Good morning

High Low High Low
EUR/USD 1.0967 1.0931 USD/ZAR 12.7043 12.6220
GBP/USD 1.5619 1.5570 GBP/ZAR 19.81 19.70
EUR/GBP 0.7030 0.7012 USD/RUB 65.23 62.53
USD/JPY 124.11 123.88 USD/ILS 3.7992 3.7644
GBP/CHF 1.5132 1.5096 S&P 500 2,098 2,093
GBP/AUD 2.1452 2.1142 Oil (Brent) 49.95 49.34

Having spent over 20 years working in the FX markets the one thing that became apparent was the volatility during the holiday season as thin markets exaggerated the  moves in the FX market. It seems 2015 is becoming an “odd year out” as the FX markets remain in a somewhat stable and range bound theme. This is false hope because as soon as the traders start heading back to their desks the realisation that the FED are in all likelihood going to raise rates on the 17th September will see traders begin to position their books for the move. What strikes me as interesting is despite being range bound, EURUSD FX volatility remains elevated in the 1-3 months period as traders prefer to pay premium and have the security of knowing the calm can change in the blink of an eye. 1m vols stands at 10.60/10.75, 2m at 10.55/10.70 and 3m at 10.25/10.40 dropping to 9.80/10.10 in the 1 year. In other words the curve is INVERTED which tells you traders are MORE concerned about the short term than the medium to long term. As a keen reader of our daily commentary you will know we are differently poised to other commentators as to when we think EURUSD will hit PARITY (1.00;1.00)  from current levels at  1.0960. As the FED recently commented the US economy continues to grow independently of any help from the FED, the labour market is shining and Greece is now contained in the business section of the newspapers (rather than page 1). In other words the puzzle is almost complete which will then allow the FED to raise rates for the first time in over 6.5 years. As such I predict we will see EURUSD at least ATTEMPT to take out PARITY before the end of the year. Bold prediction you might say, but the ingredients are all there. As the EU continues to lag, China in tears, investors alike will climb onto the USD gravy train in the expectation that the currency will rally strongly vs the majority of her main trading partners.

Which brings me to the GBPUSD. For the past month the Pound has traded between 1.55-1.5650 which as you would expect has seen the FX volatility rates slashed. Cast your mind back a few months and GBPUSD volatility was trading at a premium to EURUSD. The recent comments by the Gov. of the BoE that we should start preparing for rate hikes in early 2016 has no doubt given the GBP a lift and allowed the currency to remain strong not only vs the USD but especially vs the EUR. This THURSDAY (6th) heralds a new beginning for the BoE in the way they communicate to the markets. At noon, the BoE will release their rate decision, the minutes of the meeting AND the August Inflation report. In the past these 3 had been separated, so all 3 together will no doubt add some extra volatility to the currency. At the same time we are expecting a change in the vote (for a rate hike) from 9-0 to 8-1 with Martin Weale as the most likely to vote for a rate hike. No doubt as the year drags by and we approach year end that same vote will be cut to 7-2, 6-3 and then…..its off to the races!!! In other words if the FED do raise rates as expected in September I do not expect the GBP(USD) to get roasted given the fact that the UK is next in line to hike rates (and thus support the GBP). If you are a buyer of GBP any gap lower should be seen as an opportunity to buy the GBP at least in sections thus improving your average overall. Suffice to say as Governor Carney has noted, “the decision as to when to start that process of raising interest rates will likely come into sharper relief around the turn of this year” (in a speech on 21 July 2015) implying that an additional six months of data will be necessary to convince this group whether or not to hike. In other words 2016 at the earliest.

Have a good day ahead.


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