20150930 – DAILY FX COMMENT

Good morning

High Low High Low
EUR/USD 1.1262 1.1211 USD/ZAR 13.9956 13.8170
GBP/USD 1.5175 1.5130 GBP/ZAR 21.21 20.92
EUR/GBP 0.7431 0.7403 USD/RUB 66.82 64.00
USD/JPY 120.13 119.70 USD/ILS 3.9383 3.9114
GBP/CHF 1.4777 1.4706 S&P 500 1,903 1,880
GBP/AUD 2.1708 2.1583 Oil (Brent) 48.64 48.07

While the markets globally have seen a respite today after the recent sell off, I think we have NOT seen the end yet. While the US is powering ahead, the commodity/energy/precious metal markets have been obliterated as the slowdown in China continues to bite. I have noted on MANY previous occasions that the Renminbi (CNY) is ripe for FURTHER DEVALUATIONS.  Trading around 6.36 at the time of writing I truly believe that the PBoC will “surprise” us yet again (following the deval in August) with further devaluations to improve exports and kick start the economy.

Michael Mabbutt, manager of the Liontrust Global Strategic Bond fund, noted recently “China has opened a Pandora’s box by allowing the currency to depreciate modestly. This, combined with the social impact [of a slowing economy], leads us to believe it will go much further. Typically you need a drop of between 15 per cent and 20 per cent for it to have an effect. That would take us to about 8.00 as an exchange rate [against the dollar]. I suspect we’ll have a few more devaluations.” Mr Mabbutt noted this drop would take the renminbi close to the level at which it was pinned to the US dollar between 1997 and 2005. I think there are many strategist and FX dealers who are thinking the same thing and the FX options market has seen an increasing number of options traders buy USD CALLS vs CNY (low delta strikes). With volatility levels creeping up the market is waking up to the realisation the reward is worth the “risk” of shelling out the premium.

The fallout from weaker stock markets has played into the hands of a stronger EUR as we have seen in recent days despite the crisis at VW. FX traders have waded into the EUR despite the “threat” from the FED that rates are on the up this year. With the backdrop of a weaker China, FX traders are betting that the FED might have to sit this one out and look to hike only in 2016 as growth in China continues to fall. Truth is you have to think the rate hike rumours are well priced in so that if it does happen (say in December) we won’t be surprised and thus the USD is unlikely to see a jump to 1.0462 – sadly that means my prediction for EURUSD at PARITY before year end is losing its shine. Under normal trading circumstances I would probably have been spot on (like predicting EURUSD would fall from 1.3770 to 1.2000 by 31 Dec 2014), however what I never took into account was the severity of the economic situation in China and the collapse in energy and commodity prices. Still I can hold my head up high and say at least we got close (1.0462 back in March 2015).

UBS has also come out in favour of a stronger EUR, joining HSBC, Morgan Stanley, BOA/Merrill Lynch and Citibank in raising forecasts for a stronger EUR(USD). UBS commented, ” the argument that an expected hike can benefit the dollar partly relies on ‘carry’ as a driver, and although there is empirical evidence that higher yielding currencies outperform lower yielding currencies over time, we don’t think EUR/USD is likely to become a carry trade. Rate differentials between the US and Euro area are not large, with the two right in the middle of the G10 pack. Even when the Fed starts hiking, the cycle is unlikely to widen the differential enough to make it much of a carry trade. Even if the Fed were to hike enough to make carry in the USD worthwhile, this would imply a macro backdrop that is even less conducive to carry trades than the current one, as higher US rates would likely increase volatility, and decrease global liquidity.” In other words just like I have noted above a US rate hike is UNLIKELY to see a rush to buy USD as the rate differential is already so close. For now it appears then that EURUSD will remain “range bound” with the prospect of further appreciation. The GBP however is unlikely to enjoy such respite and my prediction is the GBP will continue to FALL vs the USD and EUR over the coming months despite the HEALTHY (don’t tell Corbyn this) GDP growth numbers in the Western world (2nd behind the US).

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc

20150929 – DAILY FX COMMENT

Good day

High Low High Low
EUR/USD 1.1281 1.1218 USD/ZAR 14.1655 13.9642
GBP/USD 1.5205 1.5155 GBP/ZAR 21.50 21.24
EUR/GBP 1.7437 0.7380 USD/RUB 67.28 65.56
USD/JPY 120.05 119.24 USD/ILS 3.9531 3.9220
GBP/CHF 1.4786 1.4692 S&P 500 1,895 1,870
GBP/AUD 2.1867 2.1706 Oil (Brent) 48.18 47.53

STOCKS continue to get battered here there and everywhere as China’s growth worries continue to play havoc with the markets. Sure this is “old” news but the continued slowdown is just not showing any signs of easing. Japan’s Center for Economic Research in fact noted that China’s GDP for Q2 is likely to come to only 5% WELL BELOW the 7% the PBoC have aimed for.

One of the prominent news stories was the 30% fall in Glencore’s shares overnight in Hong Kong – down 30%. The China slowdown and fall in commodity prices is playing havoc with Glencore (not to mention the mothballing of the Steel works in the UK which cost 1700 jobs).

It is no wonder the FED decided to hold off raising US interest rates a couple weeks ago. Be rest assured, unless thing stabilise I would not be surprised to hear the FED delay yet again at the December FOMC meeting. In spite of  this, the FED are remaining cautiously optimistic as FED member, Williams noted he hasn’t changed his view as yet and expects the FED to raise rates at some point this year. On the flip side, FED member Evans noted that before raising rates, he would like to see more confidence that US inflation is picking up, rising US house prices aren’t at tipping point and stocks settle. In other words there is a lot to play for and as things stand, things are likely to remain on hold. No point in adding fuel to the fire (even though a 0.25% US rate hike is unlikely to have a marked impact overall).

Despite the mini rally in the EUR (fall in the USD), EM currencies continue to get battered. USDZAR has since recovered from over 14 to trade at 13.99 as I write this, as has the CNY and TRY.

For now then expect increased and persistent volatility as investors run for cover and commodity/energy companies look to stay afloat  in the face of a Chinese tidal wave.

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc

20150928 – BITING THE BULLET

High Low High Low
EUR/USD 1.1215 1.1164 USD/ZAR 14.1442 13.8385
GBP/USD 1.5214 1.5169 GBP/ZAR 21.50 21.02
EUR/GBP 0.7385 0.7350 USD/RUB 66.08 64.88
USD/JPY 120.65 120.17 USD/ILS 3.9655 3.9092
GBP/CHF 1.4907 1.4799 S&P 500 1,939 1,917
GBP/AUD 2.1696 2.1583 Oil (Brent) 48.76 48.31

 

Saudi Arabia looks like it’s battening down the hatches with its rumoured strategy to take out high cost US Shale gas producers. No one can argue that the strategy (if it is true) has been working but the growing fiscal stress in the middle eastern giant shows that the casualties are not just on the American side. The Financial Times reports that Saudi Arabia has been withdrawing tens of billions of dollars from global asset managers in an attempt to plug a widening deficit. This is newsworthy for many reasons, not least it is a sign of the resolve OPEC has to maintain supply with the consequence being that oil prices will remain at current levels or possibly lower for some time to come. This will have a big impact on inflation globally. But it’s also important because Europe has historically been a beneficiary of the luxury consumption of oil producers that might be less evident in the coming years. When you consider all this, it’s not that surprising that the Centre for Economics and Business Research (CEBR) predicts that rate rises aren’t like from the Bank of England until at least the summer next year. Interestingly GBP/USD is actually a bit stronger this morning. After the rapid descent of the last few weeks, it is likely time to be cautious as a correction might be due. If this is the case the bounce could take us up to the 1.53 – 1.54 zone before a larger decline pushes cable towards the 1.40s. That would be my best guess for what we have in store over the next few months. If that’s the case, the next week or two could represent your last chance to sell pounds and buy dollars at reasonable levels. You have been warned!

 

We have already spoken quite a bit about the Federal Reserve’s hesitation with regards to raising interest rates. Whether you agree with it or not it is clear that the labour market targets, set by the FOMC, have largely been met, so the question is… what could force the Fed’s hand at this point? The answer is obvious.. inflation. As it happens we get some core PCE data later on today, I believe that this data point, as well as CPI and average hourly earnings will be the focus for the market going forward. Any numbers that indicate that prices are rising faster than expected will bring closer the day when interest rates rise for the first time in almost a decade. From a currency perspective this means that the risk for abnormal currency moves will be greater around these data releases going forward. For now, I don’t believe the risk of positive inflation surprises is too great, but we should bear in mind that the large falls in energy prices are working their way out of annual CPI indices now, and we will be in new territory over the next few months. Of course it might all be irrelevant by then, Yellen might have already bitten the bullet. I doubt it, but we shall see.

 

For this week, I believe there is a significant risk of some sort of GBP/USD bounce, but in my view such a move would be corrective in nature, the signs look set for a significant impulsive move lower. We could therefore be observing the last chance to sell GBP against a number of currencies at bargain levels, particularly against EUR and USD….

 

 

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc

 

 

 

20150925 – DAILY FX COMMENT

Good morning

High Low High Low
EUR/USD 1.1234 1.1185 USD/ZAR 13.9489 13.8222
GBP/USD 1.5261 1.5205 GBP/ZAR 21.23 21.02
EUR/GBP 0.7371 0.7316 USD/RUB 66.54 64.79
USD/JPY 120.54 120.00 USD/ILS 3.9595 3.9153
GBP/CHF 1.4942 1.4873 S&P 500 1,943 1,923
GBP/AUD 2.1832 2.1638 Oil (Brent) 48.84 48.30

A very well respected Elliott wave technician (and good friend) sent us his thoughts yesterday on GBPUSD and just like I mentioned in our comment yesterday, the outlook for the GBP DOES NOT LOOK ROSY. And I quote: ” GBP sits on the cusp of a massive breakdown as it coils against key long term levels. 1.5160/80 has held 5 months of spike (bullish) price action in which the market has established a love affair with the pound. I interpret this as an energy build capturing a B wave and waves i,ii of the next trend leg lower. I look for a decisive fall in GBP as we continue to break levels across the board from EURGBP to GBPJPY. This should be a third wave and 1.45 is the immediate target on a transition into the long term targets in the 1.30’s”.  As you can see the market has fallen out of love with the GBP in recent weeks having risen to over 1.58, the GBP is now under serious threat of breaking down. I mentioned yesterday that despite the risk of a rate hike in Q1 2016, FX traders nonetheless think the GBP is overvalued and due a correction en route to this year’s low of 1.4566 which all things considered will not be a surprise. For weeks during the GBP appreciation many of us were wondering why the GBP was rallying to such an extent on the back of nothing obvious. Yes, wage growth exceeded expectations and there was talk that inflation had bottomed giving rise to an imminent rate hike. However with the situation in China, EU, Greece and now Germany all likely to seriously hamper global growth, the US has put their rate hike on hold and in turn delayed the hike due in the UK. For this reason alone, I think the GBP has come and will continue to come under pressure.

 

A sure sign (as I mentioned yesterday as well) that rates in the US were due to rise later this year, were CONFIRMED by FED chairwoman Yellen last night. The Federal Reserve is on track to cut rates this year, despite recent dips in inflation, she said. In Spite of the FOMC anticipated rate hike last week, the FOMC voted by -1 to hold rates as global market volatility, largely led by tumbling shares in China, overshadowed a stronger domestic picture in the US. However, Yellen said US economic prospects “generally appear solid”, and as long as inflation remained stable and employment numbers continued to move higher, conditions would be right for a rise later in the year. She added recent inflationary weakness in the US was the result of short-term factors including falling energy prices and a strong USD. Yellen said it is unlikely to affect the path for US monetary policy. Rates are currently at a seven-year low of 0-0.25%. “Most policymakers including myself, currently anticipate… an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter,” Yellen told students at the University of Massachusetts. She added keeping rates at ultra-low rates carries financials risks when the US is showing signs of sustainable economic growth. “Continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability,” the FED chair said. However, a rate rise, which would be the first hike in nine years, is not set in stone. “If the economy surprises us, our judgments about appropriate monetary policy will change,” Yellen added. Analyst expect the Fed to raise rates by 0.25% in December. YOU HEARD IT FIRST AT PARITYFX (in our commentary yesterday!!)

All the above spells bad news for EM currencies in particular the ZAR, MXN, BRL (who have their own internal problems), TRY, RUB and of course CNY. Talking about the recent CNY depreciation an official with the PBoC  said on Friday that the nation’s exchange rate reform was rolled out at a good time. Sheng Songcheng, the head of statistics at China’s central bank said in a speech that large yuan depreciations will be unlikely in the long-term given the country’s relatively high economic growth, large current account surplus and relatively high domestic interest rates. He also said that markets had experienced volatility as a result of the relatively slow pace of China’s exchange rate and capital account reforms over the years compared with interest rate liberalization, adding that volatility shouldn’t delay the pace at which China’s financial system opens up to market forces. He also said the PBoC’s decision the devalue the currency was timely given that China’s domestic interest rates were falling, thus limiting the impact on the economy.

VOLATILITY IS BACK WITH A VENGEANCE – embrace and enjoy!!

 

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc

20150924 – DAILY FX ANALYSIS

Good morning

EUR/USD 1.1224 1.1164 USD/ZAR 13.9800 13.8300
GBP/USD 1.5286 1.5240 GBP/ZAR 21.33 21.10
EUR/GBP 0.7350 0.7321 USD/RUB 67.50 54.80
USD/JPY 120.40 119.85 USD/ILS 3.9636 3.9278
GBP/CHF 1.4952 1.4878 S&P 500 1,947 1,928
GBP/AUD 2.1980 2.1707 Oil (Brent) 48.53 47.94

Forget China, forget Greece, yes this time it is about a “small” car manufacturer in Germany that is clogging all the headlines!! VW what were you thinking. Class action suits, CEO resigning, massive fine on its way in the USA and UK and who know where else…this event is likely to have a significant effect on the German economy and no doubt Chancellor Merkel must be absolutely fuming at the news (not to mention the “rumours” in some papers that SHE WAS COMPLICIT/AWARE – I hope not!!). Suffice to say the impact on the German economy will only be known once the numbers start to surface, with €5bn already set aside for the US fine…this is just the tip of the iceberg and that number will no doubt grow many times over. As the largest car manufacturer in Germany, VW contributes an enormous % to German employment, exports and imports (GDP).

“All of a sudden, Volkswagen has become a bigger downside risk for the German economy than the Greek debt crisis,” ING chief economist Carsten Brzeski told Reuters. “If Volkswagen’s sales were to plunge in North America in the coming months, this would not only have an impact on the company, but on the German economy as a whole,” he added. “Should automobile sales go down, this could also hit suppliers and with them the whole economy,” industry expert Martin Gornig from the Berlin-based DIW think tank told Reuters. In 2014, roughly 775,000 people worked in the German automobile sector. This is nearly 2% of the whole workforce. In addition, automobiles and car parts are Germany’s most successful export — the sector sold goods worth more than €200bn to customers abroad in 2014, accounting for nearly a fifth of total German exports. “That’s why this scandal is not a trifle. The German economy has been hit at its core,” said Michael Huether, head of Germany’s IW economic institute. The spill over effect from this is going to be felt in every industry that supplies parts to VW. VW has a war chest of €21bn that they will have to use to settle with the authorities and civil suits. It is the long term effects not only on VW but the entire German and Global car manufacturing industry that all eyes will be focussed on now. I mean if VW did it, was there anyone else? Time to come out and tell the truth now or be caught later and suffer even greater shame.

The PBoC added 80 billion yuan to the financial system on Thursday using 14-day reverse-repurchase agreements, double the 40 billion yuan supplied via seven-day contracts a week ago. Open-market operations injected a net 40 billion yuan for the week. As we have mentioned previously the PBoC will continue in her efforts to use QE to stimulate the economy, not to mention currency depreciation (USDCNY slides to 6.3850 mid from 6.3450 a couple days ago). No matter, this is not going to be a short term fix by any means, and therefore patience is called for. Overall with China, EU, Greece, and Germany (VW) now all on the rocks, the biggest winner – you guessed it the good old U S of A. I shudder to think how the markets would be behaving now had the US still been involved in QE herself and growing flat. The global fallout no doubt has added to the stress levels in the FED and with everything that is now going on i would guess the FOMC would be likely to postpone YET AGAIN the US rate hike.

Watching the GBP very carefully, as we wrote earlier this week, the weakness (GBPUSD) continues with cable trading sub 1.53 handle. Vs the EUR the pound has lost ground trading at 0.7335(1.3630) at the time of writing (from 0.7260 1.3775) just a few days ago. I do expect the pound to weaken more over the coming months as the USD trades stronger, though the weakness is likely to be slowed vs the USD (compared to the EURUSD)

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc

20150923 – MARKET UPDATE

High Low High Low
EUR/USD 1.1155 1.1105 USD/ZAR 13.7989 13.6710
GBP/USD 1.5370 1.5329 GBP/ZAR 21.17 20.99
EUR/GBP 0.7276 0.7235 USD/RUB 68.25 65.07
USD/JPY 120.34 119.62 USD/ILS 3.9553 3.9343
GBP/CHF 1.4996 1.4940 S&P 500 1,947 1,921
GBP/AUD 2.1875 2.1655 Oil (Brent) 49.63 48.87

The bad news just keeps coming from China. Data published this morning shows that manufacturing in the Middle Kingdom has slowed at the fastest pace in 6 years. It’s payback time following the gargantuan monetary easing in the wake of the global financial crisis. At that time, the government could have rightly claimed credit for being the biggest reason why the world economy avoided depression, but the excesses of the past are now coming home to roost with a vengeance. It is unclear how much of that growth (since 2009) was good investment but the evidence is piling up indicating that far less than necessary was for sustainable or justifiable purposes. So far this year the major shocks that have hit financial markets – excepting the Greek crisis perhaps – seem to have come from East Asia. It seems inevitable that measures to mitigate the slowdown in China will be announced in the coming weeks, the issue is, what will they do? Ironically President Xi Jinping was speaking in Seattle during a state visit to the United States shortly before the data was published and he assured the audience that currency devaluation was not going to be a policy tool going forward. We shall see…

 

The dollar is getting stronger across the board. Whether you look at emerging market currencies or majors, all currencies are weakening against the greenback… except the Japanese yen. You could argue that the JPY has had a head start (JPY weakening started many quarters before the euro depreciation for example), but what is clear is that the trend for USD/JPY looks biased to the downside now (JPY appreciation). Whether this is sustainable or not is hard to tell, but it certainly looks different to most other currencies at the moment. I’ll hold off making high conviction statements for now, but it certainly looks like a bullish dollar dynamic is building. What I will say is that key trigger levels have not been bypassed yet. The most obvious would be the early September low in EUR/USD at 1.1087, but the 1.0810 – 20 zone is the most important. Through that support area the chances of a test of the year’s lows and the massive channel support that has formed since the global financial crisis. For your guide, that channel support is now close to parity. It is ironic but the Federal Reserve not hiking interest rates may just have been the most effective means of ensuring that dollar strength returns to the market. I could be wrong, but think about it, we’ll continue to speculate about when that first rate rise will happen, that’s dollar bullish right there…

20150923_eurusd

Putting my technical hat on, the equity markets look poised for another leg down. It’s possible that the recent market lows will be tested, but this could represent a fantastic opportunity to buy stocks into the end of the year. The Chinese manufacturing data certainly sets risk sentiment on the right course for a short term dip in equity prices, and I see that German PMI data is slightly worse than expected this morning, that’s not going to boost risk sentiment either! French manufacturing PMI came out at the same time and as in recent times the French data is definitely experiencing an upturn of sorts. Alas that is no replacement for a booming German manufacturing sector!

 

Bottom line, we could be in for a rocky few days if I’m correct and equities retreat for a while. But it could be a great opportunity for some. Of more interest to me is the fact that the dollar appears to be strengthening in this type of environment. I will continue to monitor the situation, the paradigm that has been in place since at least this time last year has been dollar strength when risk sentiment is positive. I suspect that is still the world we live in, but if it’s not, best to know sooner rather than later. It usually means something significant when a paradigm shifts…

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc

20150922 – DAILY FX ANALYSIS

Good morning

High Low High Low
EUR/USD 1.1206 1.1154 USD/ZAR 13.4900 13.4200
GBP/USD 1.5555 1.5485 GBP/ZAR 20.93 20.80
EUR/GBP 0.7221 0.7195 USD/RUB 67.45 64.89
USD/JPY 120.62 120.32 USD/ILS 3.9463 3.9254
GBP/CHF 1.5121 1.5063 S&P 500 1,976 1,968
GBP/AUD 2.1780 2.1669 Oil (Brent) 49.15 48.56

Despite the FED holding back on raising rates last Thursday, it has now come to light that the FED are insisting that they continue to target raising US interest rates this year. EURUSD in particular reacted to this news falling from over 1.13 to 1.1154 overnight. The EUR has failed to claw back its losses and opened at 1.1175 at the time of writing. FED futures are now pricing in a 44% probability that the FED will hike at either their 28 October (unlikely) meeting or 16 December (most likely). This Thursday sees the FED chairwoman Yellen speak and there is hope that she will drop a hint that this is indeed the case (and the reason they stayed put last Thursday). To take advantage of this, buying a risk reversal (buy a EUR put and sell a EUR call – zero cost) is the best way to take advantage of this scenario. By locking in your best and worst case scenario, you hedge against either move without the risk of locking in your rate (using a forward) at disadvantaged rates currently in the market.

Technical analysts have commented that should we break and close below EURUSD 1.1090, this would signify a fresh wave lower to 1.0500 and it is my opinion that as we head firmly into Q4, my prediction for the EURUSD to reach PARITY (1.00/1.00) is becoming more of a reality (I said back in January it would happen in Q4). It is for this reason that I made my comments above about hedging via a risk reversal. As I wrote last week, the FED were in my opinion, fed up that they were not able to hike rates last Thursday as widely expected. The US economy is now driving forward comfortably and securely, giving the FED the “ammo” to hike rates. Granted China is a real problem, but given the efforts by the PBoC to turn things round in China, I am certain the FED will now want to react sooner rather than later.

As far as the GBP goes, the move overnight in the EUR has seen the GBP rally vs the EUR from 0.7335 (*1.3630) to 0.7210 (1.3870) with all eyes now back on the 0.7000 (1.4285) psychological level. If the EUR(USD) does what we think it will do and break 1.1090 en route to 1.0500 the reality of 1.4285 becomes ever so nearer. With regards to GBPUSD, the horse has bolted, and the opportunity to buy USD at 1.56+ (in my opinion) have diminished for now. I think the next 3 months will see the GBP slowly but surely weaken vs the USD en route to our recent lows in the 1.46 handle. I know you are saying, but if the UK hike rates that’s GBP supportive, and yes you are right….but that is very much “priced into” the current GBP levels. For this reason I think if and when the FED do hike later this year, we will see the break of 1.5000, slowed down by the fact that Gov Carney is gearing for a UK rate hike sometime in Q1 (despite recent rhetoric that rates could actually FALL). No doubt Gov. Carney wants to keep his promise and hike when the time is right (wage growth growing, now all he needs is a tick up in inflation….and the rest is history).

Tomorrow sees the key Chinese PMI figure come in the early hours, followed later by Eurozone PMI and SA CPI numbers and then the SARB MPC decision in the afternoon. A Reuter’s poll shows only three of 31 analysts expect a SARB hike this week.

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc

 

20150921 – DAILY COMMENT

Good Morning

High Low High Low
EUR/USD 1.1322 1.1263 USD/ZAR 13.3900 13.2600
GBP/USD 1.5555 1.5509 GBP/ZAR 20.80 20.57
EUR/GBP 0.7286 0.7259 USD/RUB 68.48 65.71
USD/JPY 120.26 119.72 USD/ILS 3.9602 3.8902
GBP/CHF 1.5099 1.1463 S&P 500 1,963 1,949
GBP/AUD 2.1698 2.1522 Oil (Brent) 48.40 47.58

And so the wheel turns and it is GREECE that is back in the news -Greek voters had the choice yesterday to accept austerity and reject the previous leader who led their country closer than ever to being forced out of EU/EUR. Instead, they embraced him and voted him back into power, albeit on a smaller majority.

PM Tsipras and his party SYRIZA, emerged from a second election in eight months (5th in 6 years) with a level of support barely diminished from the emphatic victory that catapulted him into power and a standoff with the euro region. SYRIZA, took 35.5% of the vote compared with 28.1% for the centre-right New Democracy, will enter a coalition with the same small party that helped it rule before. After coming to power pledging to end austerity and restore “dignity,” Tsipras now must implement the further sharp spending cuts and tax increases he ended up agreeing to in exchange for €86bn of fresh European aid. The electorate has voted to return to power a party that “ditched its promises, switched its policies, and caused the collapse of Greek banks, bringing in an unneeded recession,” said Stathis Kalyvas, a professor of political science at Yale University. On the other hand, “this government will be called to implement a stringent set of fiscal and structural reforms that it vigorously rejected before,” he said. During the Summer of discontent, Banks were closed, commerce ground to a halt, and European officials began to talk openly of Greece exiting the EUR. The crisis was only resolved when Tsipras caved in to creditor demands, agreeing to a package of requirements arguably even more onerous than the one Greek voters rejected in a referendum less than two weeks earlier. Tsipras’s power over matters of taxation, spending, and regulation will be minimal given that all key economic decisions have effectively been made by European finance ministers and central bankers, and any deviation risks a halt to aid payments. “The space for brinkmanship or renegotiating the agreement is close to zero,” said Brunello Rosa, an analyst at Roubini Global Economics. An initial review by creditors of the country’s progress in implementing the program is due before the end of the year, with another in spring 2016. I think considering what we witnessed since February, Tsipras has grown both as a leader and politician understanding what it takes to rule a country that is so divided. This time however I think Tsipras and his Syriza party understand that austerity is simply unavoidable and changes have to be made. Greece (like Scotland) cannot afford to go it alone. Time will tell!!!

I owe you an apology – I wrote last week the FED will definitely raise rates – I was wrong. Despite the strong economic data supporting a hike, the FED could simply NOT IGNORE the global crisis that is upon us. A strong China means more to the US that the prospect of higher interest rates. December is the next possible date, but unless China makes a remarkable turnaround, the chances are we will now only see a US rate hike in Q1 2016. Bear in mind authorities in the UK have also been calling for rate hikes, but one thing is for certain the UK would never jump the gun and hike first (never say never) – but I think you get what I am saying. So any UK rate hike has indeed been pushed out at the same time. Interesting to read over the weekend some calling for a CUT in rates and negative interest rates. I think that is a little too much as the UK economy is doing just fine.

Last Friday Moody’s (rating agency) downgraded France’s government bond ratings by one notch to Aa2 from Aa1. The outlook on the ratings is stable. The key interrelated drivers of today’s action are: 1. The continuing weakness in France’s medium-term growth outlook, which Moody’s expects will extend through the remainder of this decade; and 2. The challenges that low growth, coupled with institutional and political constraints, poses for the material reduction in the government’s high debt burden over the remainder of this decade. Quite unexpected if I am honest, but not surprising. EURUSD has not really reacted adversely to this news and the FX market has taken it on the chin.

In the aftermath of this week’s FOMC, for this week there are 9 CB meetings: South Africa, Turkey, Israel, Czech Republic, Hungary, Philippines, Taiwan, Mexico and Colombia. Not expecting too many fireworks from any of these meetings.

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc

20150918 – THINKING BEFORE LEAPING

High Low High Low
EUR/USD 1.1436 1.1390 USD/ZAR 13.3602 13.2145
GBP/USD 1.5607 1.5556 GBP/ZAR 20.83 20.57
EUR/GBP 0.7340 0.7309 USD/RUB 67.96 64.45
USD/JPY 120.42 119.49 USD/ILS 3.8971 3.8471
GBP/CHF 1.5011 1.4936 S&P 500 1,994 1,982
GBP/AUD 2.1765 2.1519 Oil (Brent) 49.64 48.67

 

So after all the speculation, after all the waiting, the members of the Open Market Committee stared across the gap and decided to pause, to have a think if you will, before leaping into a future where America tried to move monetary policy on from the global financial crisis to a more normal setting. The pleas of the IMF, World Bank, top bankers and others have clearly been listened to. For now there is no interest rate rise, the Federal Funds rate remains set a 0 – 0.25%, possibly for the rest of 2015, despite Ms Yellen’s earlier determination to see a start to normalisation in 2015. The uncertainties surrounding the slowdown in China, the recent bout of market volatility, the fragility of the recovering US labour market were too much – in the considered view of the committee – to justify a rate hike at the present time. One decision maker even thinks rates shouldn’t rise until at least 2017, but it’s clear that the consensus is moving towards an early 2016 rate rise.

 

Markets reacted gleefully to the announcement with the S&P 500 jumping more than 20 points initially but ending up slightly down on the day as all the ‘no hike’ bets were taken off at a profit. Similarly in the currency markets the dollar sold off sharply into the news, but the markets have been less quick to take off the winning bets as is clear looking at EUR/USD and USD/JPY. The greenback is considerably weaker against peers than it was this time yesterday.

 

I do have some sympathy with the view that a rate rise yesterday could have sparked a 1994 style bond market meltdown. Then the results of Federal Reserve hawkishness precipitated the so called ‘Tequila crisis’ and near financial collapse for Mexico. In this case who knows which economies would have played the role of victim, perhaps sitting down at the FOMC, a decision maker might have theorised that China could somehow be in line for the starring role, no one can criticise pulling back from the brink if that was the case! China, after all, is NOT Mexico. It is now the 2nd largest economy in the world (or 1st if some PPP measures are to be believed), and if the Tequila crisis brought some of the largest US banks to their knees, goodness knows what the cascading effect of a Chinese collapse would have done to the global economy. No.. in retrospect perhaps caution was the wisest course. As you all know from my blog yesterday I was fully in support of the need for a hike, and I’m not backing off, but I can empathise with the decision if those were the risks that were considered. I still believe that we live in a world where there is an asymmetry in the monetary decision making process, if inflation is temporarily low it can be used as a justification for keeping interest rates lower than they should be, yet if inflation is temporarily high central banks will “look through” the data and justify holding rates lower for longer. Interest rates are equivalent to the cost of money in my view, it is a hugely important variable in a capitalist system. I fear that investment decisions are being made now at distorted cost levels and we will all pay in the long term for the understandable misjudgements. It is a judgement call that relies on avoiding the pain now, but potentially storing up something considerably worse in all our futures.

 

For now the currency markets will need to adjust to a new setting. There needs to be a reassessment of the determination of the Federal Reserve to normalise policy, if, as I expect, the market sees this as merely a pause then the dollar will begin to rally again. In this scenario I would expect GBP to underperform USD, EUR and JPY. After all whither goes the decision of the Federal Reserve, so goes the Bank of England.

 

 

 

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc

20150917 – UNLIKELY AND UNWANTED

High Low High Low
EUR/USD 1.1319 1.1284 USD/ZAR 13.3517 13.2564
GBP/USD 1.5522 1.5489 GBP/ZAR 20.70 20.54
EUR/GBP 0.7296 0.7274 USD/RUB 65.80 64.62
USD/JPY 120.95 120.34 USD/ILS 3.8750 3.8527
GBP/CHF 1.5072 1.5025 S&P 500 1,999 1,992
GBP/AUD 2.1618 2.1524 Oil (Brent) 50.22 49.64

 

As I mentioned a few days ago, the market is increasing doubting the possibility of a Federal Reserve interest rate rise later on today. You can see it in the way the dollar has sold off in recent sessions, the way gold and oil have rallied and even the equity markets too. Oil has traded above $50 per barrel for the first time in over a week, and this happening on the day of the FOMC should tell you something, similarly the S&P 500 got within a fraction of a point of the psychological 2000 level last night, which would have been the first time since the height of the market turbulence in mid-August. Clearly not only is the market seeing a hike as unlikely they view a hike as unwanted. Perhaps others don’t agree with my thesis that a small hike now would be a declaration of the strength of the US economy, and would lead to a more gentle hiking cycle later!

 

Over on this side of the pond the data published yesterday only reinforces my view as far as I’m concerned. The labour market data in the UK was very constructive with the unemployment rate falling yet again, down to 5.5%, but even more pertinent was the rise in average earnings to the fastest rate in 6 years. Admittedly the ex-bonus number showed a more steady increase, but when you add bonus’ we get a number which was 0.4% better than forecast, and a solid increase over the prior period. Now most of the time it pays to look at the ex-bonus number, but it’s worth pointing out that if bonus’ are better than expected that’s valuable information in its own right! My main point though is that the UK and US are together at the vanguard of the post-GFC recovery, despite recent concerns both of these economies remain in a very strong position and should really be considering tighter monetary policy at this point in the cycle.

 

The OECD has cut its global growth forecast on the back of poor Chinese data and recent market volatility. When you consider that there are increasingly public doubts about the veracity of Chinese GDP growth data – with some thinking that the East Asian giant is probably not even growing faster than 5% annualised GDP in reality (rather than the official 7%), you can imagine that even the OECD’s re-estimation of global growth might be on the high side. The OECD has clearly joined the ranks which includes the IMF and the CEO of Goldman Sachs, Lloyd Blankfein, who are seeking to discourage the Federal Reserve from hiking rates tonight.

 

The bottom line is the market will most likely have its way tonight. It wouldn’t shock me if the FOMC tells us that rate hikes won’t happen until next year. If that happens we might get a brief dollar sell off, but at some point the worm will turn, and I’m guessing sooner than most expect. The dollar will quickly start to recover and will rally strongly, because this is the paradigm we are in – positive risk sentiment equals rising equities and a stronger dollar. But there is fundamental support for a dollar rally in a ‘no Fed hike’ scenario: the likelihood of the US central bank falling behind the curve will be that much greater if the Fed doesn’t hike now, and a more aggressive hiking cycle later could drive the greenback to fresh highs.

 

 

 

 

 

 

 

 

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.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc