support from 229 of the legislatures 300 members.

 

We have the ECB’s rate decision today, and then more importantly the press conference afterwards. It will be very interesting to hear what President Draghi has to say so soon after his involvement in the Greece crisis talks. There will most likely be volatility around the press conference, but for now it looks like we’re back in dollar bull mode

 

 

 

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20150715 – MORNING UPDATE

High Low High Low
EUR/USD 1.1028 1.0987 USD/ZAR 12.3783 12.3167
GBP/USD 1.5677 1.5629 GBP/ZAR 19.39 19.25
EUR/GBP 0.7046 0.7021 USD/RUB 57.59 55.68
USD/JPY 123.57 123.26 USD/ILS 3.7837 3.7536
GBP/CHF 1.4837 1.4766 S&P 500 2,114 2,106
GBP/AUD 2.1019 2.0897 Oil (Brent) 58.99 58.42

 

This might very well go down as a historic week. 2 deals of potentially game changing significance appear to have been favourably concluded, but in each case observers are as concerned about their imperfections and sustainability as they are excited about the successful outcomes themselves. On the one hand we have the Greek bailout, and on the other we have the Iranian nuclear deal. We might look back in a decade and say, “that was the week”, for good or ill. We cannot know this yet, we are swept helplessly onwards in the relentless currents of uni-directional time.

 

As always with markets, the anticipation has elicited more reaction than the event itself, so the 15% fall in oil price over the last month or so has been followed by a corrective bounce when it became clear that a deal with the Iranians was imminent. Iran should be quickly able to add supply to the market, and over time will be able to invest to expand capacity. I can think of a lot of competitors who will not see this as anything but bad news, but it is what it is. Experts are rushing to downgrade their oil price forecasts for the periods ahead. Bad for producers, but great news for central banks everywhere I would imagine. This of course is as long as the Iranians comply with terms of the deal, it is by no means certain that they will, but economic self-interest will be an encouraging factor.

 

In Greece, Prime Minister Tsipras has already admitted that he doesn’t believe in the bailout deal, but he had no choice but to sign. I’m not sure this is going to inspire the legislature to enact the requirements, but I’m ready to plead complete ignorance where Greek politics is concerned. The bottom line is that in both situations there is a great deal of uncertainty surrounding the willingness of one side of the negotiation table to comply with the agreements. This will keep volatility a bit higher at least in the short term.

 

Yesterday, Governor Carney of the Bank of England put interest rate hikes firmly back on the agenda and the pound ripped higher. Even though he was clear that rises will be gradual and limited GBP/USD moved impressively from the 1.54s to the 1.56s in fairly short order. Bear in mind these comments were after slightly softer than expected inflation numbers in Mr Carney’s Treasury select committee appearance. But this just seems like common sense to me. The UK economy is rock solid, and the more it seems like the crisis in Greece is ending the less the risk of economic contagion to the UK economy, thus the more we should judge the UK economy on its own strong domestic fundamentals.

 

The issues for the Bank of England and Federal Reserve are identical. Solid economic performance but wage growth is some way behind where one might expect at this stage of the cycle. But… normalising interest rates is an important step towards moving on from the Global Financial Crisis. There are huge distortions in the global economy, and policy makers do themselves no favours by maintaining the status quo when it is not necessary anymore. This is why we continue to anticipate USD and GBP appreciation versus other currencies. These are the lead cycle currencies and fundamentals support strengthening. But events of the last week have shown that there is enough volatility to hijack any trend. It might be somewhat delayed but the path ahead is clear…

 

 

 

 

 

 

 

 

 

 

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20150714 – OVER FOR NOW?

High Low High Low
EUR/USD 1.1014 1.0965 USD/ZAR 12.4734 12.4331
GBP/USD 1.5493 1.5451 GBP/ZAR 19.32 19.22
EUR/GBP 0.7115 0.7091 USD/RUB 57.61 54.90
USD/JPY 123.74 123.18 USD/ILS 3.7888 3.7604
GBP/CHF 1.4752 1.4701 S&P 500 2,102 2,098
GBP/AUD 2.0951 2.0798 Oil (Brent) 58.33 56.92

 

A deal has been agreed! But before we all pop the champagne corks there is still a final hurdle. The agreement has to be signed off by the Greek parliament and it is unlikely that the governing party will be able to secure enough votes from within their own party, Syriza. Thankfully the formerly mainstream parties were always going to be more friendly towards the Eurozone, so Prime Minister Tsipras will have to lean on this fact to get the bill through. What a sorry state of affairs!

 

Stepping back from this, I can’t help but opine that the possibility of a future political and fiscal union has received a hammer blow from these recent events. Can you imagine the German electorate (and I’m not even going to bother mentioning the Finns, or Austrians, who are probably more hard-line than Germans) accepting a situation where Greeks and other southern Europeans are permitted direct access to Northern European government coffers? I simply can’t see it. These past few months have exposed the dirty little secret of the European project, as shared as the history is between the various national constituencies of the Eurozone, the cultures are too different, it is almost impossible to envision a time when this will change. Perhaps the British view will finally prevail and a more pragmatic commercialist Eurozone will evolve out of this mess. One can hope!

 

Let’s quickly run through the anatomy of the agreement:

  • This is a 3rd multi-billion euro bailout for Greece, by its Eurozone partners
  • Greece will be required to pass into law the terms of the bailout before the funds are released. This is the work that the Greek parliament has to do
  • Greece must request continued support from the IMF, whose program was due to end in 2016
  • Greece must broaden its tax base and in particular consumer taxes, and generally increase its tax revenue
  • The pension system must undergo extensive reforms to make it viable
  • Greek statistics agency must be made independent. No more dodgy numbers that got them into the Eurozone in the first place!
  • Enact legislation that ensures the labour markets become more flexible. Industrial action, collective bargaining, and collective dismissal laws will have to be looked at
  • Enact quasi-automatic fiscal rules to ensure missed budget surpluses are solved with spending cuts
  • Reform the civil justice system, and capture cost efficiencies

There’s more, but I’m sure you get the picture. These are all sensible requirements that will give Greece a chance. If these changes are implemented Greece could well become an efficiently governed modern European country. We can all hope.

 

The currency markets have been reacting predictably to these events. Once the crisis has been shown to be largely behind us, the markets will look to the next major issue. This clearly has to be about general risk sentiment (positive) and US interest rates, these are both US dollar positives. And accordingly the euro and other major currencies have been weakening since Monday morning versus the greenback. I hardly need to tell you that equities have greeted the news with some decent rallies over the last 24hrs. It’s been a good few days and the signs look set for more US dollar strength.

 

We expect to see some further volatility as the Greek legislature comes to terms with the rather humiliatingly prescriptive nature of the bailout terms, but in the end I would expect these requirements to be signed into law. Northern Europeans will probably see that as an end itself, but call me cynical, it’s not clear to me how effectively these new laws will be applied. Execution is everything! Only time will tell. The point I am trying to make, is that while the recent crisis may well be over, it is not clear to me that this is the last Eurozone crisis, it might not even be the last Greek crisis..

 

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20150713 – MORNING UPDATE

High Low High Low
EUR/USD 1.1198 1.1089 USD/ZAR 12.5465 12.3837
GBP/USD 1.5553 1.5488 GBP/ZAR 19.48 19.22
EUR/GBP 0.7203 0.7147 USD/RUB 57.14 55.54
USD/JPY 123.10 122.17 USD/ILS 3.8023 3.7425
GBP/CHF 1.4639 1.4525 S&P 500 2,086 2,060
GBP/AUD 2.0939 2.0780 Oil (Brent) 59.02 57.12

What price Greece staying a part of the Eurozone? That price might be as high as fiscal sovereignty, such is the loss of trust between debtor and creditors at the moment. Or at least creditors of a northern European persuasion. This is one of those difficult situations where it is easy to comprehend both sides of the argument. Would you want your country to surrender to external economic supervision? Would you be willing to lend to a debtor who has shown absolutely no evidence whatsoever of being a good credit risk? One thing must be clear by now, the Greeks have surely understood that Eurozone leaders are in a hard-line mood, the question is whether any agreement can be sold to the Greek people in time for an agreement to be made.

 

We will keep today’s blog short, because this crisis is the critical episode over the weekend, and the coming days. As fraught as discussions have been this weekend, the euro is trading comfortably within the range of Friday’s price moves. As things stand it seems likely that an agreement will have a positive effect on the euro, given the fact that EUR/USD is currently trading near the top of its daily range and the Eurozone’s ultimate flight to safety asset – bunds – have sold off slightly, the market is leaning in this direction. This is further confirmed by the strong start in the European equity markets.

 

News is likely to be fluid over the next 24 – 48 hours. We will be sure to tweet breaking news if it points towards resolution or the opposite.

 

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20150710 – MORNING UPDATE

High Low High Low
EUR/USD 1.1135 1.1031 USD/ZAR 12.5231 12.4266
GBP/USD 1.5417 1.5363 GBP/ZAR 19.26 19.13
EUR/GBP 0.7225 0.7171 USD/RUB 57.42 56.08
USD/JPY 122.05 121.27 USD/ILS 3.8026 3.7650
GBP/CHF 1.4607 1.4546 S&P 500 2,073 2,045
GBP/AUD 2.0659 2.0536 Oil (Brent) 59.75 58.60

You can never underestimate the importance of the right personality in negotiations. It is just possible that the new Greek Finance Minister, Euclid Tsakalotos, is buying in to the process more readily than his presumably hard line leftist predecessor Yanis Varoufakis. That has to be the hope, as the Greek government has submitted new plans to Greece’s creditors that looks rather close to what creditors were seeking two weeks ago:

  • An overhaul of the system for V.A.T
  • And re-working of the pensions system

You may recall that these were precisely the issues that were rejected by the referendum just last weekend. I’m not even going to try to rationalise the logic of this, but perhaps with a first name such as he has, the Finance Minister has done the maths, and considers a successful negotiation the best solution for Greece. If this were football it would be the last minute of extra time and the referee is taking every opportunity to check his watch. It’s really that close now. By all accounts the plan was approved by the Greek cabinet despite some last minute objections by the most left leaning cabinet members. Tsipras has stated that the Greek government is ready to compromise, let’s see where it leads us.

 

It’s always interesting hearing anecdotes on the ground, and according to a story in the Financial Times this morning, the Bulgarian Lev, the currency of the Greece’s north eastern neighbour is now good for use in some establishments in parts of Greece. That tells us a lot. Psychologically the Greeks might just be getting used to life without the euro.

 

As expected the Bank of England kept interest rates unchanged at 0.5% yesterday. No one was expecting otherwise. Governor Carney has warned that while inflation remains low at the moment, it is expected to pick up going in to the end of the year. The expectation is for the first hike to happen sometime in the first half of 2016.

 

There isn’t much significant macro data published today. In the Far East, Chinese equities have continued their recovery with shares higher today. It has been interesting watching how the Japanese yen has been used as a flight to quality resource in the recent situation. Today USD/JPY is slightly higher (despite the dollar being generally weaker against other currencies) which might be an indication that normality is returning. For now it looks like investors are suitably impressed with the credibility of the attempts made by Chinese authorities to stabilise the market.

 

This morning currency markets show a slightly weakening US dollar, it looks as if the market is taking a breather from the moves of earlier in the week. We still contend that the general trend is for a stronger US dollar, but it might take more news from Greece to add impetus to the currency markets.

 

 

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20150709 – THE BOY WHO CRIED WOLF

High Low High Low
EUR/USD 1.1126 1.1063 USD/ZAR 12.5934 12.4740
GBP/USD 1.5422 1.5356 GBP/ZAR 19.38 19.20
EUR/GBP 0.7224 0.7196 USD/RUB 57.76 56.60
USD/JPY 121.54 120.46 USD/ILS 3.8067 3.7709
GBP/CHF 1.4555 1.4510 S&P 500 2,062 2,045
GBP/AUD 2.0783 2.0540 Oil (Brent) 58.20 57.14
12.5478 12.4234

Since I started off yesterday’s blog about the falling Chinese equity markets, it’s only fair that I update you about it. The index I showed you yesterday is up 17% today. Go figure! Well actually it’s not entirely random, Beijing have introduced measures to boost liquidity and calm panicking investors, it appears to be working. Margin requirements have been relaxed, banks are now permitted to lend to companies wishing to purchase their own shares, even the police are involved, with announced plans to thoroughly investigate any incidences of “malicious” short selling, and here’s one I like, investors (read senior execs and board members) with more than 5% stakes in a company are banned from selling shares! You can’t make this stuff up. This might slow down the decline, but these aren’t positive fundamentals supporting stocks, so there is no reason for the deleveraging not to continue. Expect more exciting days ahead.

 

Greece has heavyweight backers and I’m not talking about Russia. Both the United States and the IMF are urging debt relief for Greece. I can understand the sentiment if you look at Greece in isolation, if in fact Greece was the only Eurozone country in crisis then debt relief would be the right thing to do. But Spain, Portugal, Italy and Ireland have all had difficulties since the global financial crisis as well. If you give relief for one country aren’t you likely to be asked by others? No…. unfortunately debt relief is a line that will be terrifying for Eurozone creditor governments to cross, and it is impossible to imagine their electorates would permit it. Perhaps the tough stance of the creditors is working because Greece has proposed a new plan over 3 years, with promises of serious reforms to come in the next few days. I imagine Eurozone creditors are rather like the villagers in the town with the sheep boy who had amused himself by crying wolf. There will be some scepticism, and somehow for this crisis to be resolved, trust has to be rebuilt. I fear the onus is on the Greek side, and we can only hope that these proposals are being put together in good faith.

 

Yesterday we saw sustained dollar strength, indeed the bearish momentum from the day before was so strong that the probability of the 1.14+ high in EUR/USD being the start of the next phase of dollar strength is rising. This morning we are seeing that bullish dollar momentum being somewhat reversed, but this has the feel of short term traders booking profits, I fully expect the next impulsive moves to be in favour of the dollar. Still.. what is interesting to observe is the fact that the euro has  not been participating in this anti-dollar recovery. This speaks to the weakness of the single currency, and the view that it will be the weakest horse when the dollar bull trend continues.

 

We have the Bank of England’s monetary policy decision to look forward to later, plus some jobless claims data in the US. I don’t believe anyone expects any change in interest rates just yet in the UK. I would expect them to follow the U.S, and frankly it would be surprising if they do anything this year. The UK budget announced yesterday will be as good as an interest rate hike for activity in the UK anyway!

 

 

 

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20150708 – DAILY UPDATE

High Low High Low
EUR/USD 1.1032 1.0974 USD/ZAR 12.5478 12.4234
GBP/USD 1.5468 1.5427 GBP/ZAR 19.39 19.20
EUR/GBP 0.7139 0.7108 USD/RUB 27.70 55.99
USD/JPY 122.58 121.77 USD/ILS 3.8046 3.7669
GBP/CHF 1.4653 1.4580 S&P 500 2,084 2,057
GBP/AUD 2.0928 2.0726 Oil (Brent) 58.21 56.36
12.5478 12.4234

Over the last week I’ve often mentioned the Chinese equity markets, and the dramatic goings on there, but perhaps a picture speaks a thousand words. Look at the chart below. The market closed just shy of 10% down, but has been as much as 13% down today. These are dramatic moves by any measure, and probably represents a larger loss of financial wealth than anything that happens in Greece from this point on. Fortunately such losses are likely to be dispersed amongst a very large group of people so this situation is considerably less tragic than anything going on near the Mediterranean. But as I’ve mentioned before, there could be global implications, whether it’s contagion to other equity markets around the world, social instability in China, or politicians in China implementing policy on the hoof in reaction to these events. It will bear watching.

20150708_china

The industrial production data published in the UK showed a solid improvement of +2.1% versus 1.2% previously. For now it seems the UK economy is shrugging off any tailwinds related to the Greek crisis. It is uncertain if there will be tailwinds, one could imagine some, but this is for the future clearly, given the better than expected industrial activity currently.

 

In Europe, it appears that time is running out to avoid Grexit. Rather than bolstering the position of the Greek government, the No vote looks like it further limits what creditors will find acceptable in terms of proposals from the Greeks. The Eurogroup has effectively given Greece a deadline to come up with comprehensive proposals – 5 days, the time for interim agreements is over. Every day this crisis continues, the probability of Grexit rises. The ECB estimates that Greek banks can hold on until the end of the week, but as things stand there are no plans to extend liquidity further than that. It’s hard to see how Greek banks won’t start to go under.

 

Yesterday saw fairly significant falls for both EUR/USD and GBP/USD, in fact over the last couple of days EUR/GBP is actually a bit higher. Meanwhile the Japanese yen has acquired a bit of a safe haven status given the calamity going on in the Chinese equity markets. The broad picture still shows a steadily appreciating dollar, but at the moment I wouldn’t characterise is as a general move. That said we continue to see dollar strength as the path of least resistance, with the most likely victims being the euro and the pound sterling. Oil sensitive currencies like the Russian rouble and naira should also be vulnerable to weakening at this time. While support levels are maintained in the US equity markets the red warning light will remain switched off, but this is a fluid market with 3 very significant occurrences so far this week:

 

  1. Chinese equity market falls
  2. Oil price falls
  3. Greek crisis

 

The light could start flashing at any time…

 

 

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20150707 – DAILY UPDATE

High Low High Low
EUR/USD 1.1060 1.1018 USD/ZAR 12.4581 12.3607
GBP/USD 1.5611 1.5560 GBP/ZAR 19.40 19.27
EUR/GBP 0.7089 0.7071 USD/RUB 57.82 55.78
USD/JPY 122.81 122.53 USD/ILS 3.7873 3.7564
GBP/CHF 1.4733 1.4698 S&P 500 2,086 2,068
GBP/AUD 2.0892 2.0771 Oil (Brent) 57.77 56.70

 

The price of crude oil fell dramatically yesterday, with the near Brent contract down 4.4% at the close, and as much 5.6% intra-day. The most likely cause in my view is the market is starting to discount Iran reaching a nuclear deal with the west. Once that happens, it becomes easier for Iran to normalise relations with the west – another feather in President Obama’s cap – and an opportunity for the country to start exporting oil again. This would be huge as Iran was always one of the larger OPEC producers, so much additional supply will naturally impact the demand-supply dynamics of the black gold. I am rather more sceptical about laying the blame for this move on the Greek crisis, it doesn’t strike me that oil was a particularly popular risk asset, it wouldn’t make sense to deleverage oil holdings on the back of the crisis. We will move on to the Greek crisis in a bit, but it is worth noting that this bearish oil move was due. As I mentioned earlier on in the year, the bounce in the price of crude oil was corrective, and the downward trend and a possible test of the lows was very likely. I believe this is what we are seeing, and this will have implications for commodity exposed currencies, particularly the currencies of oil producers – Russian rouble, Kazakhstani Tenge, Nigerian naira and Mexican peso to name a few. The chances of these currencies coming under pressure if this bearish move persists has unquestionably risen. I will monitor the situation closely going forward.

 

Yesterday we saw solid ISM data published for the non-manufacturing sector in the United States, although the employment component was indifferent. Overall the data was encouraging, and it is further evidence of the sustained strength of the American economy. Other data that came out yesterday pointed to a continued and strengthening recovery in Spain (Mr Tsipras are you watching?), and somewhat less inspiring factory orders data out of Germany. Overnight the Reserve Bank of Australia kept rates on hold, which was as expected, and we have already seen industrial production data published in Germany which backs up the somewhat stagnating factory orders data we saw yesterday. Later on today we get industrial production data in Britain, as well as the NIESR GDP estimate for the UK. And perhaps most importantly there will be yet another Eurogroup meeting as well. I believe that the message from the financial markets is that the Greek crisis is fairly well discounted already, but there is still a risk of heightened volatility as we are exhausting the known unknowns, and moving towards unknown unknowns, if you will excuse my Rumsfeldian speak. It is notable that equity markets which were close to support levels bounced fairly aggressively yesterday, and look to be off to a good start today. It is no surprise that there is some gentle dollar strengthening that is occurring in sympathy with the mild risk on tone in the equity markets. That is as it should be, given the paradigm we have observed over the past year.

 

That leads us nicely on to Greece. When Merkel and Hollande met yesterday, they clearly stated that the ball is in the Greek court. Perhaps they have made the right first step with the resignation of the rather hardline leftist Finance Minister, but I would imagine that there are pretty severe trust issues now. I’m not sure there is anything the Greeks can propose that will be trusted by the more conservative northern European members of the Eurozone. Agreement is one thing, but implementation is quite another. No one really believes that agreements will be adhered to by the Tsipras government, and worse still no one is sure they have the experience or competence to effectively manage the situation on the ground. It promises to be a difficult few days of negotiations, but the odds of Grexit are rising. Make no mistake, financial counterparts are already starting to speculate about what a new Greek currency would look like. This is all well and good, the key point is that there is no panic at the moment. Best we can hope for, and on that basis we continue to look for a strengthening of the US dollar across the board, new lows in EUR/GBP are likely, and there is a risk that commodity exposed currencies will start to underperform the lot.

 

 

 

 

 

 

 

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20150706 – NO!

High Low High Low
EUR/USD 1.1114 1.0969 USD/ZAR 12.4448 12.3005
GBP/USD 1.5599 1.5537 GBP/ZAR 19.39 19.14
EUR/GBP 0.7144 0.7054 USD/RUB 57.08 55.33
USD/JPY 122.90 121.76 USD/ILS 3.8148 3.7542
GBP/CHF 1.4717 1.4623 S&P 500 2,071 2,043
GBP/AUD 2.0887 2.0687 Oil (Brent) 60.90 59.71

 

It finally happened. There have been many insightful articles over the last decade, and indeed even preceding the inception of the euro, which have postulated that countries exiting Project Euro was a possibility and indeed a probability. The one size fits all concept for a disparate group of countries with different levels of economic development, and vastly differing cultures, was always viewed with suspicion by astute observers. But over the last decade we have seen an unstoppable expansion of the great European project with eastern expansion… until yesterday evening. The Greeks voted, and they said no! No to continued austerity, no to multi-generational penury, no to the terms of the bailout. It’s difficult to ascertain what the long term consequences for the Eurozone will be, and it is commonly accepted that the Greek situation is unique, but you can’t help but wonder if the political calculations of fringe groups within the Eurozone will be forever altered by events on the south eastern edge of the Eurozone. And who knows, whether joining the Eurozone might be less appealing to those who are not yet in.

 

What will Eurozone leaders do now? We will surely get a chance to see firsthand if the firewalls the ECB has put in place are as water tight as they claim. My best guess is that there is a minimal risk of contagion. Any banks who still have significant exposure to Greece have only themselves to blame, but one can’t imagine that risk sentiment will recover quickly. This morning European stock exchanges are down as one would expect. This is a tough time for the Greeks, my heart goes out to them, but it is also a time of great opportunity. Freed of the straight jacket of creditor demands, Greece could forge ahead and make its own future. This probably means a return to the drachma (New Drachma?), and the troika, ECB, IMF and the EU will suffer huge losses as and when Greek debt default follows. It would make no sense to reject the bailout without defaulting after all. But wait.. let’s look at the impact this momentous decision is having on the markets. EUR/USD is down 0.5%, and GBP/USD is virtually unchanged, more importantly EUR/GBP – a purer measure of Eurozone woes – is down about 0.4%. Markets have clearly been prepared, and this outcome has been fairly well discounted. Furthermore Asian equity markets appear to have focussed on their own domestic concerns. As one would expect, markets don’t wait for events, they anticipate. The uncertainty will focus on what decisions political leaders and monetary officials in Europe make in response to the events in Greece. I would expect that there will be efforts to ensure that Greece stays a part of the EU, even if it exits the euro. But none of this is certain yet. We will find out in the coming days.

 

On the other side of the world, significant events are occurring as well. Since mid-June the Chinese equity markets have fallen almost 30% to the end of last week. There was no fundamental reason for this, what we’re seeing is what happens to markets that run up with no rational reason supporting the move. Gravity will always win. The question now is whether the colossal loss of wealth will have an impact on the spending habits of the retail investors responsible for the move. Are there political consequences we should be concerned about? I’m no China watcher, and it would be foolhardy to speculate on the basis of Western preconceptions. All I can say is that this situation needs to be carefully monitored, it could have consequences that affect all of us. Who knows.. Overnight, Beijing, pledged to provide liquidity. This is the most recent of a number of moves in recent weeks designed to mitigate the fear and panic on the local stock market. As a consequence we have seen a 5% bounce in the market. Whether this will sustain is unknown, but clearly the fear is infecting the authorities as well. It is unlikely that a new buying mania will ensue, human behaviour being what it is, we should expect efforts by individuals to de-risk after this recent harrowing lesson. As we’ve have mentioned before, stocks can go down as well as up!

 

We continue to anticipate gentle dollar appreciation, but it’s worth noting that key equity markets hover at the bottom of recent ranges, any downside break could transmit to the currency markets. If the euro remains a funding currency as we expect, don’t be shocked if it appreciates in response to a sustained bout of negative sentiment.

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

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20150703 – UP AS WELL AS DOWN

High Low High Low
EUR/USD 1.1109 1.1081 USD/ZAR 12.2986 12.2335
GBP/USD 1.5624 1.5602 GBP/ZAR 19.20 19.07
EUR/GBP 0.7115 0.7098 USD/RUB 56.09 54.47
USD/JPY 123.19 122.81 USD/ILS 3.7898 3.7558
GBP/CHF 1.4737 1.4701 S&P 500 2,080 2,074
GBP/AUD 2.0630 2.0413 Oil (Brent) 62.42 61.85

If you compare the highs and lows shown in the table above to what I published yesterday you could be forgiven for thinking that both are cut outs of exactly the same day just slightly different timing, perhaps half an hour apart. Prices are not far removed over the last 24 hours, despite the much awaited US non-farm payrolls employment report. The employment data was pretty much in line with expectation, albeit with relatively disappointing average hourly earnings data, which showed no wage growth over the month in comparison to economist forecasts and the previous month numbers of +0.2%. The unemployment rate came in lower than expected at 5.3%, but the participation rate (the percentage of the civilian labour force that is in work, or seeking work) was lower than the previous month at 62.6% and remains at generational lows. I’m no employment expert but it wouldn’t surprise me if demographics, specifically an older population has something to do with this. The bottom line is that I don’t think this employment report affects the decision making process either way. There really wasn’t much to grab on to for the currency markets and I suspect Federal Reserve policy makers will feel the same way. We watched the markets closely as the numbers came out, as is our habit, and after a brief dollar sell off, the markets reversed and were back to where they were, before the number, in no time at all. I can only imagine the dollar sell off was a reaction to the flat wage growth number. Certainly if we had seen signs of accelerating wage demands it would have given US policy makers a strong incentive to begin the normalisation process as soon as possible.

 

The IMF has published a report which almost gives the impression that the global institution wants to go all in with regards to Greece. The report suggests that Greece should be granted comprehensive debt relief and the maturities on their outstanding debt should be doubled from 20 to 40 years. While this is a balm for Syriza, the governing party in Greece, the report does make the point that the new government has certainly not helped the situation. This weekend promises to be hugely significant with the referendum scheduled for Sunday, but we are already hearing statements from the Greek government that negotiations will continue next week. It makes you wonder when we’ll get a final final decision. It might just be taken out of their hands, as Eurozone central bankers meet on Monday and if they toughen their stance on emergency loans to Greek banks they could effectively make all other discussions redundant if they force Greek banks into bankruptcy. That could be Grexit by force.

 

Today is a holiday in the United States, we are therefore expecting activity to be relatively muted. Don’t tell that to investors in the Chinese equity markets, as we’ve seen another 4 – 5% decline in the market. Retail investors are learning the hard way – the good way – that stocks can go up as well as down. This is a guideline we will all do well to remember this weekend. The outcome of the referendum could cause a spike in volatility next week, manage your risks accordingly

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

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