We, at ParityFX Plc, would like to extend our heartfelt condolences to any and all who lost loved ones in the heinous tragedy in Paris this weekend. No doubt there were other events, if not similar in scale, but no less tragic and our sympathies are with any affected, but this one was so unexpected, so close to home, it forces upon us all a new perspective.

I was asked over the weekend whether the events in Paris would have an impact on the currency markets, and to be honest, that’s a difficult question to answer. The euro is a vastly traded currency, and at any given time it is bought and sold for a myriad of reasons, while I’m sure some transactions will occur which are a direct consequence of Friday’s tragedy, it is likely to be overwhelmed within the larger context.

Elsewhere in the world, the data was both good and bad. Michigan Consumer Sentiment was published on Friday afternoon, and clearly the US consumer is in fine fettle. The picture was not so positive in Japan, which appears to be slipping back into recession. So much for Abenomics. Interestingly, this is all about capital expenditure, the Japanese consumer is spending away happily like there is no multi-trillion dollar debt mountain. Some other generation’s problem I guess! Later this morning we get Eurozone inflation data, and in the afternoon Empire Manufacturing data from the US.

I suspect that we are approaching the end of the period of consolidation following the recent dollar rally. The next move should be further dollar strengthening. Looking at emerging currencies and their current weakness, it is likely that the next dollar move could be quite a significant and broad one. The million dollar question will be what sort of impact strong dollar appreciation will have on risky assets? Clearly the US equity markets will have a tough time of it, but this will be primarily due to stocks with non-US or commodities exposure, no doubt this is a great time to own domestic/ consumer focussed enterprises in the United States. The picture could be more grim for emerging market equities. Something to look out for, as this could feedback into emerging market currencies.

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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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Good morning

Commodity, precious metals, stocks have all faced renewed threats after last week’s NFP (+271k) number which indicated the FED are lining up a rate hike in December. While the number was reassuring and the FED are satisfied the ECB and PBoC are doing everything they can to boost their economies, we cannot take for granted the FED will indeed act. The past 5 months have not been kind to the markets and data has been disappointing to say the least, so one positive NFP doesn’t suddenly mean everything is back to normal and a hike is a done deal. The coming 5 or so weeks will be watched closely by the FED and the NFP number in December (4th) will go along way to cement the FED’s decision as to whether the timing is indeed right. Let us not get ahead of ourselves here and wait for more economic data to be better prepared. Fed funds are currently at a 70% chance of a rate hike. Strange that before the NFP number last week just about everyone was saying the FED will wait until March 2016….so you can see how fickle the market is.

FED’s Fisher said “while the dollar’s appreciation and foreign
weakness have been a sizable shock, the U.S. economy appears
to be weathering them reasonably well. Monetary policy has
played a key role in achieving these outcomes through deferring
lift-off relative to what was expected a little over a year ago. October FOMC signalled December rate rise may be
appropriate”. Interesting comments concerning the USD given that the USD’s strength has played havoc with US exporter earnings – perhaps Mr Fisher “is talking his book”. No doubt the comments we will be reading about over the coming weeks will be trying to talk up the FED at the December meeting so as not to jolt or panic the market when the announcement is made. If they do hike, I would think the USD will sell off (buy the rumour sell the fact) as traders take profit on the long USD positions. ParityFX noted we will/should see PARITY EURUSD on the 31st December….let’s wait and see if our prediction is CORRECT for the 2nd year running!!!

Regarding the USD strength and impact on US corporate earnings abroad, Cisco Systems forecast adjusted profit and revenue growth for the second quarter below analysts’ estimates, citing a slowdown in order growth and weakness in its enterprise business outside the
US and a strong USD. Cisco shares fell 5% to $26.41 in extended trading on Thursday as a result. Like I said above, nothing is certain yet and the FED need to time the rate hike to perfection in order to ensure they don’t head back into deflation (and unwind the rate hike in early 2016).

BoE’s Haldane said “the case for raising interest rates is
still some way from being made. A rate rise would increase
unnecessarily the chances of the economy falling below critical
velocity, thereby extending the period inflation remains below
target”. This is playing into the GBP bears hands and as I have noted previously we think the coming months could see the GBP fall heavily towards the 1.45 handle ….

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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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The IMF seems to believe that there are greater risks to an “early” interest rate hike than waiting longer. You can probably sense from the inverted commas what I think of that! When you consider that US corporates have increased debt levels since the global financial crisis, primarily for share buybacks, and when you also consider that there is absolutely no reason for them to stop that strategy right now, I would question how much more risky it is to raise rates earlier rather than later. Just my opinion…

Talking about accumulated debt since the global financial crisis, the Institute of International Finance (IIF) has just published a report which (using data from the Bank for International Settlements {BIS}) states that total debt levels in the 18 large emerging market economies have risen from 150% of aggregate GDP to 195%. I’ve said it before, and I’ll say it again.. when you take a step back and look at the post crisis policy solutions, making it cheaper to borrow when you have a debt crisis is one of the most bizarre remedies. But then, perhaps common sense only has a tenuous relationship with economics!

Slightly (very slightly) weaker than expected industrial production numbers published overnight in China, but this is balanced by ever so slightly better than expected retail sales numbers. It seems to be a pattern in recent months that retail sales are outperforming industrial production. This is of course the direction that is needed for the much mooted China rebalance from a manufacturing to more consumption based economic structure. Let’s hope it continues.

Later on this morning we’ll get UK unemployment data. The anecdotal evidence is that activity in the UK is fairly robust at the moment, and you only have to recall the report I mentioned yesterday about office shortages in London to get a sense of the lay of the land. You could take this one of two ways, either the UK economy is actually doing well and the pound should strengthen, or despite the UK economy performing strongly the Bank of England wants to ensure that sterling weakens. You picks you chooses, as they say.

Also in the UK, the Takeover Panel will make its decision about whether to approve INBEV’s takeover of SABMiller. This is a £68bn deal, although a huge portion of that will be transacted in equity there will still be a substantial amount of GBP moving around because of the deal. Obviously those involved haven’t been sitting on their hands waiting for approval before mitigating any sterling risk. Far more likely would be a “buy the rumour, sell the fact” type effect, with the deal requiring the purchase of GBP versus EUR. So don’t be surprised if you see the opposite happen.

I would still characterise the dollar to be in a corrective sequence after the recent impulsive appreciation. This could go on for a few days yet before, I would expect, another larger bout of strengthening of the greenback. I think 1.05 in EUR/USD and sub 1.50 are easily within reach over the next few weeks.

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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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The news published in the Financial Times this morning that London office construction has reached a 7 year high and risen by a fifth over the last 6 months, makes me look back at the recent MPC and wonder yet again if my speculation in its immediate aftermath was correct. At the time I wondered if there was a deeper reason for the dovish report than simply concerns that inflation and demand would remain subdued over the next year. Could it, as I suggested, be to do with the UK’s terrible investment deficit? Higher gilt yields would likely make the deficit worse. It certainly feels like something’s not strictly on the up and up, as London apparently is booming, with real estate experts talking about short term shortages of supply!

Surfing for macro news over the last 24 hours the 4 items which captured my attention were:

• Chinese inflation coming in lower than expected year on year to October, and in fact a slower number than the previous data point. This just after news that the economy had grown by an amount (6.9%) lower than the year-end target, and also the continuing shrinking of imports last month, -18.8% if you weren’t aware. All this paints a picture that we are becoming very familiar with. How large a shock a Chinese slowdown will be to the global economy is yet to be determined, but it looks increasingly certain that we’re going to find out.

• FOMC dove Rosengren sounds upbeat note on a US interest rate rise. If this came from a more hawkish member of the committee it wouldn’t be as newsworthy, but there it is. Rosengren is rightly optimistic about the strength of the domestic economy and doesn’t think the market turbulence a few months ago was significant enough to damage prospects for the US economy. As far as he’s concerned it would be perfectly justifiable for gradual rate rises to occur with a continuing improvement in the US economy. Perhaps the divisions amongst FOMC members were less than some have opined.

• Saudi Arabia is likely to tap the international bond markets for the first time. It looks like lower oil prices have been very damaging for Saudi public finances and debt levels could increase by 50% of GDP over the next 5 years. It’s remarkable given all this, or perhaps it’s because of this, that the Middle Eastern kingdom will not be cutting back on crude production anytime soon. And that’s without even considering more Iranian oil which will be coming on stream sooner or later, or indeed the expected constraint in demand growth due to the push for more sustainable forms of energy over the next 5 years. It seems like cheap oil is here to stay for a considerable period of time.

• It looks like Nigerian sovereign debt is dropping out of another bond index. This time it’s the Barclays Emerging Markets Local Currency Government index, last time it was JP Morgan’s. Barclays said that “the investment conditions in Nigeria have become more challenging for foreign investors in the past 18 months.” It will however remain in Barclays’ broader index, but this can’t be dressed up as good news. The Nigerian central bank has made life difficult for international investors with some of its unorthodox policy contributions this year. As I’ve said many times before it’s up to the new government to create policy that will give domestic and international investors alike confidence that a credible plan is in place. This would give the CBN space to conducting more conventional monetary policy one would hope.

It looks like currency markets in general are taking a breather after the huff and puff from last week. But the greenback has taken great strides over the last few days and a pause is entirely understandable. The levels that have been breached suggest we should see further big gains around the corner.

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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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What a difference a day makes. There we were watching NFP shrink from +280k in June to +142k in October only for the number to rebound in an impressive way to print +271k and send the USD into a buying frenzy.

So from doom and gloom and everyone pointing to a rate hike only in March 2017, suddenly the bookies are betting that a rate hike on the 16 December is a forgone conclusion. Ah, how the financial market switches at the click of a button.

The funny thing is, on the 01 January this year we predicted that EURUSD will hit PARITY (1.00:1.00) come 31 December 2015…. Only a week ago I kinda threw in the towel. Oh how mistaken I was. Having said that, now that we know what we know, do not be surprised if the when the rate is announced the USD gets SOLD off (buy the rumour sell the fact). I fact come 16 December I would imagine the USD will be trading stronger than presently 1.0750 following which FX traders will cash in their chips and SELL the USD and take profit. It is certainly going to be a close one whether we actually manage to break through the years low 1.0463 ish before the meeting kicks off.

Saudi’s announced over the weekend they are prepared to continue pumping oil at the current rate to protect its global market share in spite of the financial pain it is having on their economy. New customers are being sought to unload to in the face of increased competition from Iraq and Iran.

In Spain, the Catalan independence campaign enters a new phase as they have voted to now begin the process of gaining independence. Do they realise that Barcelona (FC) would be affected and thrown out of the league (potentially).

Emerging market currencies feeling the pain of a stronger USD with the ZAR trading up to over USD 14.33….with more pain to come. Is this a surprise, not at all given that the EU is SA’s largest trading partner and therefore a weak EUR(USD) = Weak ZAR(USD). Watch this space but there is more to come!!!

GBP finally kicked off in the way we expected and fell off the cliff. This is my opinion is just the beginning with more GBP weakness on the way. 1.45 handle is my initial target before another larger leg lower is started. This is reinforced by comments over the past week or so that UK rates won’t rise until at least 2017 – not that a trust those comments.

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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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Well! I have to say I was surprised. Even if the net result is that GBP/USD is going down as I have been expecting, I didn’t think it would go down in quite this way. Yesterday, ‘Super Thursday’, the Bank of England published its Inflation report; the votes for the decision to stay on hold; and the meeting minutes. As I said in yesterday’s blog, there was a chance that recent stronger UK data might push some wavering hawks towards recommendations for rate hikes. No such thing happened. The vote remained the same as it’s been after recent meetings, and furthermore the Inflation Report suggests rates could remain on hold for longer than expected.

All the recent economist and trader polls which have suggested that hikes might come sooner than previously thought got it spectacularly wrong. The whole City has egg on its face quite frankly. This points to a divergence between the likely actions of the Bank of England and Federal Reserve in the coming months, so no surprise than GBP/USD got punished yesterday. This isn’t likely to stop anytime soon. I’m still trying to get my head round how the market could have got it so wrong, and I have a rather cynical thought as to the reason why.

As I mentioned in a recent blog, the structure of the UK’s current account deficit has changed since the global financial crisis. Whether by dint of historic empire or some other reason, the UK used to earn more from international investments than foreigners did from their investments in the UK – an investment surplus. But the huge issuance of government debt in the last decade has put paid to that. So where, in the past, the UK used to earn a healthy investment surplus but ponder about how to fix its persistent trade deficit, the investment deficit has now become a burden to the UK basic balance. My cynical thought is this… what if Messrs Carney et al, are afraid of increasing the investment deficit by allowing gilt yields to rise (which would probably happen if interest rates started to go up)? What if they see a weakening of the pound sterling as the solution to the problem, because it might help make British products more competitive abroad? Perhaps more importantly, currency depreciation would boost the sterling value of UK overseas investments, thus reducing the investment deficit. What if indeed? If that’s what they they’re doing, they are walking a very tight line. If the market rumbled to it, GBP and the gilts market might collapse. Anyway.. it’s just my idle speculation, so feel free to disregard it.

Today is non-farms payrolls in the United States. The all singing and dancing labour market report that’s published at the start of every month. Following Chairwoman Yellen’s recent testimony to Congress, it’s clear that a US interest rate hike is a real possibility in December. So any signs today that the recent deceleration in jobs growth was just some sort of temporary blip and the probability of an interest rate hike would increase dramatically. All eyes will be on this report. It’s not just the dollar that would react strongly to this data. I rather suspect that equity markets would not react positively to strong employment growth, nor do I think would emerging market assets which have only recently been recovering from the China woes of a few months back. This could be a rocky day indeed!

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Anyone thinking Chairwoman Yellen would back off from her seeming enthusiasm for a first interest rate hike to be in 2015, would have been disappointed by her comments to Congress during her testimony. She continues to see the US economy as performing well and she pointed out that despite the slowing employment gains much of the spare capacity in the jobs market has been significantly reduced over the calendar year. She indicated that a rate hike was a “live possibility” at the FOMC December meeting. Others might have been disappointed but the greenback certainly wasn’t. EUR/USD is now trading comfortably through the trend-line support I showed in a recent blog. The longer it stays below, the more likely we will see further gains, for now the 1.08 level should represent a support zone of some sort, and the 1.0910 resistance.

So here we are, it’s Thursday… “Super Thursday”, will cable be shaken or stirred? For some time now the assumption has been that the Bank of England is likely to be less keen to hike than the Federal Reserve. Indeed until recently traders, when polled, weren’t expecting hikes in 2016 at all! Now, following some decent UK data, that consensus has edged towards earlier hikes, perhaps in summer 2016, but economists are more hawkish than that, they are looking for a May hike, perhaps even February. If your City economist is now looking for an earlier hike, it’s no surprise that two of the more hawkish MPC members are being watched more closely. Will they join the lone voter who has been pushing for hikes? The vote has been stuck at 8 for unchanged, 1 for hike for a while. The bookies are probably still expecting the same, but it could easily be 6 to 3 this time. If that happens, expect the pound sterling to strengthen.

Talking about the decent data in the UK, let me be more specific. Yesterday saw stronger than expected Services PMI data in Britain. While the data in the Eurozone (which also published) was stagnant, comprising of worse than expected data in Germany versus better than expected in France (a pattern that seems to be occurring with increasing frequency this year), the strong performance in the UK was matched by what came out across the pond. In the United States ISM Non-Manufacturing data was strong, a significant improvement on both the prior number and very subdued expectations. This is very encouraging indeed, after all, services is by far the dominant proportion of economic activity in both of these post-industrial advanced economies (U.K and U.S). It is certain to have made central bankers in the UK and US more comfortable about the sustainability of their respective economic recoveries. If we get a strong number tomorrow for the non-farm payrolls report, the calls for a December Federal Reserve hike will get louder for sure. I don’t need to tell you what would happen to the dollar then.

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ECB President Draghi once again stated that Eurozone officials stand ready to support the ongoing recovery in the region. He made his comments at an event in Frankfurt, reinforcing his recent comments that the central bank is battling downside pressures to meet the ‘just under 2%’ inflation target. Weak energy prices and slowing global trade were the culprits of course. While he considers the QE exercise undertaken at the start of the year to have been largely successful, President Draghi has also made it clear that further action to loosen Eurozone money supply is possible at the ECB’s December 3^rd meeting. Eurozone policy makers may or may not carry out this threat, but one thing is for sure, his comments are doing a job – probably its intended job – of weakening the euro. The single currency remains under pressure against both the dollar and pound sterling.

For want of a better description I consider this type of… manipulation… as aggressive action. Contrast that with the conundrums facing both the Bank of England and the Federal Reserve. These central banks are actively debating initiating a tightening phase of monetary policy. Even if they are actively paying attention to their exchange rates at the present time, it is more likely that they are attempting to give signals that don’t unduly strengthen their currencies. I would describe this as more passive action. On that basis, you have the ECB who look like they’re trying to weaken their currency while the actions of the custodians of USD and GBP are more directed towards not unduly boosting theirs. Now I ask you… in the battle between the 3 currencies, which one will you bet on to weaken? I agree… the euro!

While in recent weeks emerging market currencies have experienced relief rallies versus the dollar, one would expect that as the reality of imminent normalisation in the United States gets closer, these currencies will again come under pressure. Not least because corporates in these markets borrowed dollars heavily in times of plenty. It should be noted that there are a large number of dollar victims amongst corporates in the United States, indeed I read a report recently which suggests that drop in corporate America’s profitability due to the strong dollar is already approaching $100bn for this calendar year. That’s not a small sum of course, but it’s likely to get tougher if the greenback is in the midst of a huge long term appreciation phase, these companies will have to adapt or die, just as European corporates had to do the same when the euro was at peak strength. The point is.. don’t count on the benign period of rallying risky assets we’ve seen in recent weeks to continue for too long. As I’ve said before, I think this equity market rally can persist until year-end, but remember how nasty January was this year?

I am monitoring the 1.5440 – 50 zone in GBP/USD, a move above this area will confirm that my preferred path for cable is incorrect. I guess I’m not the only one who is concerned about a more hawkish than forecast voting pattern at tomorrow’s MPC. I suspect super Thursday and non-farm payrolls on Friday will be a key focus for currency markets in the hours to come.

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This is a huge data week with the ECB and Bank of England decisions on Thursday and the key US labour market report – nonfarm payrolls – on Friday. If that’s not enough we’ve just had the rate decision from the Reserve Bank of Australia (RBA), which was unchanged (some big hitters were calling for a cut, so no surprise that AUD is strong this morning!), and can expect a decision from the Norwegian Central bank on Wednesday. And in between all of this, a number Federal Reserve policy makers will be making speeches as well as testimony from Chairwoman Yellen.

Here are the key things to look for…

• No one is expecting any change in the headline interest rate decision in the UK, but there is a suspicion that more members are getting ready to vote for hikes. The voting was previously 8 to 1 in favour of keeping rates on hold, and even if economists are still forecasting the same, recent comments from members of the committee make it possible that others are more ready to move into the hawkish camp. If that were to happen the pound would surely get a boost. It’s not my base case, but this is what to look out for.
• In the United States any further slowing in labour market growth will probably put a final nail in the coffin of any December hike hopes – for my part, I still think March is more likely. Over the last few months the payrolls numbers have disappointed. Economists expect a bounce of some sort, if in fact the number is worse than the previous one, concerns will grow and should be sufficient to give the doves the ascendancy in policy discussions.

Meanwhile, taking a step back and looking at the big picture, markets have rallied impressively since the end of September. With the macro data coming out this week it will be very important to see if further headway can be made. I would venture to say that if equity markets continue to rally (and the S&P 500 is now back around the 2100 level) despite central bankers possibly sounding more hawkish this week, and despite the huge amount of equities to be sold into the market – for those who aren’t aware, there are IPO’s for postal banks in both China and Japan – if the markets continue to rally, then almost nothing will stop a decent year-end rally. From a technical perspective 2130 is a big level to watch for the S&P. Closing above that level, could mean that equity markets will rally some way further.

It’s hard to project strong conviction in front of the data minefield in front of us this week, but I continue to see the path of least resistance as dollar strength. There might be sharp reverses along the way, but once the fog is cleared, we know the ECB will continue thinking about expanding QE, we know there are hopes that the same is being considered in Japan. How can the dollar not get lifted up if its two major rivals are sold? That’s the question I have to keep asking..

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