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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