The big news this morning is the Q2 GDP number out of Germany, while it was positive and an improvement on the prior quarter it was short of expectations, which when you consider it… the exceptionally weak euro should have led to a bonanza for the economy which counts for almost one third of Eurozone GDP. To make matters worse French GDP, which also came out, was stagnant. This is all very disappointing, considering the conditions were perfect for positive data surprises. This just reinforces the point that a lot of work is required before the Eurozone is on a sustainable and decent growth path.

Later on today we get GDP data from some other Eurozone countries – Italy and Portugal to be specific, and in the afternoon we get Michigan sentiment data in the United States. Reading through market reports, it seems that economists are still anticipating as many as two interest rate hikes by the Federal Reserve this year according to a Reuters poll. This is slightly at variance with market pricing at the moment which reacted to the Chinese devaluation by lowering the probability of a September Fed hike. Part of the rationale for sticking with the view despite the events of this week is that interest rates are near zero so it is believed that even a cumulative rise of 0.5% from now to the end of the year would not exact a significant burden on the US economy which continues to grow at a reasonable pace.

We are moving away somewhat from the initial excitement surrounding the renminbi move, indeed the decline in the Chinese currency has been halted for now. But the collateral damage is there with sympathetic moves in other Emerging market currencies, lower prices in the commodity complex etc. A commodity expert has even speculated that we may be close to a bottom in some parts of the commodity complex, the idea being that the Chinese are notoriously good at identifying market bottoms and they could secure excellent prices in a swathe of commodities at the moment. They could be right, but it won’t be enough to stop the problems that are no doubt brewing behind the scenes for a number of resource rich economies. Even the Saudis appear to be having some fiscal problems, so you can imagine what less financial strong resource rich economies are experiencing at the moment.

We continue to maintain a fairly positive view on the US dollar, although there is more scope for short term weakness in my view than perhaps was the case just weeks ago. In addition we are more bullish on the euro at this point than the pound sterling, albeit relatively speaking. Our bigger picture view (i.e., longer term) remains the same, we are in the middle – we may not even be halfway through – a major dollar bull trend.

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Good morning

The big news over the past 24 hours remains the PBoC devaluation of the CNY. Overnight the PBoC were at it again, this time devaluing the CNY by 1.1% taking the USDCNY to 6.3850 at the time of writing. The PBoC have denied claims that they intend to weaken the CNY by a total of 10% to support their exports and economy as a whole. Obviously the recent interest rate changes they implemented simply did not do enough to stimulate the economy so they did the next best thing and devalue their currency. The USD and AUD (especially) have been hit hard of course as a result and no doubt the US authorities are not sleeping well. While the Chinese have reduced their US Treasury holdings by a “mere” $300bn recently to a eye watering $3.7trn, the US in trying to avoid a currency/trade war, will have to tread carefully so as not to “upset” the Chinese. Not for one second do I think the Chinese would rattle the US by selling or threatening to sell their Treasuries because that will create a financial meltdown which will do more harm than good. I imagine the US are going to have to accept the PBoC’s decision because a strong Chinese economy helps everyone. As things stand the US economy is continuing to grow unaided and obviously the Chinese are trying to get their economy to do the same. Having initiated QE, reduced interest rates and now devalued their currency the Chinese will now hope these 3 in conjunction will accomplish the job of stimulating the economy.

Stocks have rebounded this morning after the PBoC stated there was no basis for any further devaluation of its currency. Which makes me wonder why the PBoC would say the country’s strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provided “strong support” to the exchange rate. But even if the PBoC succeeds in halting the appreciation the CNY for now, weak July economic data and expectations of more interest rate cuts later in the year are likely to fuel expectations that the PBoC could actually allow the CNY to slip further. No doubt this story still has legs and in the coming weeks as we draw closer to the 17th September FED policy decision day, speculation will be rife as to whether they will indeed pull the trigger and raise rates. While the US are no doubt annoyed at the PBoC’s decision to manipulate their currency, the question will be whether they fire one back at the Chinese by raising rates and thus cementing their 1st place status (of raising interest rates which confirm their growth status).

Greece (remember them) and her creditors finalised a new multi-billion EUR bailout enabling Greece to meet a crucial repayment due to the ECB later this month. Kinda like borrowing from Peter to pay Paul….needless to say the agreement at least keeps Greece out the news and thus the markets. Had it not been for the PBoC, no doubt this news would have made front page news. Now it is relegated to somewhere in the business pages. Now you know how fickle and easily forgotten the markets can be regarding Greece. Still this is great news and hopefully the reforms that Greece has imposed will start to put Greece back on the EU map.

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For a second day the Chinese currency’s value has plummeted resulting in a cumulative greater than 5% depreciation of the offshore currency (the onshore currency will have moved approximately the same). This is a hugely significant moment in 2015. The first or second largest economy in the world doesn’t devalue its currency without tremendous consequences and ripple effects throughout the global economy. The most obvious end result of the events of the last few days is that in my view the possibility of an interest rate hike in the United States in the next few months is now seriously in jeopardy. Here’s why…(1) a Chinese devaluation is a deflationary event. Chinese export products will now be cheaper in world markets so consumers will experience lower prices, i.e., disinflation; (2) China is exporting their slowing growth to the rest of the world as their competitors will now be disadvantaged by having to compete with cheaper goods in world markets. This will be a negative growth event for competitor economies (3) commodity markets will be adversely impacted by the Chinese devaluation as it will be that much harder for them to sell their now more expensive products in China unless their prices adjust downwards. Obviously this means less revenue for resource rich economies, and another vector through which deflationary pressure will ripple around the world.

Equity markets have tumbled in response to the news coming out of China, no doubt because of the direct impact on exporter earnings of a more competitive renminbi, but also because of the uncertainty surrounding the implications on geopolitics. We are heading into an election year in the United States, Presidential candidates are unlikely to take the Chinese devaluation lightly and it’s hard not to imagine a hostile response. Quite what that will be, no one knows, and markets will not like that. Over the last year I have repeatedly discussed my concerns about the hard currency debts of corporates in Emerging markets. One of the largest issuers of dollar debt have been Chinese corporates. Perhaps retail investors in China were on the right track when they started dumping their shares a month ago. One can only imagine the difficulties some of these companies will now face with their dollar debts that bit more expensive in renminbi terms. There are consequences upon consequences to this currency move, and please bear in mind that other Asian currencies have weakened sympathetically, these other Asian economies also have accumulated large amounts of dollar debt. The global financial system is a more risky place than it was at the start of the week, it will take some considerable time for us to fully understand how much more so.

The euro, as the world’s carry currency (or you could say funding currency – traders who leverage will borrow in euros to fund more risky investments) has appreciated considerably today. This is normal, as risk sentiment becomes more negative those who would leverage carry currencies tend to unwind their risky positions. This will naturally lead to the carry currency being repurchased to close out the trading position.

The imminence of rate hikes in the United States was always going to expose vulnerable economies, the events of this week have seemingly accelerated the process. From Singapore’s slowing economy to Chile suffering the consequences of falling copper prices, there are many narratives that highlight the multitude of risks facing the global economy. There are positives as well, please don’t misunderstand, an example would be the better mortgage rates available to house buyers in the UK, with interest rate hikes receding, but do not underestimate the problems brewing in developing countries. We will continue to assess the situation, the devaluation of the renminbi represents an event that is consequential enough to alter our assessment of the most likely path for major currencies, it will take time to update our narrative. Things have changed.

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In a move that has reverberated globally the Chinese central bank has devalued the renminbi by 2%. Quite the most significant move by China for 2 decades, most Asian currencies have weakened in response and resource rich countries with exposure to China are likely to do the same. Indeed there has been a substantial weakening of the Australian and New Zealand currencies already. It is well known that the growth rate of the Chinese economy has been decelerating for some time, and any pretence that this was due to the managed (and necessary) rebalancing of the economy from an export driven powerhouse to a more consumer driven domestically focussed structure was discarded ages ago. The trade data that was published late last week indicated falling exports and sharply lower import demand. One of the reasons that the commodity complex is in bear market territory has been the poor demand profile coming out of China and this will likely gain momentum with recent events. The flipside of policies that have resulted in the renminbi having a soft peg to the US dollar has always been a scenario where the greenback starts to trend higher. This was a problem in the Asian crisis in the late 90s and while steps have been taken by Asian mercantilists to learn from the previous crisis not all solutions have eliminated the risks of continuing such policies. Even as the euro and the Japanese yen have dramatically weakened against the dollar over the last year, they have weakened against the renminbi as well, the euro has fallen 10% and the yen 4% against the Chinese currency and surely some of the export difficulties facing Chinese companies relates to this. It’s hard to see how Chinese products can compete against higher quality, albeit more expensive, products from Japan and Germany except on price, and any erosion of that advantage was always likely to spell doom. The Chinese authorities have reached that conclusion and acted. Remember this is reputedly the largest economy in the world – certainly so in terms of purchasing power parity – there is surely some loss of face doing this, and it is a mark of how dire the situation must surely be for the authorities to sanction the move. I very much doubt that this action will be ignored by competitor nations, this is no butterfly wing fluttering, it is a dragon’s. More to come in the days ahead…

It’s been so unusual this year for good news to be coming out of Europe, but times are a-changing. Greece has agreed an outline debt deal with creditors – watch out for the detail though! This would be the 3^rd debt deal for Greece, and we can only hope that three times is a charm, but don’t bet the farm on it – it still strains credulity to believe that the Greeks will ever be able to repay all that they owe, so this is more of a can kick. All we can hope for is that it is kicked far enough into the future for us to focus on other things. The euro and pound sterling have been creeping higher since the early afternoon yesterday on the back of the good news as have European equity markets. It is entirely possible that the environment going forward is going to be fantastic for European equities, but I have far less confidence in the euro. At the end of the day monetary policy in Europe will have to remain super loose, while the spectre of rising interest rates will continue to hover in the UK and US. This should be fertile ground for the euro to gently depreciate versus the other two currencies, but the path is never straight, and the devaluation in China has as yet unknown consequences.

The seeds for the next global economic crisis have almost certainly been planted, we just don’t know how long it will take for the trees to grow and cast their shadow over an unsuspecting world. We might look back and talk about the catastrophic effects falling oil prices are having on Venezuela, the dire economic data coming out of Russia, the delays implementing a coherent policy in Nigeria. We may focus on the more advanced economies and the normalisation cycle in the United States and the UK, none of us can truly know until it happens, but when the best of the good news is coming from Greece it makes me shudder…

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Good morning

After last week’s super Thursday the GBP (USD) has been trading in a new range 1.5425-1.5525 as the market awaits the next USD move. With the summer holidays in Europe in full swing the GBP has had little to trade against and thus has left the GBP trading pretty much in no man’s land. Expectations as you know are high that the US will rates in September and thus the big swings will in all likelihood start to manifest themselves towards the end of the month as FX traders come back from their holidays and begin to align their books in the expectation that US rates are on the rise.

Negotiations to secure a third bailout deal in time to prevent Greece from defaulting this month on bonds owned by the ECB appear to be advancing in the wake of the deliberations held between Greece and her creditors over the weekend. Greek Finance Minister Euclid Tsakalotos and Economy Minister George Stathakis met Sunday with the European Commission, IMF, ECB and the Eurozone’s own bailout fund. Greek officials said they discussed the economic overhauls and budget cuts the government needs to complete to clinch a third loan package of up to €86bn, and secure the first tranche of aid from the bailout. European officials are quoted as saying “a lot of progress had been made.”  With the 20th Aug. deadline fast approaching, when €3.2 billion of Greek government bonds owned by the ECB come due, the pressure is back on to secure a lasting agreement. Defaulting on these bonds would severely complicate Greece’s chances of the remaining funds, given they would likely compel the ECB to withdraw its extensive support to Greek banks. The hope is after the fiasco of the previous negotiations the coming bailout agreement will be easier and simpler to accomplish. Needless to say nothing is certain so do not be surprised to hear of hearsay and rumours surfacing about negotiation complications.

Nigeria’s Central Bank surprised the market and announced (last week) the prohibition of the acceptance of foreign currency cash deposits. The move is expected to ring-fence the Nigerian economy against illicit financial flows as well as check the activities of economy saboteurs like foreign exchange speculators and money launderers.  The outright ban on the acceptance of foreign currency cash deposits by commercial banks by the CBN was to stem illicit financial flows. This followed the decision of commercial banks to either cap or ban such deposits a fortnight ago due to the unavailability of outlets that could absorb their cash. A circular by Olakanmi I. Gbadamosi, CBN Director of Trade and Exchange Department, said in a statement, “The Central Bank of Nigeria has considered the recent statements by Deposit Money Banks (DMB’s) concerning the large volume of foreign currencies in their vaults and the decision to stop accepting foreign currency cash deposits into customers’ domiciliary accounts as a welcome development. Therefore, in its continued efforts to stop illicit financial flows in the Nigerian banking system which aligns with the anti-money Laundering stance of the Federal Government, the CBN hereby prohibits from the date of this circular the acceptance of foreign currency cash deposits by DMBs. For foreign currency cash lodgements made prior to the date of this circular, the account holder has the option to either withdraw his or her foreign currency cash or the Naira equivalent. For the avoidance of doubt, only wire transfers to and from Domiciliary Accounts are henceforth permissible.”  A domiciliary account allows an individual or business to make transfers and save directly in British pounds, euro or dollars from within the Nigerian banking system. The move saw the NGN appreciate from 234 to 222 and was widely welcomed. The NGN has fallen from 200 to 234 in recent months (in line with other emerging market currencies, ZAR, MXN). As the largest economy in Africa the move could not have come at a better time as Pres. Buhari begins to implement wholesale changes in his government to clean up any dirty laundry.

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So we had the first Bank of England ‘super Thursday’ yesterday. This new invention where the central bank publishes its inflation report and monetary policy minutes at the same time as the latest rate setting decision. The pound sterling didn’t like it, it fell 0.75%! What did for GBP was the fact that economists were expecting 2 of the 9 voters to push for an interest rate hike, but only one did. This implies that the committee is somewhat less hawkish than the market anticipated. Never a good thing for a currency. In particular the chances of a rate hike in 2015 have diminished considerably. That’s not to say that Governor Carney is not bullish on the UK economy, in fact he raised his estimation of UK growth this year and he is more optimistic about productivity and wage growth than before. All in all a more balanced picture for the UK economy emerged, which is all to the good, although the pace of employment growth could definitely be better.

It’s a big day for macro today with the U.S employment report published in the early European afternoon. Before I go into it, I should tell you that economists expect the Federal Reserve to implement their first interest rate hike in September. Today experts are forecasting a 223,000 addition to payrolls and the unemployment rate remaining steady at 5.3%. They also expect a 0.2% rise in average hourly earnings. In the last FOMC minutes,policy makers remarked that “some further improvement in the labour market” was desirable before the process of normalisation would commence. It should be noted that the Federal Reserve’s estimation for full employment is an unemployment rate at 5 – 5.2% in along with further signs of a tightening labour market. But the current data is contradicted by alternative measures of employment trends which capture part-time workers and discouraged workers. On this basis the unemployment rate is yet to recover to the levels that existed before the global financial crisis in 2008 (see chart below). The one really encouraging thing in the chart is that the trend is clear and continuing to improve. Wage growth remains anaemic considering the level of the unemployment rate, although perhaps it’s more understandable if you believe the alternative measures are a better representation of labour conditions or indeed if you consider importance of the participation rate which hovers at levels not seen since the dark days of incomes policies and stagnation in the 1970s. Bottom line, if we get better data than the market expects it will reinforce the conviction that we will see the Federal Funds rate rise for the first time since 2006. This could be the day that breaks the back of EUR/USD and GBP/USD’s stubborn buoyancy. More on that in a bit…

{Source:- http://www.macrotrends.net/1377/u6-unemployment-rate}

Before I focus more on our near term views on the major currencies I’ll spend a bit of time on Nigeria, and the naira. Nigerians and international observers have raised concerns about the time it’s taking for the new President to put together his team. As of now there is still no insight into who will take up the main ministerial portfolios. I confess I too have shaken my head in frustration at these events, but as we all know, ignorance invites sloppy thinking. There is method to this, and a deeper understanding of the new incumbent’s main objectives is essential to add a context to the seeming limbo. It seems that the new President is very serious about combating corruption, and we should applaud him for this. All candidates for ministerial posts are being vetted, as they should. So far some of his initial picks may not have been able to stand up to the scrutiny. This President is prepared to wait until the right people, capable and honest people are vetted. It is expected that the process will not be complete for another month, but surely this is worth waiting for? Meanwhile the naira has been on quite a journey in recent weeks. Concerns about the lack of policy direction had put the naira under pressure, but a few days ago commercial banks were urged to stop accepting foreign currency cash deposits in a move expected to reduce speculation. Coupled with news that President Buhari plans to reduce recurrent expenditure in next year’s budget and focus more on development projects, the naira was able to gain about 4%. Of course the central bank selling $80m of foreign currency didn’t hurt. The central bank will continue to resist calls to allow the currency to devalue, despite the continued weakening in Nigeria’s main export… oil. In case you missed it, the black gold is flirting with sub $50 levels again and the Iranian deal isn’t going to add a bid to it any time soon! There seems to be an air of realism about this new Nigerian administration, but until the ministerial positions are filled it is too early to pass judgement. The President seems very serious about getting the giant of Africa on the right path, let’s hope macro events are kind to him.

Back to the majors… I have watched over the last few days as first EUR/USD flirted with the July lows but didn’t quite make it down to 1.0808, and then GBP/USD in the wake of the Bank of England’s super Thursday announcement yesterday fell sharply and tested but did not breach an interim low at 1.5467 (the more significant level to watch remains 1.5330). These currency pairs continue to hold on and avoid what we all expect… dollar appreciation. As I mentioned in a recent blog, the longer it takes for this to happen, the more impressive the build-up of potential energy becomes, the more significant the fall is likely to be. I am of the belief that GBP/USD is likely to be weaker than EUR/USD. In fact I grow more and more sceptical about when we are likely to see EUR/USD parity. Don’t get me wrong, I expect it to happen, I just think it might take considerably longer to happen than I originally expected. For those of a technical nature, here’s an illustration of what I’m thinking…

This is long term though. For those with more immediate needs, we don’t expect too much excitement before the big data this afternoon. Data meeting expectations or surpassing it can only boost the dollar at this point…

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Good day

SUPER THURSDAY for the pound and UK markets in general. Not only do we get the MPC interest rate decision (0.50% unchanged) at 12.00 but we also get bombarded with the minutes from the meeting, the rate decision vote, the economic forecasts and finally the inflation report.

Suffice to say the first thing markets will digest is the rate decision and vote. Then power words will be looked for in the inflation report and economic forecasts….suffice to say you can expect wild gyrations and certain volatility to follow the 12.00 bell. As we mentioned a couple days ago, we think the voting will change from 9-0 at the last meeting to 8-1 (martin Weale likely to vote for a hike). While this is nothing extraordinary given recent comments by Gov. Carney re hike rates in early 2016, it is nevertheless the beginning of a change of hands when it comes to voting for a rate hike that is significant. We are still over 6 months away from this but markets will be looking to see if there is any change to the wording of the minutes that signal a hike could come EARLIER or LATER. After the minor rally in the USD yesterday we have opened up above 1.56 handle again. No doubt this matters none once the announcement is made at 12.00. As we wrote yesterday, with the likelihood of a US rate hike in September, any disappointing news from the BoE (no vote change or change in the minutes/inflation report) will be pounced on and lead to a weakening of the GBP vs the USD and EUR. On the other hand a vote of 8-1 or 7-2 will keep the GBP above 1.5600 until economists have digested the reports to see if there is a any change on the likely hike….it’s all to play for.

Very interesting article in Bloomberg (http://www.bloombergview.com/articles/2015-08-04/how-spain-fixed-its-economy) which strangely was followed up by the Guardian newspaper (http://www.theguardian.com/business/2015/aug/05/spain-eurozone-big-four-growth-markit-greek-debt-crisis) regarding Spain and how they have weathered the storm and come out (last month) as the strongest of the big 4 European countries. What this article shows and what we have written about many times (regarding Greece) is that IT IS POSSIBLE to come out the financial crisis without putting the EU/EUR and global markets on a lifeline. Austerity and good luck WORKS. Had Greece followed Spain 6-7 years ago we probably would not be writing about Greece and Tsipras would be a figment of your imagination. Without wanting to repeat what was written in these 2 articles (and confirmed what we have written previously) I think it sums up the disparity between those that want to help themselves and those that want handouts. I recently visited Spain and truly the change in sentiment is extraordinary. People are feeling confident that they have turned the corner and facing a bright future.

EM currencies facing a warpath…with the ZAR, MXN and NGN being devalued after the markets sold the local currency. The ZAR is within touching distance of GBP 20.00 – it sounds too crazy to even think about. Only a few years ago the ZAR was SUB 10 vs the GBP. With precious metals under pressure and the ZAR a commodity based currency it is really not surprising to see the ZAR weaken to such an extent.

Regards

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The title of today’s blog is a question that has exercised my thoughts for weeks. Every time the key levels I am watching are compromised, my alert level spikes, but so far it’s only led to disappointment. Technical signals in the currency markets have been like the boy who cried wolf so many times the credibility of chart watching is at a low ebb for me. But sooner or later the wolf always comes, the big dollar trend will start again and new highs will beckon, and in trading, timing is everything. There’s a reason why I’m studying the dollar’s position relative to the major currencies more closely now, that’s because it has been on a tear against emerging market currencies for some time now. Look at USD/ZAR, USD/RUB or USD/MXN and you’ll see exactly what I mean, the dollar looks mighty against the smaller currencies but the big players are holding out, but how long will that last?

Looking at the weekly chart for cable (GBP/USD) I am struck by the coiling pattern that has evolved over the last month, more and more I am convinced that there is a massive energy build growing in the cable chart. The end game is likely to be new multi-year lows for this currency pair, and it is unlikely that EUR/USD will remain unscathed, indeed the euro is currently far weaker than the pound sterling – EUR/GBP is within sight of recent lows. One technical pattern I have been studying suggests a target of 1.42 for GBP/USD if it should come to pass, but these summer markets in currency land have been the destroyer of hope and confidence, all we can do is wait and observe…

Today we get PMI data in Europe, and ISM data in the United States. In a neutral world one might consider relatively stronger data in Europe as a rationale to bid for European assets rather than American, but I would argue that anything that puts some distance between a scenario where the Eurozone is in crisis and reality, while we continue to see solid economic growth in the United States, actually increases the odds of interest rate rises by the Federal Reserve. I’m not saying that’s what will happen, I’m just trying to describe what I believe should be the state of mind of the market right now. For all my talk of GBP/USD, I should finally point out that EUR/USD is trading close to its mid-July lows near 1.0810, a breach to the downside could open the way for the big dollar move we are anticipating, that darn sheep boy could be about to cry wolf again…

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Good morning

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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The seeds of a rebirth in commodity prices might just have become visible now, but green shoots are a dream for the distant future. I am of course referring to news that commodity companies have been cutting back on major new investment over recent weeks. The age old problem of over-investment in the good times and retrenchment in the bad was thought by some to be a thing of the past, but.. “plus ça change, plus c’est la même chose” as they say! I describe this news as the seeds because for commodity prices to recover demand must again start to exceed supply, or at the very least the possibility of such a scenario is a necessity. We may never have another Chinese investment boom as the country has largely industrialised, largely but not completely. There is still the case for the Chinese hinterland in the north and west to catch up with coastal and central China, but it is unlikely that these less populous areas will have the same global impact as the first great multi-decade capital investment boom that raised the Chinese from little more than subsistence farming to the industrial power house it is today. If such a thing is to occur, Africa and India are the more likely regions. In any case, this news of capital retrenchment will be a huge blow to resource rich economies everywhere as the price of their staples already commanding far less in world markets are now compounded by less inward investment as well. Australia might be one of the few of such economies where there is a recognition that the currency needs to weaken, but self-knowledge is not a prerequisite for markets to correct. We expect the likes of the Russian rouble, Indonesian rupiah and Brazilian real to stay under pressure for a considerable period of time to come

The flip side of commodity price weakness can be seen in South Korea where a record current account surplus for the first half of the year was published on the back of lower oil import bill. Resource poor and a big importer of commodities, the boost from lower import prices has caused the rising surplus to become a concern to the Korean monetary authorities. Currency appreciation versus trading rivals has resulted in efforts now being made to encourage foreign investment. As they say, every cloud has a silver lining.

This week will see the hugely important non-farm payrolls report published in the United States, detailing the evolution of employment trends in the world’s largest developed economy. As we get closer to the Federal Reserve initiating interest rate normalisation, the key metric that central bankers are focused on is wage growth and the tightness of the labour market. It was written in the last minutes of the FOMC for all to see…”it will be appropriate to raise the target range for the Federal funds rate when..()… some further improvement in the labour market”. Enough said!

Later on today we get some ISM data as well, which will be a nice aperitif before the main course later on in the week. We expect further evidence that the US economy is powering ahead. We continue to believe that the next big moves will see the US dollar appreciate against the euro and pound sterling, but we remain as confused as everyone else about when this will happen. GBP remains stubbornly strong, the only thing I will say about it is that I believe EUR/GBP will be more relevant to determining how long sterling strength will persist. I am convinced that the competitiveness of the British currency in the context of its relationship with the euro is the most likely thing to dent its continued strength, but we might be some way from the peak at the moment. Time will tell…

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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