Good morning

What a horrible start to the year in China and global markets as China’s stock market falls 7% following disappointing Manufacturing PMI data falling from 48.6 to 48.20 (expected 49.0). European markets opened over -1.75% down as a result of the unexpected and very disappointing Chinese data.

The USD will likely find support in Friday’s NFP report. NFP data of over +150k over the coming months should be consistent with a gradual increase in the FED funds. Given the high expectation of NFP I continue to think the USD will outperform and the FED will deliver another 0.25% hike over the coming months (to June) followed by an additional 0.50% of hikes for the remaining year. Currently, FED funds price in only about 0.10% chance for March and 0.50-0.60% for the remainder of the year. Following the ECB’s disappointing rhetoric at their meeting on the 3rd December and only 0.10% fall in depo rates, the increased interest rate differentiation (between EU and US) as well as the improved economic situation in the US, will in all probability see the EUR fall through PARITY over the next 4-8 weeks – especially as traders return to their desks and start piling on positions.

As for the GBP, Mixed December PMIs will be the focus this week including manufacturing (Monday; consensus: 52.8; last: 52.7), construction (Tuesday; consensus: 56.0; last: 55.3) and services (Wednesday: consensus: 55.6; last: 55.9). The GBP traded heavily on new year’s eve given the thin markets and I think the GBP will continue to weaken over the coming months as the market concentrates on downside risks, including aggressive fiscal tightening and the impending EU referendum. However against the EUR the GBP could have mixed blessings, in that it is “hoped” the EUR will deteriorate vs the USD at a faster pace than the GBP vs the USD. If this should happen the GBP will find some respite and rally vs the EUR. Overnight we saw the currency fall to 0.7425 (1.3468) following on from Thursday’s sell off (GBPUSD).

Have a good day ahead and HAPPY 2016

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