20150828 – DID BLACK MONDAY REALLY HAPPEN

Good morning

High Low High Low
EUR/USD 1.1270 1.1231 USD/ZAR 13.1580 13.1070
GBP/USD 1.5444 1.5398 GBP/ZAR 20.30 20.20
EUR/GBP 0.7309 0.7286 USD/RUB 67.28 64.25
USD/JPY 121.32 120.86 USD/ILS 3.9462 3.9037
GBP/CHF 1.4905 1.4848 S&P 500 1,995 1,979
GBP/AUD 2.1561 2.1398 Oil (Brent) 48.83 47.15

So after witnessing a black Monday markets have brushed themselves off and back on the march. Was it perhaps in my commentary a couple days ago, “AM I CONCERNED, NO” that freaked people out 🙂 ….

The big news overnight and the reason why the USD rally (and stocks rose over 2.5%) reaffirmed itself was following the Commerce Department revised second-quarter US GDP growth upward to 3.7% from 2.3%. Could it be that the exceptionally strong growth in the world’s largest economy is deflecting from the bad news out of China and the second biggest economy globally. Granted countries that are heavily reliant on a strong China (Australia, Canada) will continue to see their currencies affected by the slowdown. But what everyone wants is a strong US economy, and that is something they are getting. Only a few days ago economists and analysts were saying the prospect of a US rate hike in September had dropped from over 50% to 26%….I wonder what those same people are saying now. I jumped into the fray and also wondered if the time was right and then after careful thought and my comments a few days ago about whether I was concerned or not leads me to think the US rate hike will PROBABLY still happen (albeit by a 0.25%) with the FED then holding to see how that rate hike feeds through the US and global economies. What they don’t want to do is spook the market and set things back by hiking too early, but if one looks solely at the US economy (which they can’t of course) then hell ye, the timing is ripe for a rate hike. But that decision lies with Pres. Yellen and her FOMC colleagues who no doubt will be having late nights leading up to the 17th September.

Oil had a rebound after stocks surged and 2 incidents affected oil production in Nigeria. With the price of petrol down to 1.079 let’s hope the spike doesn’t set back the recent falls at the stations.

A very good friend (Guenter) at a large Swiss bank wrote this morning in his daily commentary (I hope he doesn’t mind me quoting him) “In brief we expect the PBoC to continue defending the CNY with FX reserves for a while, before resorting to the tightening of existing controls and delay of some capital account opening measures. We believe this may not be very effective as the exchange rate has not been allowed to adjust sufficiently. Sometime next year we may see the CNY being allowed to depreciate again. We maintain our end-2015 USDCNY forecast of 6.5, but revise our end-2016 forecast from 6.6 to 6.8. As we expect a further decline of in China’s FX reserves in the coming year, we see multiple RRR cuts from the PBC to help stabilize domestic liquidity conditions”. I am glad to read these comments as these are fundamentals I have been talking about for months now, Rate cuts, QE, exchange controls and currency devaluations. The US did it and did it well….cast your mind back to the USD falling to over 1.60 to the EUR and over 2.00 ag the GBP not to mention the $50bn a month QE and rate cuts  to almost 0.00-0.25%. Took over 6 years but America is BACK. I think you get the point I am making (Greece are you reading this?). Short term pain –> long term gain.

On the FX volatility front, to be expected, EUR vols have fallen in line with the stock rally and USD rally with speculators coming out the woods to buy both GBP and AUD vol as the currency weakens back towards tipping levels. With the UK long weekend holiday expect fewer GBP buyers given the extra day in time decay. But as I have been saying, with the summer holiday almost over and traders back to their desks, liquidity is improving and more importantly positioning is taking place for the next 6 months. As far as my thoughts on the currencies, my view stays the same, EURUSD heading to PARITY and GBPUSD heading towards 1.40-1.45 despite the rate hike threats in Q1 2016. It is a USD rally not a GBP weakness.

And one last comment, remember what I said about the ILS and how strangely stable she was at 3.82/3.85 – well she finally took off and fell to 3.9250 at the time of writing. Good things don’t last forever and I fully expect over the coming months the ILS to weaken beyond 4.00 in line with other major EM currencies.

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20150827 – DAILY UPDATE

High Low High Low
EUR/USD 1.1365 1.1310 USD/ZAR 13.1397 13.0300
GBP/USD 1.5510 1.5459 GBP/ZAR 20.34 20.17
EUR/GBP 0.7336 0.7301 USD/RUB 69.40 67.31
USD/JPY 120.37 119.79 USD/ILS 3.9457 3.9020
GBP/CHF 1.4781 1.4726 S&P 500 1,953 1,938
GBP/AUD 2.1828 2.1672 Oil (Brent) 44.79 43.48

The more I look back at the volatility of the last few days, the more I am attracted to the idea that we have just experienced an October ’87 type event. And as much as most will recall that ‘Black Monday’ in 1987 turned out to be one of the great buying opportunities, my perspective is more in terms of the policy errors that occurred as a result of the stock market collapse at that time. Central bankers added liquidity into the market to counter fears of systemic collapse, and to boost confidence. Within a few years it was widely recognised that policy makers should have largely ignored the market moves and focused on the real economy which had been doing ok. Instead their actions encouraged a belief that central banks would always be there to bail them out, I can’t say they’ve been wrong – the ‘Greenspan put’ is part of the lexicon now! Today, the problem is not that central banks are going to take actions to soothe a fearful market, in fact volatility is slowly stabilising. What is most concerning is that the actions we – the market – had come to expect look further away now than before recent events. Deep down I’m not sure anyone really expects the Federal Reserve to hike rates this year now, but I believe that’s exactly what they should be doing. Bill Dudley the Governor of the New York Fed seems to have been pouring cold water on a September interest rate rise last night. Now he’s not exactly known as a hawk but there’s no reason to believe he isn’t communicating the majority view of the decision makers – plus ça change, plus c’est la même chose.

 

As I’ve mentioned many times before, during every great dollar rally there have been significant periods of time spent with correcting and directionless markets. The last 5 months, since the middle of March when the greenback started to give back some of its gains, might seem like a long time, but historically there have been periods 2 or even 3 times longer that have constituted a mere corrective blip in a long term upward trend in the dollar. That scenario still remains my base case, but there is no question that from an Elliott Wave Theory perspective EUR/USD has completed a beautiful a-b-c correction from the March lows. I must say, I find the bullish-dollar-into-the-end-of-the-year scenario highly appealing because (given the dollar up, equities up paradigm in place) it is consistent with strongly rallying equity markets for the final quarter, even if I don’t give much credence to Presidential Cycle theories, that scenario fits into my overall view of what could be taking place in the macro world at the moment. I am obliged to qualify that view with another possibility, one I don’t want to really entertain… this suggests that we are in for another bout of falling equity markets. While I understand the technical pattern that makes this a possibility, I can’t really find the narrative to support this. I should add that the bearish scenario would be invalidated if we see the S&P 500 up another 3% from current levels.

 

We get GDP data from the United States this afternoon. While it’s a lagging data point, it is very useful information, and one would expect market participants to focus on it. Markets continue to recover strongly, but volatility remains elevated. When you consider that even Chinese equity markets are not up over 12% from their recent lows it is reasonable to believe (hope?) that we have seen the worst already. All this translates into a currency market where the US dollar should continue to strengthen against its peers today, but it wouldn’t surprise me if the greenback lags behind emerging currencies, as improving risk sentiment will also be of benefit to the less liquid currencies.

 

 

 

 

 

 

 

 

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20150826 – AM I CONCERNED, NO

Good morning

High Low High Low
EUR/USD 1.1562 1.1464 USD/ZAR 13.2197 13.0768
GBP/USD 1.5721 1.5683 GBP/ZAR 20.75 20.50
EUR/GBP 0.7364 0.7301 USD/RUB 72.23 68.29
USD/JPY 119.84 118.44 USD/ILS 3.8869 3.8374
GBP/CHF 1.4847 1.4722 S&P 500 1,908 1,854
GBP/AUD 2.2125 2.1908 Oil (Brent) 43.99 43.09

So the PBoC cut interest rates as widely predicted and expected. At first the global stock markets rallied (over 3%) but then (go figure) the DOW gave up those gains and ended up falling 2% at the close. European stocks already on the back foot this morning expected to open up down an equal amount. Look, we are by no means through the worst and you can expect additional volatility and losses being experienced. However as my subject line says, I am not overly concerned. The reason, I truly believe the PBoC in conjunction with the FED, ECB, BoJ are going to do everything that is needed to get China “back on the map”. Stocks have for the most of the past year rallied handsomely on the back of the US recovery. However the US does not exist alone and therefore financial ripples being felt elsewhere will have a marked effect on the US economy. I have no doubt after the Greek fiasco that lasted for the most part of 2015, the FED were relieved to see that issue put to bed….then as soon as that happened another “leak” burst the bubble with China growth. The imminent FED rate hike that was widely expected to take place in September is now in serious jeopardy and if the Libor market rates are anything to go by that expected rate hike is now likely to be put on hold until the situation calms down in China (and globally) and markets stabilise. President Yellen must be having a terrible summer given that all the signs locally gave her and the FOMC the firepower to raise rates for the first time in over 6.5 years. But and this is a big but, given what has happened in China surely the FOMC are now going to have to wait at least till October (though this is doubtful as there is no press conference scheduled along with the FED’s interest rate decision that day) to see if the time is right.  That basically leaves December 16th as the next best date. There is absolutely no need to rush the situation and the last thing the FED need is to raise US rates which in turn have a ripple effect and send the markets lower (increased demand for USD and US assets > desire for Chinese productivity). In fact Mohamed El-Erian, chief economic adviser at Allianz SE commented “The window was open a few weeks ago when you had strong domestic economy, which you still do, you had pretty neutral international economy and the financial markets were in relatively good shape.” Adding (markets) “have turned violently against the Fed, so I don’t think the Fed will take the risk of hiking in this environment, because if it makes a mistake, it will end up making a mistake that will spill back on to the U.S. economy.”

After trading over 1.17 on Monday, the EURUSD has settled back to trade at 1.1480 as I write this. Volatility rates still remain on alert given the recent FX moves. With the Chinese issue still very much front page news, FX option traders will remain cautious about selling volatility on the expectation that the markets will calm down soon enough. Additionally with the 1m expiry date including the FOMC decision, market makers will no doubt be happy to own gamma, not to mention that traders are returning to their desks after the summer holidays thus expecting to add to the already prevalent volatility. As far as China are concerned, I think there will be ADDITIONAL RATE CUTS, INCREASED QE measures, and ADDITIONAL CNY devaluation. As growth and productivity improves in the US, local importers will take advantage of the depressed CNY to increase demand for local goods (selling USD to buy CNY). Additionally as US domestic demand indicators remain solid, this in itself will help China as the “feel good factor” spreads not only to China, but globally. Given what I have said above, you have to keep mindful of the fact that growth does not happen overnight and it could take many months for the Chinese markets to stabilise and return to growth levels that the latter so crave. Once the market has finished its recent sell off you can expect things to initially stabilise and then return to normality and that is the reason why i said AM I CONCERNED, NO.

The GBP has for most part stayed out the “party” though we did see GBPUSD rally up just above 1.58 yesterday before the PBoC announcement and is currently trading just shy of 1.5700. Vs the EUR however the GBP has weakened considerably and currently trading around 0.7325…overall my medium view remains the same for the GBP to fall to below 1.5000 and 0.7000

 

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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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20150825 – NOT FOR THE FAINT HEARTED

Good morning

High Low High Low
EUR/USD 1.1621 1.1512 USD/ZAR 13.2500 13.0800
GBP/USD 1.5786 1.5744 GBP/ZAR 20.90 20.63
EUR/GBP 0.7367 0.7296 USD/RUB 72.26 68.72
USD/JPY 120.11 118.24 USD/ILS 3.8720 3.8200
GBP/CHF 1.4871 1.4660 S&P 500 1,933 1,871
GBP/AUD 2.2112 2.1774 Oil (Brent) 44.00 42.47

Wow, what a day to be part of the financial markets yesterday. Brings back memories of 2008/2010 markets when the markets remained in the red almost every day. Yesterday as you have by now read was quite possibly a catastrophe. Billions (in every language) was wiped off stocks globally as the Chinese problems finally caught up with the markets. ParityFX has been talking about the Chinese growth and subsequent problems for months now, so it really does raise the question why suddenly. I guess the thin summer holiday markets didn’t help, and one could argue that yesterday’s fall was a culmination of weeks of speculation (as opposed to a gentle daily fall rather). Am I panicking….hell NO. Am I surprised, hell NO. China as we have said is the world’s second largest economy, but more importantly imports everything from A-Z to fuel her internal growth. As China slowed, despite the fall in commodity and oil prices, the orders simply were not coming and as a result companies supplying raw materials to fuel China’s growth have all disappointed. Glencore and BHP Billiton amongst the biggest names to suffer. Granted they are well positioned for a recovery, but that recovery will take time.  Additionally have you not found it strange (as I have repeatedly noted) how QUIET THE US authorities have been about the Chinese devaluing their currency. Trust me when I say this, the world needs a STRONG CHINA and if that means currency manipulation or what ever other “manipulation” then so be it. Countries of that size need big daddy’s help so do not be surprised to see additional rate cuts, more intense QE and continued currency devaluation.

The fall out from yesterday’s stock plunge was felt equally in the FX market. None more so than EM currencies like the ZAR, BRL, IDR, MXN, TRY etc. Plunging over 5% at one point the S. African Rand looked like she was heading for the gallows until the SARB stepped in and in a statement announced ” In the event of developments that threaten the orderly functioning of markets or that may have financial stability implications, the SARB may consider becoming involved in foreign exchange markets to ensure orderly market conditions.” reference the bolded word MAY….well seems the FX markets missed that word and bought the ZAR back to 13.10 before people realised it was a MAY……I have had the pleasure of trading the ZAR for many years back in S.Africa in the days when the SARB ruled and controlled how the currency traded daily. I also remember quite clearly having been limit up short ZAR vol at an average of 4% the SARB stepped aside and the ZAR collapsed from 3.75 to 4.75 in a matter of minutes. Suffice to say that was my worst single day of trading and a lesson learned. Central Banks globally have tried to intervene to “help” their currencies (Swiss for example) but that help can only go so far before the plug is pulled and the fall out is catastrophic. The billions that were lost when the Swiss CB pulled the 1.20 floor….my point is the SARB can put out statements all they like, but what they cannot control is the strength and desire of the financial markets. After all the CB have only so much money they can throw at intervention before it becomes futile (BOJ?)

Markets have stabilised (excl China that fell again o/n), with FX volatility remaining on high alert (though lower than yesterday of course). 1m EURUSD 12.00/12.10, 3m 10.50/10.80 and 1y 9.85/10.00 FX option traders flipped to owning gamma in the event of another fallout. As history and experience tells me, the European Summer is NEVER dull and it is always wise to own gamma and pay decay. Yesterday is a case in point gamma is king.

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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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20150824 – HANG ON TO YOUR HATS!

High Low High Low
EUR/USD 1.1499 1.1369 USD/ZAR 13.7167 12.9241
GBP/USD 1.5700 1.5630 GBP/ZAR 21.61 20.25
EUR/GBP 0.7338 0.7246 USD/RUB 71.86 68.15
USD/JPY 122.08 120.72 USD/ILS 3.9007 3.8590
GBP/CHF 1.4906 1.4692 S&P 500 1,980 1,914
GBP/AUD 2.1788 2.1427 Oil (Brent) 45.73 44.24

The deterioration of global risk sentiment continues apace, this is as bad a decline as we’ve seen for quite some time, and depending on where we close at the end of the month this could be as bad as it’s been since the start of the bull market rally in March 2009. For the record, it would take an additional decline of another 20 points or so on the S&P 500 to fully realise that statistic. Does it really matter though? This is quite enough as far as most would be concerned, the devastation wrought by the Chinese devaluation (for the layman, the Chinese economy is doing badly enough for the authorities to take the extraordinary step that they did) on the commodity complex first and then the wider equity market has rippled across the globe. As I’ve written many times in these blogs, corrections by themselves are by no means a bad thing for the longer term health of markets. The question I’ve been asked a few times in recent days is… is this the end? I would say no, it doesn’t have the feel of a market top, but this is certainly the sort of correction one might expect to see during the mature phase of a bull market. As such I think we are approaching levels where buying opportunities will crop up. Looking at my longer term chart I could easily see the S&P 500 approaching 1850 which would be a further 4-5% decline before any sustainable bounce, but I would not be shocked to see intermediary bounces before that happens. In summary, hang on to your hats, it could be a rocky road in the weeks ahead!

 

As we have noted all this year, the euro appears to have become the go-to safe haven currency, perhaps usurping the Japanese yen which for the last few decades has fulfilled that role (prior to that it was probably the Swiss franc). EUR/USD has all but hit 1.15, and the possibility exists that before all is said and done, and risk sentiment stabilises, we may see 1.18. But if I were still trading a book I would probably close my eyes and sell the bejeezuz out of EUR/USD at 1.18. In the meantime the euro has strongly outperformed the dollar, Japanese yen and pound sterling. This is the inevitable consequence of the ECB’s actions (read quantitative easing) to assist the recovery of the Eurozone economic area.

 

They say a picture paints a thousand words, the Chinese equity markets are down by more than 40% since early June. That’s a grizzly bear of a market! See the chart below, but note that the index is approaching solid support levels – the price range before the break out late last year. These are volatile markets for currencies so some violent swings are to be expected, but the general tone of weakening dollar, strengthening Japanese yen and euro, and rapidly depreciating emerging market currencies and also commodity rich currencies like the Australian dollar should continue to dominate until risk sentiment stabilises. As I said.. hang on to your hats…

20150824_SH_A50

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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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20150821 – GREECE UPSET OVER CHINA

Good morning

High Low High Low
EUR/USD 1.1295 1.1228 USD/ZAR 12.9929 12.9230
GBP/USD 1.5724 1.5679 GBP/ZAR 20.41 20.27
EUR/GBP 0.7195 0.7156 USD/RUB 69.29 66.59
USD/JPY 123.50 122.80 USD/ILS 3.8881 3.8350
GBP/CHF 1.5056 1.5000 S&P 500 2,036 2,011
GBP/AUD 2.1526 2.1368 Oil (Brent) 46.73 46.13

Well well well, just when you thought Greece (AS NOTED YESTERDAY) was out the news, the shock announcement by PM Tsipras that he is resigning and calling a snap election. Rumours were rife over the past month that something like this was on the cards and now its out. Suffice to say we believe the next government will in all likelihood be a coalition government that has in effect already voted in favour of the bailout and in so doing have already received the bailout money from the creditors. Greece also repaid the €3bn back to the ECB that she owed so so far so good. The EUR rose on the back of this news (including of course the selling of the USD on the back of China) and crossed through 1.12 to trade at 1.1265 at the time of writing. FX volatility rates have edged up as a result with the 1m trading 9.90/10.10 (from 9.75) 3m 9.70/10.00 and 1y at 9.6/9.9 in other words it is the front end of the curve that has edged up changing the curve from a see saw to inverted. The market has no doubt been caught wrong footed and with the recent sell off in global stocks on the back of an increasingly worried market over China, one can expect volatility to remain “bid” as a means of protecting against further event risk.

China remains a true problem globally and it has now taken the best part of 2 months for the markets to latch onto this story. We have been writing about the weakness in China for many months now and how the slowdown in growth will affect not only China’s trading partners but the global economy’s as a whole. As I have written many times, the world needs the Chinese economy to be strong because without it everyone suffers. It is one thing for the US economy to grow and show signs of life, its another thing to have the world’s second largest economy faltering. As much as one could argue that the timing is right (within the US) for the FED to raise rates, one could argue that the recent fall in stocks, slow Chinese growth/productivity (manufacturing PMI was published this morning again showing signs of strain at 47.10 from 47.80), the fall in energy/food/metals/commodity prices could be creating one serious headache for Pres. Yellen and the FOMC members on when they should in fact raise rates. I have said this countless times, if they get the timing wrong and raise rates too early it could send the US economy back into free fall which after the awesome work done by the FED would be catastrophic. So the decision on whether to raise or not to raise is quite possibly the most important decision in the past 2 decades.

Then we had that little scuffle over in Korea which added fuel to the fire. One cannot tell what Pyongyang are likely to do but no doubt the 26500 US soldiers based in S.Korea will be on high alert just in case the confrontation escalates. Technically speaking the 2 Koreas have been at war since 1953. This is not the place to comment on N or S Korea and their domestic policies, other than to say this confrontation needs to stop now, for the sake of world peace and security.

Emerging market currencies continue to be obliterated with the ZAR trading above 13 to the USD, TRY touching 3.00, RUB in free fall, not to mention MXN and BRL getting sold off heavily. One should then expect the ILS to begin following suit (I for one am very surprised to see the currency on a 3.8 handle still). As a betting man, I think there is a good chance the ILS starts to play catch up with other EM currencies especially given the recent flat to disappointing data.

So there you have it, the world on the brink of another Korean war, China staggering, stocks obliterated, Greek politics back in the news, London weather cold damp and horrible and most importantly Manchester United lost out to Chelsea in signing Pedro….can anyone find any good news floating around?

20150820 – NOW IT’S ALL ABOUT CHINA

Good morning

High Low High Low
EUR/USD 1.1150 1.1115 USD/ZAR 12.9666 12.8569
GBP/USD 1.5702 1.5659 GBP/ZAR 20.31 20.16
EUR/GBP 0.7106 0.7089 USD/RUB 67.56 66.15
USD/JPY 124.16 123.76 USD/ILS 3.8930 3.8585
GBP/CHF 1.5167 1.5113 S&P 500 2,081 2,070
GBP/AUD 2.1481 2.1284 Oil (Brent) 47.31 46.89

For the first part of 2015 all we could talk and write about was Greece. Now that that has been put on ice, it is now all about China, their “disappointing” growth and recent currency devaluation. Let’s be quite honest here, the world NEEDS a strong China regardless of the contradictions. Commodity countries like S.Africa, Australia, Canada etc have all found their currencies on the back foot as the slowdown in China means less appetite and demand for their products. The lack of rhetoric from the US also raises eyebrows considering the long running debate between the US and China on currency manipulation. True I might not be able to show you evidence of currency manipulation as carried out by the major economies of the world but at least the Chinese are open and do what they need to stimulate growth. In a way I applaud their decision (and I am sure the Emerging markets who rely on China are currently doing the same). The point I am trying to make is countries need to do whatever they have to stimulate growth. Trust me had Greece still had the Drachma it would have devalued by many % points. China has thrown QE at their problem, cut interest rates (and more expected) and now devalued their currency by a mere 3.5% give or take. True this will make their products cheaper but exports are the lifeline of Chinese growth and no doubt this will go some way to giving growth a boost. Obviously stock markets have been battered as a result but I view this as merely a bump in the road. Markets have a way of rebounding once the knock has run its course and I have no doubt this will be the case again.

Then we had the FOMC minutes being released over night. Not quite what the market wanted or expected which saw the Dow and S&P fall, as well as the USD. Basically the FOMC members judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point. The FOMC members have been hoping to see a rise in inflation to give them more of a reason to hike rates. However with falling energy, food, and commodity prices it is hard to find a market where prices are rising consistently (excl. property of course). Having said that I do not feel the lack of inflation will stop the FED from raising rates. As my business partner noted, a 0.50% rise in rates in the US will do very little to harm the growth prospects. The economy is growing as an acceptable pace and my feeling is the rate hikes will do little to scare away investors who have enjoyed the past 7 years where money was “cheap”. So the expected rise in September is still very much on the cards despite nothing being mentioned in the minutes.

All eyes on UK retail sales where analysts expect a rise of 0.40% from last print of -0.20%. With the horrible summer weather one can only wonder if there were enough feet on the ground shopping, given that many families went east to find the sun.

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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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20150819 – DAILY UPDATE

High Low High Low
EUR/USD 1.1074 1.1020 USD/ZAR 12.9227 12.8670
GBP/USD 1.5685 1.5654 GBP/ZAR 20.25 20.17
EUR/GBP 0.7065 0.7038 USD/RUB 66.36 64.84
USD/JPY 124.44 124.21 USD/ILS 3.8705 3.8367
GBP/CHF 1.5320 1.5279 S&P 500 2,102 2,088
GBP/AUD 2.1421 2.1298 Oil (Brent) 48.96 48.55

 

Despite the persistent strength of the pound sterling and falling energy prices, core CPI rose to a 5 month high in the UK. One can be forgiven for suspecting that inflationary pressures are taking root. This will clearly be a concern for the Bank of England, and the market reacted with a strong surge in the value of GBP, numbers like these will bring the time for interest rate normalisation much closer. The expectation had always been for inflationary pressures to pick up towards the end of the year as the steep falls in petrol prices last year come out of the calculation. For price pressures to be evident already will surely be food for thought for Governor Carney et al. I must say I am close to capitulating on my view that the pound sterling is destined to weaken somewhat, perhaps my capitulation is a necessary requirement, the markets have been that cruel to me in the past!

 

Today we get inflation data published in the United States, it will be very interesting to see whether the same occurs in the U.S as in the U.K, it wouldn’t shock me. There has been a perceptible rise in volatility over the last few weeks and many emerging market currencies have weakened significantly, not just because of the Chinese devaluation. By the way, there’s a great article in the Financial Times today which argues that the Chinese over the past few years have actually allowed their currency to appreciate quite strongly against a basket of currencies – the well written piece points out that the developed economies that have engaged in quantitative easing have a great deal more to answer to if ever the accusation of ‘currency wars’ is thrown about. On reflection I have to agree with this. Perhaps China gets a bum deal when it comes to currency manipulation theories because it’s… China?

 

Taking a step back it’s worth noting that the current bull market – there is a case to be made that we are still participating in the bull market that commenced in March 2009 – must be quite mature. I was looking at a chart recently which shows that company earnings are starting to stagnate. This doesn’t mean that equity markets cannot continue to rally, but it could put into question the fundamental basis for such a market rally. At the moment I am unable to identify a narrative that could see such a thing happen, but when you consider that the trauma of the global financial crisis is only now being left behind. It is possible that over the next year we could see market highs even as the corporate earnings continue to struggle, and ordinary retail investors look to boost their wealth. I only bring this up because those sorts of conditions have preceded market tops before. The good news is, that it implies that we have some time left before we should get really concerned, but what I find terrifying is that with interest rates already at zero, and central banks reluctant to normalise interest rates, authorities could be left with very few tools to fix a new crisis.

 

Given my recent struggles to divine a short term path for currencies, I have decided to take a step back and try to re-assess the bigger picture. I will expand on my findings in the days and weeks ahead. I am reminded that the confusing events of the last few months represent a relative minor sample as illustrated by the long term chart of the USD basket I showed some months back. The chart clearly shows that during every major dollar rally there have been periods of months, even as long as a year where the market has been directionless before the major trend re-asserted. Considering this current situation started in March this year we can still call this ranging market a blip. Nothing has happened yet which should challenge our thesis that a major dollar bull trend is in play.

 

 

 

 

 

 

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20150818 – SETTLE BACK VOLATILITY IS ASLEEP

Good morning

High Low High Low
EUR/USD 1.1108 1.1051 USD/ZAR 12.9500 12.8900
GBP/USD 1.5597 1.5563 GBP/ZAR 20.17 20.08
EUR/GBP 0.7114 0.7093 USD/RUB 66.05 64.44
USD/JPY 124.52 124.26 USD/ILS 3.8480 3.8171
GBP/CHF 1.5266 1.5211 S&P 500 2,107 2,098
GBP/AUD 2.1231 2.1100 Oil (Brent) 48.91 48.30

Just a few days ago I mentioned where EURUSD and GBPUSD volatility rates were trading. I am afraid to say since then FX volatility has been carved up as the spot market remains well entrenched in a tight range. EURUSD 1m fallen by 1% to 9.60/9.85, 3m 9.85/9.90 and 1y 9.55/9.75 while GBPUSD vol has equally fallen with the 1m trading at 6.75/6.95, 3m 7.20/7.50 and 1y 8.00/8.30.. What’s happening is the market has really come to terms with the US raising rates in September and thus the “insurance” contract for hedging against volatility has come down dramatically. The 1m expiry date is the 17th September so the options contract expires at 10am NY and thus misses the announcement from the FED at 1pm NY. The premium for the 18th though is +0.30% at 9.90/10.10 but what is quite obvious looking at the rates is the shape of the EURUSD curve….the reason being there is a chance that the FED raise again either in Oct (unlikely) or December (most likely) this the curve goes up and then slopes down again as the pace of the rate rises will be a case of wait and see how the past 1-2 hikes have affected the US economy.

I still think the likelihood of us reaching PARITY remains high for 2015 especially if the FED does go ahead and hike again in December. One could argue that the EU is showing signs of growth and sustainability. Go and tell that to the millions of people in Greece and surrounding countries and they will laugh at you. And then Greece announces amazing GDP numbers out the blue…go figure, perhaps austerity DOES WORK after all. Then you have the small problem of the thousands and thousands of migrants. The EU no doubt will have to accommodate them but the economic implication is less known. Only time will tell how they will integrate and where they will end up. But that is a political debate and one which I will not get into.

Emerging market currencies remain under pressure with USDMXN falling from 15.00 in June to 16.50 at present. USDZAR equally trashed from 12.00 in June to just shy of 13.00 at present. Not to mention GBPZAR which has finally broken the psychological 20.00 barrier. In FX circles that is a MONUMENTAL break and one which for the past 18 years has been on everyone’s lips….The recent losses can of course be attributed somewhat to the Chinese devaluation, but then again lets face facts, EM currencies were always going to devalue in the face of falling commodity and metals and oil prices not to mention the imminent rise in US -UK interest rates. We have been talking about the Chinese problems for months now and the cracks in the EM space are starting to widen as productivity slows in the world’s second largest economy.

Inflation is the focus in the UK today. It is forecast for inflation to show  -0.1% y/y (-0.4% m/m) in July, following a flat reading in June. Interestingly, MPC external member Kristin Forbes has said that waiting too long to raise interest rates risks “undermining the recovery” (The Telegraph 16 August). She argued that the temporary forces pushing down on inflation could “burn off quickly.” These remarks confirm Ms Forbes among the more hawkish members of the MPC and suggest she may join Ian McCafferty in voting for a rate hike before too long, having voted to hold policy in August. I tend to disagree because hiking rates too quickly (as the ECB tried a couple years ago) will end up destroying all the good work that has been created and send the economy back into a recession. Be Careful what you wish for Ms. Forbes.

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20150817 – MONDAY MORNING UPDATE

High Low High Low
EUR/USD 1.1125 1.1082 USD/ZAR 12.8727 12.7822
GBP/USD 1.5689 1.5640 GBP/ZAR 20.14 20.03
EUR/GBP 0.7111 0.7078 USD/RUB 65.98 64.14
USD/JPY 124.49 124.18 USD/ILS 3.8067 3.7714
GBP/CHF 1.5336 1.5246 S&P 500 2,099 2,098
GBP/AUD 2.1270 2.1184 Oil (Brent) 49.21 48.55

The Japanese economy contracted in Q2, this was expected so it’s really more of a confirmation of economist forecasts. The data suggests broad based declines in demand which doesn’t bode well for Prime Minister Abe’s project, one can only hope that his attempts at reconciliation with his neighbours by expressing regrets about his country’s actions in World War 2 will go some way to opening up trade opportunities in the future. Japan needs whatever help it can get, but it no longer has the comfort of a rapidly growing Chinese economy to count on. This is important because Japan and China represent the joint first and third largest economies in the world. If you want to consider the Eurozone as a single economic zone (more fool you) then perhaps you could say joint first and fourth? This is a substantial part of global GDP that isn’t performing that well at the moment, and we must consider the ramifications for South East Asia as well.

 

One of the members of the UK’s MPC has written an article in the Telegraph today which I fully endorse, in fact I have written about this several times. The thrust of the article is that Bank of England should be raising rates now to ensure that when activity and inflation gets to the point where action will definitely be required policy is already moving in the right direction. The reason for this is that the lag between a rate rise and its impact on the economy can be anything from 12 to 18 months. It really makes no sense to do nothing now and wait for further down the line. That smacks of a more reactive central bank which is not something the Bank of England purports to be, and even worse, a reactive central bank has to be more aggressive than a proactive one. I would make the same case regarding the Federal Reserve in the United States, but my sense is that they will be more proactive than the Bank of England in this regard.

 

In Nigeria the central bank is getting very serious cracking down on the activities of the Bureau de Changes. This activity is normally conducted on the streets of the main cities and involves individual traders who are able to trade in surprisingly large size. The Financial Times reports that trees in the capital have been pruned to ensure that their activities can’t be conducted under cover. Amazing stuff! Couple that with some of the circulars that have been sent out by the central bank in recent days, which will make it more difficult for Nigerians to physically deposit foreign currency in domiciliary accounts. This activity has been identified as one of the primary sources of the stress the naira has been experiencing this year, as rich locals hoard foreign exchange in hopes that they can profit. We’ll see if this restriction is effective, experience tells us that people always find ways to get around restrictions.

 

We get lots of inflation data this week. Tomorrow it’s in the UK, then the day after the U.S and then Canada at the end of the week. In between there will be some other interesting macro news, not least retail sales in the U.K, and key confidence data in some Eurozone countries. Talking about Eurozone countries, the Bundestag votes on ratifying the new Greek €86bn bailout plan. While it is certain to pass – the opposition Social Democrats will ensure that it does – it will be interesting to see how much resistance exists in Chancellor Merkel’s party. It is possible she could be seriously weakened by the vote, and anything really shocking will likely have a negative impact on the euro. Another item worth noting is that the Jackson Hole central banker conference is at the end of this month, but as the Chairwoman of the Federal Reserve is not going to be there, it’s unlikely to be hugely significant this year. We will however take note of any potential significant speeches if they occur.

 

From a trading perspective, GBP/USD looks to have bounced back to levels where I consider the odds favour a bearish view for this week. I had said last week that I expected the euro to outperform the pound going forward, but EUR/GBP is doing its best to prove me wrong so far this morning. I will stubbornly stick with my view, I consider the cross to have far greater upside potential at this stage than downside. In general, markets continue to trade based on the dollar rallying when risk sentiment is positive (and falling when sentiment is negative), on that basis it is not at all surprising that things have been a bit confusing since the end of Q1. The S&P 500 has basically gone nowhere since then, perhaps we’ll only see trend moves again when the big investors come back from their summer vacations.

 

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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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