Rather quietly the S&P 500 has exceeded last year’s record high and looks set to power on to greater highs. This fits in rather well with my bigger picture Elliott Wave count for the bull trend that began all the way back in March 2009.

If my count is correct then we have quite some way to go before we need to worry. Obviously I wouldn’t be pointing this out if it didn’t have implications for the currency markets. As things stand it is clear that risk sentiment, while taking a very temporary hit from the Brexit vote, has recovered nicely, and looks sent to continue in positive fashion. Even more pertinent is the fact that policy makers are likely to be taking note of the market action and consumers will be buoyed by the positive wealth effects of the rally. Based on this, and the stabilising political situation in the United Kingdom, it is likely that in the coming months the Federal Reserve will again place monetary tightening firmly back on the agenda. If this is indeed the case then, we can expect the dollar to strengthen as the market starts to slowly price in an increasing probability of higher US interest rates. I wouldn’t be surprised to see stronger consumer spending on the back of the equities rally, and I should also add that it’s noteworthy that the rally kicked off on the back of the strong jobs data last Friday. That doesn’t feel like a market that’s afraid of higher interest rates to me.

 

Sterling continues to perform strongly following the resolution of the Conservative Party’s leadership contest, rallying almost 4% from the lows now. If that’s not enough there are signs that international investors are starting to look at opportunities to buy British assets on the cheap in the wake of sterling’s collapse. This is a sure sign that some now consider the pound sterling to be undervalued. A large US fund is rumoured to have had exploratory talks with the commercial property funds which were forced to reject demands by investors to get their cash back; and a South African retailer is looking at a takeover of Poundland a high-street discount store. As I mentioned in yesterday’s blog, there is an increasing risk of a fairly sharp rally in sterling, particularly if the MPC decides, on Thursday, that interest rate cuts are no longer on the table. But it’s important to note that as things stand, economists expect 3 of the 9 MPC voters to recommend a cut, this is in comparison to the situation in the last few meetings where voters have unanimously voted to maintain the status quo. Normality can return quickly after a crisis sometimes!

 

 

 

 

 

 

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It seems we should never under-estimate the capacity of the Conservative Party to make pragmatic decisions where their survival is concerned. Andrea Leadsom the lesser contender in the internal party election to select a new leader gracefully bowed out, recognising unlike the Labour Party that if, as a leader, you only command the support of a small percentage of your fellow MP’s how can your position possibly be tenable. I can only applaud her mature decision, and the markets did the same with a recovery in the pound sterling that continues this morning.

This is where it gets interesting. Mark Carney, the Bank of England governor, has been widely expected to cut rates at this Thursday’s MPC in response to the crippling uncertainty that’s been weighing on the pound. Does the quick resolution to the Tory party’s leadership question change things? I think it could. So what happens if he says that he’s going to take a wait and see approach? How will the markets react? The UK equity markets might not like it, nor indeed the gilts market, but if sterling has been sold on the basis that more monetary loosening is coming we might see a sharp jump in the pound. After all, as I pointed out in yesterday’s blog, under normal circumstances the pound sterling looks oversold. I’m not saying for certain, but there is definitely a risk of a bit of a nasty short squeeze if Governor Carney disappoints. Watch this space.

 

Last Friday we saw a very impressive bounce in labour market growth in the US after a few months of rather disappointing numbers. The consensus had been for 175,000 new jobs created, in fact there were 287,000 compared to 11,000 for the month of May. Interestingly the unemployment rate actually rose from 4.7% to 4.9%, but the U6 number – a broader unemployment number – fell from 9.7% to 9.6%. Perhaps the prior slowdown was a blip, but it will take a few more months of data to classify it as such. For now, this is a welcome data point for the market and policy makers to mull over. Will this have an impact on the Fed? Possibly, particularly when you also consider this chart from Business Insider..

Wage growth seems to be picking up. I don’t think this means the Federal Reserve will hike yet, there’s far too much Brexit noise around, but once that fizzles out, then tightening will very likely be back on the agenda in the United States. Bottom line, don’t get too bearish on dollars any time soon.

 

Elsewhere, in Nigeria, the central bank had warned that a new current account maintenance fee would be applied, and they were true to their word. Henceforth there will be a 1 naira fee for every 1,000 naira transfer between accounts. Let me put this in more comprehensible terms, if you have to transfer N10 million (~$28,500) you will be charged N10,000 (~$28.50). That’s 0.1% charge. It might not seem like a lot, but that is a huge amount of transactional friction. I appreciate that Nigeria is experiencing rather severe fiscal challenges with lower oil prices, but surely a tax that is likely to impact economic activity, or at the very least move money out of the formal banking system is a retrograde step. It really seems a case of one step forward and two steps back at the moment. We will have to keep an eye on the economic impact of this policy on the Nigerian economy, but clearly it can’t be for the good.

 

 

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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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We have seen a substantial decline in the pound sterling versus almost every other currency since the Brexit vote.

 

First we saw the collapse in the immediate aftermath of the vote, as the market was caught completely offside. As we all know, the final polls indicated that the ‘Remain’ camp would just sneak a win, but that wasn’t to be, and panic was the dominant theme in the market.

 

After the initial fall which continued on for another day or so, the market attempted to recover, but the selling pressure has been persistent. Clearly we all need to re-assess the prospects for the UK economy in light of this historic decision, but is that what’s driving the market now? Watching the rather toxic politics affecting the major parties in the UK, I am coming to the conclusion that the market is still terrified of the unknown.

 

In this case the unknown is whether Article 50, which initiates the process for an exit from the EU will be triggered or not. In theory, at least, this is not a certainty as the referendum is not by itself binding, only advisory. But it’s hard to believe any political party, not least the Conservative Party (with its history of Euroscepticism) would dare to go against the expressed will of the electorate. It seems to me that we are likely to continue to experience uncertainty until a new leader of the Tory party has been selected, and their strategy for dealing with the aftermath of the referendum is known.

 

As things stand that new leader should be Theresa May, the current Home Secretary, but we’ve been here before haven’t we? And I’m not even referencing the Brexit vote. Last year, after Ed Milliband’s failure to win the general election for the Labour Party, he stood down and left the way open for a new leader. No one expected Jeremy Corbyn to be the winner, but here we are. In opposition to the Labour Members of Parliament’s wishes, the wider party members voted for as left wing a candidate as could be found. Now, with a choice of the known and experienced Theresa May, who voted to remain, and Andrea Leadsom, a woman with very little front bench experience, who voted to leave. It is entirely possible that the rank and file of the Tory party might do a “Labour”, voting with their hearts and not their heads. This is exactly the sort of choice that could end up costing the Tories big. Yes the UK, has a parliamentary democracy and therefore the Tories would not be obliged to hold a general election, but it is questionable how much of a mandate a Leadsom premiership would have. Such a choice carries with it a substantial risk that the Conservative Party could be seen to have lost its electoral mandate only a year after winning power. It is entirely possible that, despite this risk, a calculation is made by the rank and file that the Labour Party is in such disarray that it doesn’t matter. They might be right. But calculations like this don’t exist in isolation and could well end up being the catalyst that sees the Labour Party get its act together and a more electorally palatable candidate like a David Milliband could be sitting across the floor in the House of Parliament in no time at all. The Tories would be wise to consider this.

 

So what does this all mean for the currency markets? As of right now, this move, when you look at GBP/USD (see below) or EUR/GBP looks stretched.

But I hesitate to say this is the end of it. We often see, during the most powerful trends, currencies persisting in extreme oversold paradigms for longer than one would normally expect. There is absolutely no reason to think this is not one of those times. I am therefore very cautious of viewing the market on a purely technical basis, the fundamentals (and in this case that means the politics) must be a guide. Until we have more clarity on the leadership of at least the governing party in the UK, it is too tough to say anything other than we believe the pound will continue to trade poorly. Bear in mind that after Carney’s post-Brexit speech he indicated that rates were likely to come down this summer. Later this week we get the MPC, and markets are pricing in a 75% probability that we’ll see a cut. Even if sterling is due a bounce, it’s likely to only occur after the decision…

 

Lest we forget the rest of the world there’s much more to discuss in coming blogs, not least the stunning turnaround in labour market data in the United States and a sort of Tobin tax on steroids in Nigeria. Watch this space

 

 

 

 

 

 

 

 

 

 

 

 

 

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	High	Low			High	Low
EUR/USD	1.1107	1.1073		USD/ZAR	14.82	14.68
GBP/USD	1.3000	1.2874		GBP/ZAR	19.17	18.95
EUR/GBP	0.8615	0.8535		USD/ILS	3.8904	3.8687
GBP/EUR	1.1716	1.1608		S&P 500	2102	2095
USD/JPY	101.41	100.62		Oil (Brent)	49.48	48.65
GBP/AUD	1.7313	1.7136		Gold	1371.0	1362.0
				USD/NGN yesterday’s close		350
Please get in touch with us if you need the latest USD/NGN price

The FED released their minutes from their JUNE meeting and surprise surprise the rhetoric made it pretty clear that the delay to a US rate hike was the result of the upcoming UK referendum and uncertainty surrounding the result. The FED noted that the UK’s referendum was making it difficult for the FED to raise rates in spite of their expectation of a rise in inflation over the coming months. The members noted that rate hikes are still data dependent and especially made reference to the labour market following the recent disappointing NFP numbers (June +38k). With the elections due in November I think the FED will in all likelihood hold off hiking until December at the earliest regardless of any respectful change in NFP. I say that because rate changes could affect (in some way) the way people vote and while the FED is independent of the White House, they would prefer to tread carefully so as not to upset the applecart. No doubt the FED members will be keeping close tabs on tomorrow’s NFP (expected +175K). One could argue that the expectations as we saw in June could be vastly different (June expected +164K and printed +38K).

With regard to the UK referendum (remember the meeting was held pre 23^rd June) the minutes noted “considerable uncertainty about the outcome of the vote and its potential economic and financial market consequences.” Additionally the members noted they “would closely monitor developments associated with the referendum as well as other global economic and financial developments that could affect the U.S. outlook.” Suffice to say the FED were concerned about the spill over effects in the event the UK vote LEAVE…so with that now confirmed the FED are probably steaming up and down the corridors scratching their heads and wondering why this happened. Already the USD has seen a move that could see EURUSD head for PARITY by year end and this will add pressure to the US economy given the strong USD and the effects on corporates exporting abroad. Certainly NOT the result they wanted (or expected) and as I wrote yesterday their words were by no means scaremongering…they were facts and true to life concerns. Agh!!! If only people listened.

As for our beleaguered GBP. Down in the dumps. I read a story this morning that people planning their vacations are opting for “All Inclusive” deals because of the extra costs associated with their holidays. GOOD I HOPE THEY STAY HOME. Yesterday was another terrible day for the GBP falling to 1.2795 at one stage before recovering this morning to trade at 1.2950….not that that recovery is likely to last as pressure is already mounting and the GBPUSD is trading heavily. The market is definitely SHORT GBP overall and I expect further deterioration in the GBP until we see “a player” (be it a CB, BIS, funds) start to hoover up the GBP and sending all the shorts to cover their positions. The overall sentiment remains the same. Until we hear some rhetoric from the new PM (Ms May we hope) as to how the UK will deal with the EU (and others) and whether Article 50 will be declared, let’s assume things will remain volatile and uncertain. Honestly with Gove (the backstabber) and Johnson (the mouse) and Farage (Pinocchio) I would RELISH and jump for joy if May said to hell with it, now the cats out the bag lets have ANOTHER referendum and see what happens. I suspect people would vote somewhat differently now they know the lies that were fed to us. AGH!!!!

 

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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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	High	Low			High	Low
EUR/USD	1.1077	1.1035		USD/ZAR	14.88	14.69
GBP/USD	1.3031	1.2795		GBP/ZAR	19.28	18.98
EUR/GBP	0.8630	0.8494		USD/ILS	3.9162	3.8728
GBP/EUR	1.1773	1.1587		S&P 500	2092	2074
USD/JPY	101.77	100.57		Oil (Brent)	48.40	47.63
GBP/AUD	1.7475	1.7259		Gold	1371.0	1354.0
				USD/NGN yesterday’s close		353
Please get in touch with us if you need the latest USD/NGN price

So according to Mr Gove and Mr Johnson during and in the run up to the 23 June, the comments made by PARITYFX, FED, BoE, ECB, BoJ, IMF, World Bank, Mr’s Cameron and Osborne regarding the chaos and potential losses in the financial markets were and I quote SCAREMONGERING. Really!! Scaremongering perhaps I am wrong that GBPUSD traded as low as 1.2795 (from 1.5025) and GBPEUR 1.1587 (from 1.3158) at 10pm on 23^rd June. Is that scaremongering or is that a fact. In addition 2 well know property funds (£10billion) have ceased trading and returning funds to the investors because of BREXIT fears. Behold my fellow UK citizens who voted LEAVE – THANK YOU SO MUCH FOR UNDOING ALL THE EXCELLENT WORK DONE SINCE 2008. You know what, I guarantee you when these LEAVE people suffer because their income has fallen and they lose their jobs, they will BLAME THE BANKERS because THEY are responsible for sending the GBP weaker. Always someone else’s fault. My holiday to Spain is now 15% dearer….and for what, why??

So, the GBP sank to a 31 year low, with fears mounting about the effect that the UK (decision to leave the EU) will have on the global economy. This has caused investors to flee high yielding assets again in search of safe haven status (Look at GOLD up over $125 since BREXIT). Yesterday we had the BoE Governor take steps to ensure that UK banks can keep lending with an amount of £150bn being mentioned. The Governor said that the Central Bank would lower the amount of capital banks are required to hold in reserve, freeing up excess money for lending as well as lowering interest rates in the coming weeks.

Honestly I would love to write more but I just can’t bear to write any more BAD NEWS. Pure sadness

 

 

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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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	High	Low			High	Low
EUR/USD	1.1157	1.1119		USD/ZAR	14.74	14.52
GBP/USD	1.3295	1.3161		GBP/ZAR	19.50	19.30
EUR/GBP	0.8460	0.8363		USD/ILS	3.8643	3.8443
GBP/EUR	1.1957	1.1876		S&P 500	2108	2098
USD/JPY	102.60	101.87		Oil (Brent)	50.17	49.61
GBP/AUD	1.7676	1.7565		Gold	1352.0	1337.0
				USD/NGN yesterday’s close		353
Please get in touch with us if you need the latest USD/NGN price

FIRSTLY APOLOGIES FOR NOT WRITING THIS COMMENT OVER THE PAST WEEK

So here we are, the electorate has voted with their heads (rather than their heart) and we are exiting the EU. Shameful, sad, disappointing, upsetting, wrong, and catastrophic.

ParityFX (the FED, BoE, ECB, IMF, World Bank, heavy weight corporates) was not scaremongering when we said the GBP will collapse if LEAVE wins. As things stand the GBP has dropped 13.50% vs the USD and 9.75% vs the EUR…and counting. We have been asked several times if this is likely to continue and the simple answer is yes, we are going to suffer more. The Chancellor has given up on his promise to have a budget surplus in 2020 and has indicated that he will be looking to cut corporation tax to 15% (no timeline) to continue attracting business to the UK (good luck with that). The BoE has hinted they are likely to CUT UK interest rates (by 0.25%) at their meeting at either the 14^th July/04 August meetings and pump whatever liquidity is required into the market. I am sorry to say, that despite the best efforts by the Chancellor and BoE, the UK economy is likely to lose between 1.50-2.00% points on our GDP. All the excellent and hard work over the past 8 years has just been flushed down the drain. From being one of the top 3 fastest growing economies (amongst the G20) we are now BELOW GREECE!!! And that my friend says it all.

I cannot for the life of me explain what people were thinking. In fact we know that what swayed the vote, the LEAVE vote exercised by the over 65’s. Thank a lot. What about the “new” generation, did they not care about their future…obviously not. Chancellor Merkel told the Swiss yesterday that if they want to remain in the EU they need to allow the free movement of labour. The Swiss allowing free movement of labour now that will be something to behold.

If the UK think they will be able to muscle the EU into entering into a favourable trade conditions and at the same time limit free movement of people, then we are in for a shocking surprise. Already the 2 big LEAVE stalwarts (Johnson and Farage) have quit leaving someone else to pick up the baton and deal with the EU. It is like getting away with a drive by shooting. It is disgraceful. We should have ANOTHER REFERENDUM NOW and see how the electorate vote after all the lies and departures. These 2 should never be allowed to hold a public office ever again. Do they care, not on your life.

If fact as I write this comment the GBP has fallen another 50 pips at the open as traders batter the GBP. I really cannot see how we are going to come back from this. I think the consequences will continue to reverberate globally and the big winner ultimately will be the USD which is now likely to hit PARITY vs the EUR and wait for it, there is now talk the GBP too will hit PARITY vs the USD. While this all means UK exporters will receive more GBP for goods priced in USD and EUR, importers will be heavily hit and I am in no doubt looking to see prices start to rise as price hikes are passed onto the consumer. So all you LEAVE voters, WELL DONE your income just collapsed. Furthermore it would not surprise me to hear the Chancellor move the pension age even further out and cut benefits. After all we are heading back to austerity.

I cannot begin to tell you has sad I am right now. I was so confident people would vote REMAIN and continue to enjoy the healthy lifestyle we have been accustomed to over the past few years as business grows. Now I am afraid I am worried, VERY worried. I truly do not know how the EU and the rest of the world will deal with the UK (if we can call it that after Scotland call another referendum and this time vote to leave and join the EU).

So BREXIT, CAMERONEXIT, ENGLANDEXIT, JOHNSONEXIT, FARAGEEXIT, LABOURJOKEXIT, CONSERVATIVESHOPEEXIT, GBPUSDEXIT, GBPEUREXIT and finally MY EXIT

Have a good day and enjoy your summer holiday in the USA, Europe, or anywhere else foreign – it just cost you over 10% MORE. Nice!!!

 

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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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