China’s recent data shows exports remain weak while imports improved. Bottom line, China’s trade performance continues to suggest uncertainty regarding external growth (exports) but on the flip side improved domestic demand (imports).

This latest data does not help the FED with their rate decision given the poor data in China, UK referendum uncertainty and of course poor US data (NFP last week +38k only). The June rate hike as per her comments is “likely” to be off the table with all eyes now on July meeting (27^th). As I mentioned previously, the FED will be “hoping” for a rebound in US data, the UK remaining in the EU and China’s data improving on all fronts. Only then will they be in a position to confirm one way or another that the US economy is ready for another rate hike. As things stand and as per Yellen’s comments on Friday last week, we down to FED hikes (potentially) in July and December. Continued poor data in the US and China coupled with the UK leaving the EU will send the FED into a spin leaving them unable to raise rates at all in 2016. And that is excluding a potential win for Mr Trump in November US elections. Not since the Greek drama a few years back has the financial markets been gripped with so many simultaneous “event risks”. As far as FX (and other underlings) traders are concerned this is like mana from heaven – volatility. Traders love to be able to trade not only their “gamma” (long FX options) but also trade the event risk. Exciting times ahead in 2016.

Today has opened as a bad day for the GBP. Trading above 1.45 at the open we now find ourselves 0.50% weaker at 1.4450 as sellers > buyers. Today 2 weeks, the heat will be on as we go to the polls to vote STAY or GO.

Some good news overnight, a prominent Tory Dr Sarah Wollaston has announced she is defecting from the LEAVE camp to the REMAIN camp. Her decision she says, was based purely on the likely damage a LEAVE win will have on the NHS. Dr Sarah disputed Boris and Grove’s comments that LEAVING will unlock a £350m windfall (per week) for the NHS. She quite simply stated this “simply isn’t true”. “For someone like me who has long campaigned for open and honest data in public life I could not have set foot on a battle bus that has at the heart of its campaign a figure that I know to be untrue” said Wollaston. “If you’re in a position where you can’t hand out a Vote Leave leaflet, you can’t be campaigning for that organisation”. She continued, “I realised I would feel a sense of loss, that we had lost something, and I am now actually going to vote to remain” she said. Wollaston said she thought there would be a “Brexit penalty” for the NHS because leaving the EU would hit Britain’s economy. “The consensus now is there would be a huge economic shock if we voted to leave” she said. “Undoubtedly, the thing that’s most going to influence the financial health of the NHS is the background economy. So I think there would be a Brexit penalty”.

On the flip side, a letter from the chairman of JCB, alleges he told JCB’s employees why he was endorsing a Brexit. “I believe that JCB and the UK can prosper just as much outside of the EU, so there is very little to fear if we do choose to leave,” Lord Bamford said. Lord Bamford, while I fully respect you as a businessman and head of a super company, your life is spent at your house in Barbados (and I should say it is one very nice house), and therefore the people that work for you are the ones who will suffer the fallout from a BREXIT vote. Additionally (and I do not know the inner workings of JCB) how will your clients view your company if the UK voted to leave. Will they still want to buy your equipment, as many people have noted there will be a severe backlash financially and economically against the UK (by the EU, US and others) in response to the exit from the EU.

In my heart of hearts I truly think that despite the polls putting the LEAVE camp ahead, people will “come to their senses” on the day and vote STAY/REMAIN. Honestly, I think people will be scared at the outcome of a BREXIT vote and how this will negatively impact their lives and those of their kids. Just like the Scottish referendum, the Scots decided it was better to remain IN the UK than go it alone. How right they were given where oil has dropped to. Talking about Scotland, PM Cameron announced yesterday a BREXIT vote will in all likelihood lead to another Scottish referendum which I shudder to think of. Decisions decisions, let’s hope people decide what’s right and proper rather than what “might” be better as an outsider.

Long live FX volatility

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So it looks like the die is cast and the fighters have been chosen. Hilary vs Donald in the November US elections. Hilary becomes the first women to win the nomination of a major party to contest an election and Donald becomes the first man to win the nomination of a major party to contest the election as an “independent” within a major party. You probably thinking what am I talking about. Well the Republican power house were/are not in favour of Donald representing the Republican Party, but what choice do they have now. They are saddled with Donald and will now have to throw their weight and support behind their chosen one. My gosh, if you thought the UK’s EU referendum was exciting, the US elections are going to be something direct out of Hollywood.

If you are a fan like I am, Sky Atlantic has a show called Madam Secretary (based on the experiences of Hilary when she was Secretary of State under President Obama). I am sure the producers of the show will be hoping Hilary goes one step further and wins the US elections so that they now have a new story line, MADAM PRESIDENT. Wow now that would be history in the making, following in the great footsteps of PM Golda Meir and Chancellor Merkel. You can be rest assured between now and November there will be some pretty ugly revelations and disclosures and accusation. The US elections are never a clean fight so I expect this one to be no different. What is certain is the financial markets will swing into top gear ahead of the elections with stocks, FX and bonds highly volatile. I would think that a win for Mr Trump would send the USD into a mini fall while stocks would initially fall as Mr Trump has yet to give us a clear indication on his economic policy (other than being a Republican which equals SPEND and use debt to build)

According to Sky News, “billions of Pounds leave the UK ahead of the EU vote”. Whether or not this is directly related to the EU referendum remains to be seen. Perhaps investors are using the referendum to shift their assets to other areas as the uncertainty gathers strength. Regardless, this is a worrying factor and one the BoE can do without, especially at a time when inward investment is needed to continue building the UK economy.

On the plus side, the GBP has traded pretty well today with GBPUSD trading around 1.4600 and GBPEUR above 1.2820 (0.7800 EURGBP). This is a good sign and shows that the FX market despite the recent polls is positive about the referendum (REMAIN). Financial markets (rather than polls) for me are a better barometer of the likely result. Time will tell how right they are, or not!

With the delay in the FED announcing a rate hike in June, the likelihood is we see the USD trade in a range for the time being until fresh data (and polls) are announced. Volatility will remain with us for the time being as it is better to hold “gamma” than receive premium (sell options) and manage your negative gamma in the face of such uncertainty. There is simply too much going to risk going short “vega” selling options in other words. Pay your premium and enjoy the volatility knowing that you are covered and will make money on either a move up or down.

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The UK electorate taketh away, Chair of the FED Yellen giveth back.

What am I talking about you must be asking yourself. Well, the Guardian newspaper picked up on what ParityFX wrote FIRST yesterday that GBP volatility “reached extremes not seen since the financial crisis as City traders reacted to polls suggesting voters were increasingly likely to send Britain out of the EU this month”.  As polls indicated over the weekend, the LEAVE camp has jumped into the lead sending the GBPUSD down from 1.46 (Friday post NFP numbers) to 1.4351 (Monday). Then some respite in the form of comments from Chair of the FED Yellen who hinted that poor NFP (jobs) data meant the FED was unlikely to raise rates this month. Yellen further comments (as we wrote in our comment yesterday) that poor data and growth prospects in China as well as a threat that the UK leaves the EU has sent ripples through the financial markets and scampered the FED’s plans to hike US rates 3 times in 2016. “One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A UK vote to exit the EU could have significant economic repercussions,” she said.

Cast your mind back a few days, I further noted that while polls showed LEAVE > REMAIN, one has to take these so-called polls with a pinch of salt. The Guardian newspaper further reports that Kallum Pickering, an economist at Berenberg Bank, said there was a good reason the pound had not crashed yet. He said his monitoring of polls showed that while support for REMAIN had slumped to its lowest level all year, “analysis of the underlying poll trends does not point conclusively to a significantly higher Brexit risk”. Thank you Kallum for reinforcing my point. HSBC has told their clients that the GBP will fall 20% in the event of a NO vote to LEAVE the EU. There is consistency in the City that the GBP will be wiped clean in the event the LEAVE camp win. If you do vote LEAVE, check your bank balance and start crying because your disposable income will drop 20%. The major corporates have already sent out a warning that they will hike their prices by at least 20% in the event of a LEAVE win. Simply put, prices will rocket, holidays anywhere outside the UK will rise 20% and suddenly that tick against the LEAVE box will not appear such a good idea in hindsight.

Yes I am sure you are pulling your hair out and disagreeing with me but I am afraid to say what I write above is fact and not my opinion. It will happen pure and simple. I know there is a fear of immigration and that fear is real and understandable. But leaving the EU IS NOT THE ANSWER!! There are ways in which the sitting government can deal with immigration. Even if the UK did vote to leave do you honestly think all the hundreds of thousands of EU citizens working in the UK will suddenly be given their marching orders? The UK economy will collapse overnight and never recover. Think about the hotels, pubs, agriculture, the City, SME’s and just about every other industry that has non UK citizens working for them. How will that manpower ever be replaced – IT WILL SIMPLY NOT

For now the GBP has recovered with the FED delaying rate hikes and the selloff in the USD – but for how long is the question. Volatility will remain over 20% and continue to plague the GBP until we know one way or another on the 23^rd June, ARE WE STAYING OR ARE WE GOING – YOU DECIDE

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Oh to be a fly on the wall in the corridors of the FED. What a positively horrible number on Friday. NFP printed a woeful +38k (expected +163k) after last month’s +160k. So here is a question for you, only last Monday the FED Chair Yellen opened the door to 3 US rate hikes in 2016. However given the shocking number on Friday and the FED’s comments that hikes are data dependent, can they still hike like they indicated? One has to think that the rate hike is now off the table for June and one now has to look at July now for the “earliest” hike. No doubt, the FED will be hoping that between now and 08 July and the next NFP number, other economic data will be good and the NFP number in July goes back up to in excess of 150k giving the FED the ammo to hike on the 27 July. If if if….one thing is for certain nothing can be taken for granted anymore and the FED have real issues. Later today Chair Yellen will give a conference and no doubt US data, China growth and the impact of a potential BREXIT vote will be on her agenda. It will be interesting to see if she changes her rhetoric from last week when 3 hikes were on the table to 1-2 now. Ahead of China’s publication tomorrow of their FX reserves, the Chair will be trying to sound as positive as possible without giving the impression that they have a potential nightmare scenario in the making. From last Monday (Yellen’s speech) until this morning, odds in favor of a rate hike have dropped from 25% to 4% in June and from 54% to 27% in July.

BREXIT, oi vei. Weekend polls now put the LEAVE camp ahead of the REMAIN camp.  Impressive comments yesterday by ex PM Sir Major on the Andrew Marr (BBC1 show) unfortunately were unable to help matters. It appears quite clearly that everything now is focused on migration/immigration and the fear that in the coming years the UK will be flooded with migrants leaving her exposed and financially exposed. What surprises me greatly is the total disappearance of Home Secretary Theresa May. Surely as the Home Secretary she should be in the front line appeasing the electorate and explaining the Tories immigration policy and how they will stop the flow of people into the UK. Yet, she is nowhere to be seen. It is like she has been told to stay away and let the PM fight for the REMAIN camp. Honestly that is a bad tactical move. I want to hear from her. I want to hear what they have up their sleeve and how they will deal with immigration and benefits to EU citizens arriving on our doorstep. We know the financial implications of a BREXIT vote and we know the consequences, so why the REMAIN camp is not clarifying that and putting people’s minds to rest is something I do not understand. I will not express my view’s here, but the fact is people are “scared” and the only way to ease that fear is announce Government policies that will ease the migration flow and keep the UK clear. It is a real minefield out there and clearly more needs to be done.

Good news for South Africa, the long awaited S&P rating decision was published Friday night and S.A managed to hold onto its current rating (with continued negative outlook). The next rating decision is now in December so the SARB has its work cut out between now and then. The ZAR has enjoyed a double whammy (1) Rating confirmation and (2) weaker USD post NFP Friday. While the outlook remains somewhat negative, the SARB will in all likelihood keep rates unchanged and hope that inflation remains within the range and the economy enjoys a period of growth. Like Australia, this is all dependent on growth in China and the EU (largest trading partners).

GBP volatility is now reaching fever pitch. 1m GBPUSD 21.75 while GBPEUR 1m 19.75/22.50 and 2m 15.30/17.30 – I do not remember volatility levels so high even during the Scottish referendum. I tell you one thing, if LEAVE wins, that volatility level will crack 30 and rise close to 40% as the GBP collapses towards 1.3000…After rising to just shy of 1.46 on Friday post NFP, the GBPUSD has collapsed having traded as low as 1.4351 overnight in Asia before recovering to 1.4425 presently. Now that’s what you call volatility. Clearly we are still range bound 1.4300-1.4650 and awaiting the daily comments and polls to push us one way or another. While the polls indicate a lead for the LEAVE camp, people are known to change their minds when putting pen to paper. As things stand, it is simply too close to call though I do wonder if people will decide to REMAIN and put up with the EU rather than take a chance and dive into the deep unknown.

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The UK’s EU referendum took a nasty turn last night during the PM’s question time on Sky News. Suffice to say he got quite the (cold) reception. As I have noted continuously there are solid arguments both in favour of REMAIN and BREXIT. However, one cannot escape the financial implications of a BREXIT vote, the consequences which will be felt for years to come. I totally agree with the LEAVE camp’s argument regarding immigration/migrants/benefits/costs etc. Only recently I read a story about a Canadian family that has been given till today to sell up and get out (despite investing £200k and working hard to maintain their family) simply because they have not hired someone (something like that). On the flip side, a man from the EU arrives alone, cannot get any benefits/housing, so returns home picks up his 5 kids and wife returns to the UK walks into the benefits office and yes you guessed it, housing and benefits. Welcome to a Socialist Society. We made these laws, and fortunately or unfortunately we need to stick to them. That is a democracy at work. Of course it is not fair of course the 13,000 offenders currently in the UK enjoy the UK’s hospitality, but the law is the law. So here is a good idea, CHANGE THE LAW IN FAVOUR OF YOUR OWN COUNTRY AND HER CITIZENS. Job done. Unfortunately it was easier said than done. Something needs to be done and done fast or the UK will find herself back on her knees and financially bankrupt. Brexit’s argument on implementing an Australian points system does not work. The migration of people into the UK differs massively to that of Australia, not to mention a small difference in size. The Aussies system while commendable still has its faults and shortcomings and I simply cannot see how the UK will be able to implement it.

The UK needs to change our benefits laws. You want to come here, fine but for 3 years no benefits, no housing and no free NHS. Pay your own way and after 3 years if you can prove you are sustainable then great, welcome to the UK. When I arrived in 1996 from South Africa that is what happened to me. Except for me it was 5 years. I thought you know what that is fair. The more I put in (taxes and working) the more I can ultimately get out.

What we can expect then over the coming 3 weeks is financial instability and the increased volatility in the FX markets. The EU referendum has far reaching consequences not only for the UK, but for all our trading partners. I fear a serious backlash if BREXIT wins as the big EU economies shun the UK in favour of friendlier shores. The BoE is not scaremongering. They are petrified I am sure of the result. Let’s hope sense prevails and people see the benefits are staying in the EU and being part of the family.

Prepare today for the BIG event – US Non-Farm Payrolls. Huge event. With the upcoming FED meeting on rates on the 15^th June the FED will be hoping for a BIG number to confirm Pres. Yellens recent comments that they are looking to hike 3 times in 2016 (06+07+12) – The market is forecasting a rise of +164k (from +160k previous). Anything worse than that and I wonder what the FED will do, after all they claimed rate hikes are data dependent. Looking at the price action in EURUSD, it would appear the market is LONG USD and expecting a good number today to confirm the hike is coming. Then again who really knows?

Have a super weekend

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The EU Referendum is starting to play havoc with the GBP as you no doubt have seen. Last week the REMAIN camp opened a 65-35 (in/out) lead sending the GBPUSD to 1.47, then yesterday another “poll” saw the OUT camp open a 7 point lead sending the GBPUSD to a low of 1.4449. Seriously, can one really take these polls seriously? How can there be such a swing in such a short period of time. Granted some 18 migrants were rescued in the English Channel but was it that news that sent people voting REMAIN to change their minds and vote OUT. Makes little to no sense to me and why I refuse to take these polls for anything more than they really are, polls. Keep in mind that poll could have been taken in an area where the LEAVE camp dominate and thus portrays the country as suddenly switching sides and voting OUT. We have noted several times that between now and 23^rd June the markets with be extremely jittery and prone to large moves on the back of polls and comments by the different protagonists.

Look, let’s be honest regardless of whether your support REMAIN or LEAVE, there are solid arguments that favour each camp and which are indisputable. Facts are facts and you cannot tweak them regardless of how hard you try. What we do know is should we stay the financial markets will breathe a sigh of relief, the UK will continue to have access to 500 mio people in the EU, you and I can travel East and find a job and settle easily, and the USA will not put the UK at the bottom of their trade counterparts, oh and the ECB will be delighted tooJ. Then the argument for the LEAVE camp, migration. Let’s be honest, that is an issue and one which was on the Conservatives (and Labour) manifesto during the last election. But you can argue that Greece, Spain, Italy, Germany and France have bigger problems with the number of migrants arriving on their shores. Yes there has been talk that 12 mio Turks will move to the UK when they get EU membership….seriously are you really going to believe that. I have been to Turkey, they have lovely weather, a pretty good economy and a pretty good place to live. 12 mio people….yeh right.

China manufacturing PMI came in at 50.10 – same as last month. Happy days, China’s economy is bottoming out. Well we hope at least. With Chair of the FED Yellen’s comments Monday night that the FED are lining up 2-3 hikes this year (seems they also think the global economies have bottomed out and things will only get better from here) the market was caught sleeping (including me). I thought June or July followed by December at best. Her comments seems to indicate June, July and December hikes taking the rate to 1% by year end. I hope she is right, because from what I have seen the US economic data does NOT confirm her comments….which is odd considering she noted further rate hikes are data dependent. NFP on the 6 May certainly didn’t help (+160k vs +215k previous), so I hope the statistics improve this Friday.

The USD on the back of these comments has enjoyed a rally and if we do indeed see a SUPER NFP number this Friday, I think you will see the USD break through EURUSD 1.10 (which of course will add extra pressure on the GBPUSD and potentially GBPEUR). Time will tell how solid the US economy is and whether she was spot on raising rates 3 times in 2016.

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