High	Low			High	Low
EUR/USD	1.0619	1.0571		USD/ZAR	14.4006	14.3198
GBP/USD	1.4956	1.4920		GBP/ZAR	21.54	21.37
EUR/GBP	0.7108	0.7075		USD/RUB	68.11	66.68
GBP/EUR	1.4134	1.4069		USD/ILS	3.8925	3.8710
USD/JPY	123.50	123.21		S&P 500	2092	2078
GBP/CHF	1.5308	1.5207		Oil (Brent)	43.80	42.83
GBP/AUD	2.0518	2.0370		Gold	1055.6	1046.2

Speaking at the Washington Economics Club yesterday, Janet Yellen, the chairwoman of the Federal Reserve reiterated the case for a rate rise in the United States, and the markets reacted powerfully to the statement. The S&P 500 lost 1% subsequent to her comments and the dollar strengthened against its peers. Indeed the dollar index reached a level not seen since April 2003. The case Ms Yellen makes is in line with the point I have made repeatedly, the US economy has largely achieved all of the targets set forth by the FOMC, and there is now a real risk that if interest rates do not start going up soon then when eventually the central bank is forced to act the pace of rate rises will be considerably more aggressive and damaging than it would otherwise have to be. Let’s be very clear, Ms Yellen’s intent is for gradual rate rises, my guess is that a first rate hike – increasingly likely to be on December 16^th – would be largely symbolic. No one really believes that a 25bps hike in the Federal Funds rate will have a substantive impact on borrowing decisions.

 

As I am wont to say, that’s one side of the ledger, Governor Draghi’s speech this afternoon will be in the more formal setting of the post rate decision press briefing, this will be the other side of the ledger. Mario Draghi is expected to elaborate on plans to expand the extent of the quantitative easing programme that the ECB has undertaken since earlier on this year. The Financial Times speculates this morning that continued German opposition might limit the scope of such dovish plans, thus disappointing the market. I am not sure I buy that, if German hawks were unable to stop QE in the first place, I highly doubt they will have much success now, after the horse has clearly bolted. But it is a point worth noting, after all this is an expectations game, it is certainly possible that anything announced this afternoon might be perceived to be less aggressive than anticipated. If that happens then counterintuitively the euro might strengthen somewhat, at least on a relative basis. I think the greenback will rule the roost at least until December 16^th. It’s also worth noting that the euro while weakening in the early session yesterday on lower than expected inflation numbers and a strong US ADP employment report did find buyers as the rumours of a less aggressive expansion of QE started to do the rounds. The main victim in the G10 was the pound sterling which suffered from unimpressive construction PMI’s. The ADP report in the US is a forerunner of what the market is anticipating will be fairly strong labour market data on Friday, everyone is guessing that Yellen who is almost certainly aware of the data in advance was so strong on US economic performance because she knows something the rest of us will only find out later.

 

From a technical perspective, all that we have anticipated appears to be happening. The pace of the decline in GBP/USD appears to be picking up again. As I’ve mentioned a few times, we are looking for a target of at least 1.42/45 in the next few months, but don’t be surprised if that happens in a fairly short space of time. There are potential casualties if these views come to fruition, not least emerging market corporates in general with their excess of dollar debt and the Chinese currency, the renminbi, in particular. In the case of CNY, its pseudo linkage to the dollar, will make it a victim of a strongly appreciating dollar. Given the slowdown in China, a persistent appreciation of CNY versus the Japanese yen and euro couldn’t be happening at a worse time. I am uncertain what the consequence will be, but surely something has to give? Whether it’s a substantial devaluation of CNY, or aggressive monetary easing in China next year, surely something big will happen?

 

Not surprisingly G10 currencies are not the only ones trailing in the dollar’s wake. In West Africa, for example, there seems to be a dearth of dollar supply which is stressing local markets in Nigeria, Ghana and elsewhere. Over the last few weeks and in the approach to the Christmas and year end period, it seems that corporates have been hunting for dollars, and this activity is getting more and more frantic. The net result is that these local currencies are being forced to adjust to current realities, and that adjustment will be lower…

 

 

 

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