20151130 – DAILY UPDATE

High Low High Low
EUR/USD 1.0596 1.0570 USD/ZAR 14.4387 14.3475
GBP/USD 1.5051 1.5007 GBP/ZAR 21.73 21.55
EUR/GBP 0.7052 0.7032 USD/RUB 67.18 65.34
GBP/EUR 1.4221 1.4180 USD/ILS 3.9161 3.8600
USD/JPY 123.02 122.68 S&P 500 2092 2084
GBP/CHF 1.5511 1.5472 Oil (Brent) 45.15 44.91
GBP/AUD 2.0964 2.0839 Gold 1059.2 1053.1

As December approaches two huge events could impact the largest currency pair in the world, EUR/USD. The ECB this Thursday is likely to propose further quantitative easing measures which will have the equivalent impact of an interest rate cut, while in a couple of weeks on the other side of the Atlantic, the US Federal Reserve is likely to hike interest rates. In anticipation of these events EUR/USD and GBP/USD are under pressure this morning. In the case of EUR/USD the key levels to watch are 1.0521 and 1.0463, the latter being the year to date low, and for GBP/USD the immediate concern is the 1.50 level. GBP/USD today has already come within a fraction of a pip of this level, but it looks like someone – probably banks – are defending this level at the moment. It is highly unlikely that such a defence is will prove successful for any significant period of time. This sort of scenario occurs when there is significant optionality at a key level, and one party (mainly the option seller) is likely to lose a lot of money if a path dependent option is exercised within a set period of time. It seems all but inevitable that as early as this afternoon GBP/USD will be trading with a 1.49- handle, watch this space!

 

Interest rate decisions are not the only things we need concern ourselves with this week. We also get the US labour market report – non-farm payrolls – and Chinese and UK PMI’s, as well as a rate decision from the Bank of Canada. It’s all bunching up, and it means that there could be some serious fluctuations amongst developed market currencies. And I haven’t even mentioned the excitement that could happen with emerging market currencies as well. We have seen over the last 18 months, the disruptions that occur when even the possibility of rate rises in the United States flashes around the market. Now, as the reality finally catches up to us, there could be difficult times ahead for these less liquid currencies.

 

Interestingly the IMF has published a report with a relatively cheery view on where emerging market economies go from here. I would characterise the report as suggesting that things are unlikely to get much worse in 2016 than 2015. On that basis, it’s not time to start popping champagne corks for developing economies, certainly not when you consider that emerging country private sector debt levels will become more vulnerable with tighter monetary conditions in the United States. The future will tell us if there are any systemic issues that will be spawned by these risks, but it’s something we should all be cautious of, and we should remember that the risks are still probably to the downside.

 

For today, and indeed the next few days, it is likely that the dollar will remain ascendant. But no one should be too surprised by large currency fluctuations.

 

 

 

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20151127 – DAILY UPDATE

High Low High Low
EUR/USD 1.0639 1.0601 USD/ZAR 14.3677 14.2314
GBP/USD 1.5110 1.5074 GBP/ZAR 21.69 21.49
EUR/GBP 0.7051 0.7018 USD/RUB 66.47 64.75
GBP/EUR 1.4249 1.4182 USD/ILS 3.8966 3.8738
USD/JPY 122.73 122.30 S&P 500 2098 2087
GBP/CHF 1.5474 1.5419 Oil (Brent) 45.97 45.32
GBP/AUD 2.0963 2.0834 Gold 1074.2 1066.8

 

In a short while, this morning, we’ll get Q3 GDP data for the United Kingdom. Economists are expecting an unchanged number of 2.3% for the previous quarter. There might be some currency market fluctuation if the data surprises either way, but the truth of the matter is that this data is lagging. We are already two thirds of the way through Q4, so looking back at the numbers for Q3 will not give you much of an indication of what’s in store for the British economy going forward. Of far more relevance, was the Chancellor’s Autumn statement, which continued the stated aim to reduce the size of government’s share of gross domestic product. It’s no surprise that there will be reductions in real spending, it is only to be hoped that the private sector picks up the baton, and enables the UK economy to continue to post solid growth numbers. It is clear that reductions in fiscal expenditure will enable the Bank of England governor to take a more relaxed approach to interest rate hikes, sterling might end up being a bit weaker than it otherwise might have been, but this is all long term stuff.

 

Some mixed data in Japan, with unemployment falling to a 20 year low – good! – but inflation falling as well – bad!? I say “but”, because this is counter to the wishes of the Bank of Japan. I’m sure the huge number of pensioners in Japan aren’t crying about it though. But clearly the Japanese central bank would love to inflate away part of the huge government debt burden. Contrast the unemployment data in Japan, with the sobering news that unemployment rose to the highest levels since 2013 in France. Japan and France are two economies with vastly different structures obviously, so close comparisons are probably unfair. But there have been signs of stabilisation in the last few months in France. Perhaps this is just the dark before the dawn, but clearly news like this will only encourage those on the board of the ECB who would like to take more aggressive steps with the ongoing quantitative easing programme.

 

Later on this morning we’ll get more business and consumer surveys for the Eurozone, which will help give us more clarity about economic conditions in the Eurozone. I continue to maintain that the fate of EUR/USD will depend as much on additional QE programmes in Europe as it will on interest rate rises in the United States. It is difficult to get a sense of how much expectations are getting built up, but there is always a risk of strong reversals if surprises are large enough. For now, we continue to look for new 12 month lows for both EUR/USD and GBP/USD in the coming months, so it’s quite clear where we stand. Looking at GBP/USD in particular, the currency pair appears to be coiling, the energy build that results from this sort of range bound behaviour usually ends with an impulsive move in the same direction as the prior trend. That would mean a big move lower then. Some technical analysts who are seeing the charts in the same way as me, are going as far as to suggest that the end result will be GBP/USD reaching the 1.43/44 zone in the next few months. If this turns out to be correct, data like today’s UK GDP report might be part of the reason for it. So let’s see what happens…

 

 

 

 

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20151126 – DAILY FX COMMENT

Good morning

High Low High Low
EUR/USD 1.0628 1.0602 USD/ZAR 14.2100 14.0800
GBP/USD 1.5132 1.5089 GBP/ZAR 21.47 21.28
EUR/GBP 0.7030 0.7016 USD/RUB 66.03 64.04
GBP/EUR 1.4253 1.4225 USD/ILS 3.8916 3.8691
USD/JPY 122.80 122.54 S&P 500 2096 2088
GBP/CHF 1.5473 1.5427 Oil (Brent) 46.62 45.89
GBP/AUD 2.0951 2.0820 Gold 1075.0 1069.0

Let’s start with some good news and news that will make PM Tsipras green with envy (and proves that AUSTERITY and belt tightening works!!).  Spain’s economy grew in the third quarter at the fastest annual rate since the 2008 financial crisis. The EU’s fourth-largest economy grew handsomely at 3.4% in the July-to-September period compared with the year earlier, up from 3.2% in the second quarter. On a quarterly basis, the economy did slow slightly, expanding 0.8%, compared with growth of 1% in the second quarter. While both readings were in line with estimates it indicate Spain is on track to record its strongest economic performance this year since 2007. The statistics office showed internal demand accounted for much of the momentum in the quarter, driven by a recovery in domestic spending. What this means in a nutshell is since 2008 Spain has embarked on a period of budget cuts, income (tax) recovery, and most importantly austerity. All this has meant the economy has bottomed and is enjoying a period a positive and healthy growth (in line with the US and higher than UK). Perhaps other EU member states should acknowledge that the short term pain has now led to the start of what we hope is long term gain.

Overnight,  in an article published by Reuters, the ECB is considering options such as a two-tier system for charging deposits or buying bank loans at risk of non-payment ahead of December’s meeting. At the next monetary policy meeting on 3 December, the market is expecting a potential 0.10% cut in the deposit rate and a time extension of QE, as well as some changes in the parameters of QE, including the removal of the yield floor for government bonds. The EUR (USD) as a result fell over 50 pips and is currently trading just north of 1.0600 with Europe now taking over there is a likelihood we could see (and should see) further USD gains vs the EUR as the desire to hold the latter wanes. I have noted previously I think as we head towards both the 3rd Dec (ECB) and 16 Dec (FED) meetings the EUR will come under increasing pressure. Should the FED indeed hike rates i would expect to see profit taking before a resumption in the USD rally as traders then ask “when will the FED hike again”.

GBP(USD) trading sideways in a tight 1.5050-1.5150 range as traders focus on the EUR. having said that it is only a matter of days when I believe we should see the GBP(USD) fall through the 1.50 barrier en route to the year’s low 1.4569 (ish). After yesterday’s interim budget, it looks like real wages could stagnate as the Chancellor attempts to balance the books and create a budget surplus (2020?). I am struggling to find a reason to BUY the GBP (USD) and if the above (EURUSD) plays out, I would expect the GBP to follow. However vs the EUR, the GBP has been mixed. Trading sub 1.4285 (0.7000) briefly it rallied back to over 0.7060 before the new story broke overnight. Currently trading at 0.7030 (1.42) I think the GBP is still on course to properly break 0.7000 and trade stronger.

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20151125 – DAILY UPDATE

High Low High Low
EUR/USD 1.0690 1.0640 USD/ZAR 14.0857 13.9653
GBP/USD 1.5116 1.5075 GBP/ZAR 21.27 21.06
EUR/GBP 0.7080 0.7052 USD/RUB 65.98 63.73
GBP/EUR 1.4180 1.4124 USD/ILS 3.8845 3.8482
USD/JPY 122.59 122.25 S&P 500 2090 2085
GBP/CHF 1.5358 1.5307 Oil (Brent) 46.80 46.07
GBP/AUD 2.0806 2.0722 Gold 1081.2 1074.1

In a week which has already seen strong manufacturing PMI’s published for the Eurozone and Japan, a better than expected strong IFO report in Germany, it was heartening to see that Q3 GDP in the United States was stronger than initially thought. The domestic data, coupled with the solid data from some of America’s largest partners will only encourage the Federal Reserve to occupy a hawkish stance on December 16th. An interest rate rise looks more and more likely. However, at this time perhaps the most market impactful data might be the European one. If the surprisingly strong data – suggesting Eurozone business activity is at a 4 year high – persuades the ECB to hesitate before expanding its quantitative easing programme that might result in a more positive dynamic for the euro than the imminence of a rate rise in the US on the dollar. It’s tough to tell, but the key point is that all of a sudden the path of least resistance might not be as obvious as it was. Bigger picture, you have to expect the dollar to continue to appreciate, but as in nature there are no straight lines.

 

Talking about stronger than expected economic data, the numbers published for Q3 GDP growth in Singapore were 0.5% better than forecast, albeit we’re talking about 1.9% annualised growth which is some distance away from the sort of GDP numbers the city state used to post in the recent past. Perhaps a sign of the maturation of the economy, but never-the-less, Singapore remains a sort of canary economy, because of its open structure. This has to be positive news for the global economy as a whole. Perhaps things really aren’t quite as bad as some would like to believe. Again… this only raises the probability of the Federal Reserve strengthening its resolve to normalise interest rate policy and move on beyond the post Global Financial Crisis era, and the love affair with interest rates at the zero bound.

 

Elsewhere the Australian dollar received a boost as Glenn Stevens, the RBA governor, suggested that “we should just chill out” when asked if a rate cut was likely next week. His preference is a wait and see approach over the Christmas period, or so it seems. In Nigeria, there is continuing criticism of the currency restrictions imposed by the CBN. The popular view is that the USD/NGN official rate seriously overestimates the value of the naira with black market rates offering a truer idea of valuation, which apparently could be anything from 230 to 270 in the critics’ opinion. In the short term, Nigeria’s import dependence is leading to severe pressures on the domestic economy, but it has been conceded that in the long term the currency restrictions might lead to import substitution effects which would be a positive thing.

 

The pace of dollar appreciation looks to have accelerated in recent days, but there’s not much to get excited about until we see a decisive break above this month’s highs. I would not be at all surprised to see EUR/USD trading below 1.05 and GBP/USD trading below 1.50 at the close of this year. But the more interesting issue, and one that we will discuss in future blogs, is what is likely to happen to emerging market currencies in the wake of a Federal Reserve hike?

 

 

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20151124 – DAILY FX COMMENT

Good morning

High Low High Low
EUR/USD 1.0645 1.0619 USD/ZAR 14.1600 14.0300
GBP/USD 1.5156 1.5116 GBP/ZAR 21.51 21.23
EUR/GBP 0.7036 0.7014 USD/RUB 67.38 65.26
GBP/EUR 1.4257 1.4213 USD/ILS 3.8885 3.8679
USD/JPY 122.96 122.66 S&P 500 2090 2084
GBP/CHF 1.5440 1.5389 Oil (Brent) 45.60 45.00
GBP/AUD 2.1054 2.0986 Gold 1073.0 1067.0

The message you would think is loud and clear. FED funds will rise on the 16th December. Or will they.

We have witnessed since late June a downward spiral of US economic data, only to see an impressive turnaround earlier this month when the NFP figure showed a jump from +142k in Oct to +271k in Nov sending stocks lower and the USD higher. From all the pessimism pre the number, suddenly everyone (just about) reversed their pre NFP FED rate hike opinions and stated actually, we were wrong, the FED will hike in December (FED futures jumped to over 70% probability). So here is some food for thought, we are approaching the “festive season” companies worldwide rely on this period to boost their coffers. Hence they hire hire hire (increased productivity and sales). What happens after the festive season (forget the January sales), you would think all those hires are let go. So my question is if the NFP number comes in at or around November’s data does this signify a real change in corporate sentiment or is it merely a seasonal change. Surely one should pay close attention to the June-November figures where trading is normal rather than based on an event/season. Hence be careful what you wish for because the FED I am certain are going to be super careful on the correct timing of the rate hike. As I have said previously a 0.25% rate hike is in the broader picture neither here nor there. What it does show is intent and that speaks volumes.

As a result of these rumours and expectations the USD has been given a new lease of life. Powering through 1.1069 (support) we find ourselves hovering around 1.06, as the market continues to buy and hold USD ahead of the 16th Dec decision. Any comments to the contrary by FED members will see USD holders cut positions and run for the hills. Alternatively, no comments from the FED will reinforce USD holders to “add” or at least run the position ahead of the decision. If they did hike, I would expect there to be profit taking followed by another round of USD buying as the question then is when they will hike AGAIN!! BUT and yes a big but, US corporates are already moaning that export earnings are hitting them hard. So can the FED risk corporates sailing into the Bermuda Triangle. The FED must manage the USD’s rally (through rhetoric) so as to avoid a USD rally that really puts a dent in corporate earnings (thus fewer hires and back to the drawing board).  In fact Chairwoman Yellen on Monday argued for a cautious approach to the pace of interest rises in an unusual exchange with U.S. consumer advocate Ralph Nader. In a letter to Nader, the Fed chair repeated recent statements that the central bank should only gradually raise interest rates. “An overly aggressive increase in rates … would at undercut the economic expansion, necessitating a lasting return to low interest rates.” Enough said!!

As for the GBP, we have already seen the currency move below 0.70 (1.4285) this week before moving back above on profit taking. However vs the USD the GBP has been quite “lucky” if one could say that. For the past few months the GBPUSD has ranged 1.5150-1.5800 which in FX terms is pretty tight. Even as we approach the FED meeting the GBP continues to trade in the 1.50handle (1.5150) giving up gains slowly. While I fully expect the GBP to “dump” towards 1.45 the pace is as slow as watching paint dry. No doubt the risk of the UK hiking has been depleted in recent days but the threat still lingers. Hence I still think vs the EUR the GBP will be singing and dancing, while vs the USD it will be a slow grind lower.

 

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20151120 – DAILY UPDATE

High Low High Low
EUR/USD 1.0740 1.0675 USD/ZAR 14.0518 13.9630
GBP/USD 1.5300 1.5270 GBP/ZAR 21.49 21.33
EUR/GBP 0.7024 0.6988 USD/RUB 65.16 64.18
GBP/EUR 1.4310 1.4237 USD/ILS 3.9016 3.8536
USD/JPY 123.06 122.74 S&P 500 2089 2078
GBP/CHF 1.5532 1.5470 Oil (Brent) 44.59 44.24
GBP/AUD 2.1284 2.1205 Gold 1086.9 1079.4

The Greek parliament approved a reform bill required to unlock €12bn from the bailout agreement. The bills passing wasn’t a foregone conclusion, but it got through by 153 to 137 votes, with some resistance due to measures like limiting protection for defaulting mortgage holders. It’s way too soon to say that that particular crisis is over, but this is definitely a positive step. Whether Greece is ultimately able to repay these loans is an entirely different question. I think what most are hoping is that this can has been kicked far enough into the future that we can focus on other issues in the present. Elsewhere in the Eurozone, the October minutes of the ECB policymaker discussions shows clear evidence that additional quantitative easing measures were being considered. So here we are, even as the Federal Reserve looks to raise rates, the ECB seems to be looking at effectively cutting rates. You don’t need to be a currency guru to know that it’s looking bleak for the euro against the dollar!

 

President Dilma’s administration in Brazil lurches from bad to worse. In fact it almost brings back memories of the bad old days in Brazil. Inflation has climbed to its highest level in over a decade, at over 10%, and the economy is contracting. It is a shame that the more economically orthodox on the right of the political spectrum proved unable to find a candidate or at least a narrative in the last elections to win the votes of the Brazilian electorate, I fear the damage that economic mismanagement in the South American giant can create. Let’s not forget that the Brazilian economy is significant on a global scale now, with an economy roughly the same size as Italy’s. This matters! One can only hope we don’t end up with an old style collapse there. Thankfully we are a long way away from that, it’s just the trend that raises concerns at the moment. And when I think back to the tightening by the Federal Reserve in 1994 which led to the Tequila crisis in Mexico, I can’t help wondering if this time it’s a Cachaça crisis that will capture the imaginations of future economic historians.

 

The only one of the BRICS (Brazil-Russia-India-China- South Africa) that looks in reasonable shape at the moment is India. I don’t need to go into what ails the Russian economy, and we speak about the slowdown of growth in China frequently enough on this blog, so I’ll add a brief word about South Africa. Perhaps a somewhat fortuitous to be a member of the BRICS club, being so much smaller than the other economies, but the central bank, SARB, raised interest rates yesterday somewhat surprisingly. It’s been a tough year for South Africa, the rand has fallen over 20% against the US dollar, but inflation, which had been trending higher over the last few years, seemed to have stabilised and perhaps even begun to retreat. In light of that it really was a surprise that the central bank chose this moment to hike, but it turns out the fear is because of externalities. SARB is very concerned about a Federal Reserve rate hike and the detrimental impact it could have on the rand. This is clearly a pre-emptive strike, but it has rather more value than that. Anyone who thinks that central bankers don’t talk to each other is naïve in my view. This, in addition to the recent FOMC minutes and assorted comments from US policy makers, is as clear a sign as you will get that a US interest rate hike is very very likely on December 16th.

 

I confess I was somewhat surprised at the strength of the pound yesterday. Despite rather disappointing retail sales data in the UK, GBP/USD was able to achieve a two week high in the afternoon, trading as high as 1.5330. The move seemed to be more about the dollar than sterling, and it wouldn’t shock me if that high caps the recent bout of dollar consolidation. All the signs point towards more dollar strength the closer we get to the December 16th FOMC meeting. It would take big news for something to hijack the strengthening impact of tighter monetary policy on the greenback.

 

 

 

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20151119 – DAILY UPDATE

High Low High Low
EUR/USD 1.0719 1.0655 USD/ZAR 14.1846 14.1048
GBP/USD 1.5295 1.5227 GBP/ZAR 21.67 21.54
EUR/GBP 0.7011 0.6983 USD/RUB 66.41 62.91
GBP/EUR 1.4320 1.4263 USD/ILS 3.9070 3.8791
USD/JPY 123.66 123.08 S&P 500 2091 2081
GBP/CHF 1.5564 1.5511 Oil (Brent) 44.77 44.24
GBP/AUD 2.1456 2.1300 Gold 1079.7 1069.7

Last night we got a chance to have a look at the minutes of the last FOMC meeting. There weren’t too many surprises, most FOMC members believe that a rate rise in December is appropriate barring any unforeseen shocks and incoming data continues to point towards an improving economy. You can easily tick both boxes. There do however remain differences, with some of the more dovish members still maintaining that the US economy might not be strong enough to handle any setbacks given the minimal armoury policy makers currently have with interest rates so low. Ironically this has been one of the reasons why I have felt for some time that the sooner rates go up, the better able policymakers will be to lower rates again when this economic cycle inevitably ends. I would also argue that the earlier you start raising rates, the lower the terminal rate will be. However… there are many ways to skin the cat, and I do wonder if interest rates are the optimal tool at this point. Surely some thought should have been given to reducing the Federal Reserve’s balance sheet first? But in any case I won’t presume to second guess them, I’m sure they’ve done their homework!

 

Markets took the minutes in their stride, which is no great surprise considering the futures market is pricing in a near 70% probability of a December hike. Equity markets even drifted slightly higher post minute’s publication. Perhaps more impactful over the last 24 hours has been the news coming from the Bank of Japan. Despite the recent GDP data which shows once again that the Land of the Rising Sun has slipped back into recession, the central bank has not altered policy. Japan is clearly a victim of the tailing off in the growth of the Chinese economy with its export dependence, and even a weaker currency and weaker energy prices have not been enough to counterbalance this. The focus for the BoJ for now remains the 2% inflation target. The Japanese yen strengthened a little bit on the back of the news, but to be honest, it wasn’t particularly dramatic.

 

The pound sterling has strengthened somewhat this week, almost reaching 1.53 versus the dollar and now trading below 0.70 versus the euro (for those who prefer GBP/EUR quotes read above 1.43) in the inter-bank market. I continue to maintain my scepticism that this can last for long. In any case I would think that there is very strong resistance above the 1.54 area for GBP/USD, I would be very surprised, and my views would lose credibility if it’s able to even get above 1.5350. For now, risk sentiment remains generally positive, and dollar consolidation is expected to continue today.

 

For those with an interest, I thought this article on Bloomberg.com was interesting… http://www.bloomberg.com/news/articles/2015-11-19/we-need-to-talk-about-the-global-economy? Enjoy..

 

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20151118 – DAILY UPDATE

High Low High Low
EUR/USD 1.0672 1.0631 USD/ZAR 14.3272 14.2294
GBP/USD 1.5222 1.5187 GBP/ZAR 21.79 21.65
EUR/GBP 0.7018 0.6990 USD/RUB 65.69 64.27
GBP/EUR 1.4306 1.4249 USD/ILS 3.9212 3.9010
USD/JPY 123.48 123.23 S&P 500 2056 2047
GBP/CHF 1.5458 1.5406 Oil (Brent) 44.43 43.68
GBP/AUD 2.1445 2.1372 Gold 1072.40 1063.8

This week we’ve had inflation data for the Eurozone, UK and the US. In each case core CPI inflation either exceeded or at least matched expectations. It becomes harder and harder to persist with a narrative of deflationary fears, but I’m sure some central banks will try. Certainly if the energy complex continues to weaken then it’s possible that there could be pressure on core data, but the boost to non-oil demand should be a counter. In addition to the inflation data we also got ZEW economic sentiment data for both Germany and the wider Eurozone. The data for Germany was strong, and beat forecasts, while the solid data in the Eurozone managed to disappoint relative to expectations. All in all not bad data, this week, in terms of painting a picture of an ongoing global recovery, but at this point in time the key takeaway is that it certainly will not dissuade hawkish FOMC members from voting to hike in December.

 

In Nigeria the CBN governor offered a reasonable explanation for the refusal to countenance further devaluation of the naira. Nigeria being a mono-export economy – energy products generate over 80% of exports – would gain nothing from a devaluation because Nigeria cannot gain market share from such an action. Furthermore Nigeria’s importers would be the primary victims of such a policy as their import bills would rise. I suspect the main complaint the CBN faces at the moment is to do with the selective restrictions of imported goods. It would take a long time – if at all – for the Nigerian economy to adjust and substitute some of these imports with domestically sourced alternatives. But for now my sense is that it’s best to wait and see what policy the new ensconced ministers come up with.

 

There are tentative signs that the dollar is gaining strength again, but I suspect we remain in a period of consolidation following recent moves. EUR/USD, for example, looks to be weakening but with rapidly diminishing momentum. The same can be said for EUR/GBP, which has again briefly flirted with a sub 0.70 number, or roughly 1.43 in GBP/EUR speak. In both cases I have a suspicion that these levels are either not sustainable in the short term or could suggest a significant weakening of the euro to come.

 

Both France and Italy have been warned that their fiscal expenditure is in danger of breaching Eurozone annual spending rules. Needless to say, the timing of the message could have been better, France is unlikely to heed this criticism as it moves towards a war footing given last Friday’s events.

 

 

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20151117 – DAILY FX COMMENT

Good morning

High Low High Low
EUR/USD 1.0691 1.0649 USD/ZAR 14.3967 14.3000
GBP/USD 1.5207 1.5165 GBP/ZAR 21.86 21.71
EUR/GBP 0.7034 0.7013 USD/RUB 66.36 54.50
GBP/EUR 1.4259 1.4217 USD/ILS 3.9200 3.8875
USD/JPY 123.43 123.16 S&P 500 2057 2049
GBP/CHF 1.5368 1.5335 Oil (Brent) 45.05 44.55
GBP/AUD 2.1462 2.1383 Gold 1087.00 1076

News overnight that there is now a very high probability that the ECB will push through with additional QE and easing of monetary policy has pushed the EURUSD lower overnight as the market gears up both for this event and a (70%) hike in US interest rates. No doubt if things carry on as they are the EUR is likely to break through the years low 1.0459 en route to PARITY (WE SAID IT IN JANUARY!!). US corporates and the FED/ECB will be watching the USD closely given how the strong USD has impacted on corporate (foreign) earnings. With the cat out the bag, the only way to slow the USD rally is verbal intervention and that has been absent. So for now the trend is your friend. ECB’s Praet said the ECB sees a risk
that investors and consumers will lose faith in policymakers makers’ projections for reviving inflation. “It’s key for a central bank to keep inflation expectations anchored, especially in a period of slack in the economy, and we have some signals that these inflation expectations are still fragile”. Mechanically updated projections suggest that the risk is present that we may again have to extend this horizon, and even if it’s slightly, it’s a repetition of a past pattern. And then you go into the question of credibility of monetary policy. Our own experience with a negative deposit rate was more favourable than we initially thought. There is no decision which has been taken but it is true that, given the experience that we have seen, we thought in the Governing Council that there was the case to re-discuss the lower bound.”

UK PPI and CPI at 9.30am this morning. remember only a couple weeks ago the imminent UK rate hike was deemed to be off the table for now and should CPI especially come in as expected you will likely see the GBP drop some more. We have been saying for the past month (GBPUSD 1.55/1.57) the GBP strength is unsustainable and looking for the GBP to drop below 1.50 any day now en route to the 1.45 handle target rate. This is not to say the UK economy is faring badly, rather the USD is in play and therefore not immune from the falls experienced by the other “major” currencies.

EM currencies are being hit hard as a result of the USD rally. USDZAR for example is now trading near the year lows and it looks pretty sure the ZAR will continue to be hit hard as a result. ZAR speculators have taken the short ZAR positions to the highest levels in over 2 years which gives you an idea of what is in the pipeline. Again we are expecting the ZAR and other EM currencies to fall in line with the USD rally.

The CB of Nigeria revealed yesterday why it refused calls to devalue the NGN further, citing a deval would not have had a direct impact on Nigeria’s economy…stating ” The simple idea behind devaluation is that you make your import expensive and make your export cheaper. The whole essence is that people can now produce because your export is cheaper, but the question we need to ask ourselves is what do we produce and what do we export as a nation? Our major export commodity which account for more than 80 percent of our income is crude oil and here that the crude oil price is determined, we don’t have a control over it. So, if we devalue, it has no impact directly on your major export, and what is supposed to be the non-oil export, we are not producing effectively. It means that for the industry which is also import-dependent means they have to pay higher prices for those goods which will translate to higher inflation.” In line with the ZAR the NGN has fallen over 2% in the past week as a result. More to come? Market forces and demand will have their own say in the matter.

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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