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FX markets have been somewhat subdued (if I can use that terminology) over the past week or so as event risk continues to dominate the markets. With the Italian referendum, French elections and OPEC meetings looming, FX traders have and are positioning themselves for further bad news (which you could say all favour the USD).
OPEC: Well we all know what oil companies are hoping for, a cut in production to help stabilise and raise prices. Oil companies small and large have been cutting investment, piling on debt and slashing jobs to keep their heads above water. A cut in production will go a long way to helping these companies as demand and supply begin to “equalise”. Oil is still hovering around the $50p.b mark and while we don’t expect a sudden spike in prices, we do however expect stabilisation which will help create a sense of calm. Winner, the USD.
ITALY: The referendum in Italy takes place this weekend with the current PM Renzi citing even if he wins he will resign and seek to create a new government. Fighting talk, but with the current polls (ah the famous polls) showing he is likely to lose and lose big, I guess you could assume either way, win or lose, Italy will be looking to elect a new PM. Once again the electorate will be voting against the establishment. Basically Renzi is trying to change Italian laws allows political parties to amend and change laws quicker and easier. Seems though the Italian electorate is against this as they fear these same laws that “protect” them will now be able to change without having to go through the elaborate and complicated Italian political and legal system. Winner, the USD.
FRANCE: Francois Fillon has won the right to contest next year’s French election by a majority of 66.5-33.5 (vs Alain Juppe). Current polls (ah the famous polls) suggest he would “easily” beat the far right party of Marine Le Pen. Don’t count your chicken just yet Mr Fillon. There is a long way to go and anything can change. Another terror attack will help Le Pen no doubt. Mr Fillon is proposing dramatic economic reforms which include slashing half a million public jobs (he loses their vote), ending the 35-hour week (he upsets these folk), raising the retirement age (loses the over 60 vote but wins over the youth), and scrapping wealth tax (wins the 1% well off). Be careful what you wish for Mr Fillon, because as we all know the French electorate are fickle and can change their views very quickly. Winner, it’s a tie.
USA: We are all expecting the FED to raise US interest rates on 14th December. By how much well, that’s the million USD question. Today we will see how Q3 GDP faired with analysts expecting 3.00% from 2.90% Q2. A strong number today and strong NFP number on Friday will certainly help the FED’s position. I have recently said while 0.25% is widely anticipated and expected, I would not be surprised at all to hear the FED raising by 0.35 or 0.50% and killing 2 birds with 1 stone. However caution is probably best and with Trump winning the elections, Pres. Yellen will in all likelihood take the cautious route and hike 0.25% and wait and see. Yellen and Trump are known not to see eye/eye, however unlike Gov. Carney, Pres. Yellen will see out her term. I shudder to think who will take over from her. Given Trumps recent hiring spree, I can only think that person is going to be someone who he can “control”, perhaps his accountant? Either way the USD will be the winner here.
And so to the GBP….oi vei. Nothing good to say really. Vs the USD and EUR these past few weeks, the GBP has held up well. However I believe that could all be coming to a bitter end, at least vs the USD that is. IF as above Q3 data and NFP exceed expectations and a rate rise is indeed a foregone conclusion the USD will rally vs all the majors (EUR, GBP, JPY, AUD, etc.) leaving the GBP to lick its wounds and head towards the psychological 1.20 barrier. However strangely vs the EUR we expect the GBP to fair better as the USD rallies more vs the EUR than vs the GBP. Time will tell… but things are about to get nasty.
Have a good day
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