After the yo yo effect last week following the inconclusive FED minutes, we started the week on a USD down day. I am not too surprised to be honest as I have been saying if the FED stick to what they have told us they will delay hiking rates. But what they tell us and what they do are quite simply 2 very different beasts. You see Pres. Yellen and her board members are obviously not in agreement about US rates and whether they should in fact be hiked in September. Personally if I was a board member I would vote to hold for now especially with the Nov US elections just around the corner. We should hopefully get a little more colour later in the week when Pres. Yellen speaks at Jackson Hole (to global Central Bankers). While I am sure she will dangle the carrot I doubt it will be edible. In other words, she will keep her cards close to her chest and let us keep guessing whether or not they hike or not. The data in the US has been ok and shows continued signs of an economy that’s in ok shape, however the same cannot be said for the EU/China and the UK. In fact the global economy is now facing a situation where the former is outpacing the latter group and that is no fun at all. It is for this reason I think we will next see a rate hike in December as intimated earlier this year. There is no rush. But having said that and having mixed with Central Bankers I kinda see why and how they would vote to hike rates in September. After all how much “damage” could a 0.25% hike really have….erm, lots!!! But they know that. So while the FED are split I think Pres. Yellens casting vote could in fact swing it her way (hike) and then sit back and see how the domino’s fall.

What this all means is if we do see a rate hike the USD will move like a bullet train on the back of asset allocation as traders and financiers move their assets heavily in favour of the USD. The hike would be a real boost signalling things are ok and the global economy can withstand and absorb a 0.25% rate hike. As far as the GBP is concerned, if you shut your eyes and sold the GBP when you walked in this morning and then opened them and decided to “take profit” I am afraid to say there would be none. The GBP dropped 60pips through the day and is back to trade around the opening levels. Seems Europe likes to sell the GBP and the US likes to buy it. Unless something silly happens over the coming days, all eyes will be on Friday and Pres. Yellens speech. So I think for this week the GBP will drive in a range between 1.3000 – 1.3200 awaiting further news on Brexit and Yellen.

Talking about Brexit, I mentioned Friday that negotiations will commence in 2017 (July onwards) and I guess someone in Whitehall must have read my blog because we now know that there is a big chance of that in fact happening. A year to get their ducks in a row and a year to prepare for “war”. The EU are unlikely to cede to the UK’s desires on trade and migration. The UK will try to muscle their way through the negotiations but if the Canada/EU negotiations are anything to go by I think this will be a game of chess. I wonder who will blink first.

Financiers businesses individuals and traders are all coming to terms with the new GBP rate. Before I go let me throw this at you. All the reports I am reading these days are saying that the catastrophe that will ensue if the UK voted OUT are actually not as bad as it appears. Stocks are at near year highs, businesses have not reported a collapse in trade and have simply passed on higher costs to the consumer who is happy to pay regardless. Inflation has ticked up as a result of increasing prices (to the satisfaction of the BoE). Granted the UK’s GDP is not into the 2% mark we have been accustomed to, but hey even at 0.60-0.8% I guess we can live with that. SO my question, if things are not as bad as they appear why can’t the GBP rally say back to 1.3500-1.38-1.4000 until the negotiations actually start. DO you see where I am going with this!! Funnier things have happened. Be prepared for the unexpected.

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The minutes from the FOMC were on the whole a “non-event”. Non-event in that there was not much information to confirm one way or another how the FED/FOMC will act on the 21^st September meeting. In fact there are some members of the FOMC who are now saying it is too early to raise rates again given the slowdown in China and Brexit consequences. How right they are!! While NFP for July showed solid employment growth I believe the FOMC members should be patient and wait for further strengthening activity from the US/China/EU and UK. The minutes stated that “regarding the near-term outlook, participants generally agreed that the prompt recovery in financial markets following the Brexit vote and the pickup in job gains in June had alleviated two key uncertainties about the outlook that they had faced at the time of the June meeting.” In other words the members were not willing to stick their necks out and give the US economy the all-clear for the September rate hike.

The result of the minutes sent the USD into somewhat of a freefall sending the EURUSD above 1.13 and GBPUSD 1.31 (GBPEUR back from the abyss to trade circa 0.8625/1.1600). I think over the coming weeks we are likely to see much of the same with the greenback trading soft as a result of the inconclusive rate hike decision in September. Granted it will be a very interesting meeting that day and a rate hike will be a serious call by the FED that the US economy (and global economy) can withstand and accept a US rate hike. Whether that is right or wrong will only be known in the months that follow as the financial markets digest further US rate hikes.

Already December is being pencilled in as another potential date to hike rates, so I think I would be quietly confident that a September rate hike will be followed by a December see how the hike filters through before recommitting to another hike.

The FED have made it clear to us all that their hike path is both US and global data dependent so a growing US economy vs slowing global economy will surely give the FED some food for thought.

For now then the GBP is likely to follow the USD’s path and trade above 1.30. We know that the negotiations on Brexit will only start at the earliest late 2017 so really between now and then it’s business as usual. In fact it would not surprise me if we saw the GBP rally some more especially into the FOMC September meeting.

Wishing you a good and pleasant weekend

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Now Now, let’s not get too excited. Yes CPI has gone up to 0.60% (yesterday) and the GBPUSD rallied on the back of it. Under normal circumstances traders would be doing high 5’s with the BoE that a rate HIKE is coming. Unfortunately is this instance it was probably a low 5 as BREXIT (as predicted and mentioned repeatedly by ParityFX ahead of the referendum) has forced up prices (oil, fuel, clothing) as retailers have had to pass on the higher cost of manufacturing to the consumer. Once again let me say a big thank you to all those who voted leave…you are now poorer. But it will not stop there, this recent 24 hour rally in the GBP has already lost steam and we are teetering with 1.30 again. Basically as you know the BoE have been looking to hike rates (pre 23/06) and were looking for CPI to rise giving them firepower to raise rates. What they never counted on (including me) was 17.4 mio people voting leave.  All the hard work that the Chancellor and BoE have put in since 2008 simply went up in smoke. Already we have seen one UK rate cut and there is further chatter that a further rate cut is needed to stimulate the economy. I would expect the Governor to hold off cutting until such time that the BoE have a better idea on how the UK economy is fairing post Brexit. In other words waiting until at least Q2 and Q3 data is at hand before committing (Novemberi’sh). In-between now and then rest assured the GBP will in all likelihood take another battering in the FX markets.

Tonight the FOMC publish their minutes from their July meeting and it will be very interesting to hear the rhetoric from President Yellen given that many commentators are calling for a rate hike as early as September. While recent NFP would suggest that the US economy is growing nicely the scope to raise US rates is warranted, it is the global economy that must be a serious worry for the FED. You see China is still showing signs of economic weakness, Canada cannot agree with the EU, the UK has voted Brexit, and the EU is like a fish out of water. While in an ideal world the FED can act alone for the benefit of the US economy, that is certainly not the case now and any further rates hikes in the US could hurt the economies they trade with thus slowing the US economy as a result. Of course this is something Yellen and the FED members can ill afford or want considering the events of 2008. So one has to ask, would another 0.25% rate hike really hurt that much? The simple answer is probably no, but then again psychologically it could be very different in that the flow of capital flows more towards the USD and USA rather than say China, the EU or the UK. I hope you get what I am trying to convey. It is a real gamble notwithstanding the “little” event in November when a new US President comes to power. Considering the 2 incumbents you HAVE to think the best option (and only option for that matter) is to vote for Ms. Clinton. But after the 23^rd June fiasco I have realised the people are strange sometimes and vote on the back of lies and deceit. Unfortunately once the dust has settled it’s too late to reverse your “x”. Best Americans think long and hard what kind of America they want on the 9^th November.

All this has led to the USD taking a bit of a bath over the past 24 hours as you can see the highs in the EURUSD and GBPUSD. Oil has managed to climb a USD or so but I’m not getting too excited. What do I think will happen now, well A LOT DEPENDS on the FED minutes tonight as an indication on what they are planning (or not) re US rates. This will then have a knock on effect on the USD, stocks, and money markets. In other words watch the news tonight.

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BREXIT PLAYING GAMES. After a short term rally on Friday that saw the GBP rally past 1.30, the euphoria popped and the GBP fell like a stone over a big figure as BREXIT consequences gripped yet again. I read yesterday that PM May is likely to delay BREXIT until at least 2019 (a year before the general elections) as she feels they simply don’t know where to start the negotiation with the EU on the terms of the exit. This is nothing new given that both Boris and Gove admitted they too don’t have a clue what the shape negotiations will take and how they will be concluded. What we do know and this I think is a certainty is if the UK want the same trade terms they currently enjoy, they will have to allow the free flow of migrants in and out of the UK. That will anger many people that voted leave. You cannot have your cake and eat it. The EU will never allow that as it will be a vote of no confidence within the EU and that is something they can ill afford. Already we have seen negotiations between Canada and the EU almost at breaking point and the EU made it clear to the Swiss recently that if they want to remain in the EU they too have to allow the free movement of migrants (something the secretive Swiss will not like to say the least). So all in all things are not looking good. I have a feeling the negotiations will be fraught with difficulties and negativity until someone throws on the towel and accepts the terms that are on the table. However what those terms are currently simple guesswork.

There has been additional chatter that interest rates might have to drop again to 0.00% to further boost the UK economy. Honestly, I think the opposite should happen and Carney should raise rates. While this could add pressure on an already fragile economy, perhaps it will slow down the demand for cheap money which as we all know led to the financial crisis of 2008.

The point I am trying to make is the BoE should make it tough for banks and corporates so that they tighten their belts and invest their current assets and workforce in improving their sales. The UK electorate’s spending habits have already changed and people are going to be a lot more wary when deciding to invest large chunks of their capital. We are certain of one thing, the UK economy is heading into the roaring 40’s and screaming 50’s (these are strong westerly winds in the South Hemisphere) and we all have to tighten our belts because rest assured things are going to get tough. I am sorry to say but those who voted leave have themselves to blame for any financial hardship that comes their way and they have no right to blame the government OR ask the government for financial help. In fact the government should immediately start withholding benefits and pensions to fill the massive £60-£80bn black hole that will be left void as a result of the exit from the EU (yes I am still angry and saddened by Brexit).

The GBP opens pretty much where we left off on Friday, weak and tipsy. It looks like there is more weakness to come and the market remains short GBP on all fronts. Not that I know anything, but it is my sincere hope that in the coming weeks as importers continue to battle ahead with the high cost of doing business abroad (selling £ to buy foreign ccy), the BoE and government will come out with something that gives the GBP a boost in the short –medium term. While the BoE will not actively intervene to prop up the GBP, there is verbal intervention that I am hoping for. Just a dream, absolutely, but hey let’s hope this dream comes true in some way.

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So it looks more and more likely that the US FED will raise interest rates at their 21 September meeting. Friday saw NFP numbers confirm that the US eco0nomy is indeed flourishing with 255k jobs created. This is exactly what the FED were hoping for and they got their wish.

As a result of the “perky” NFP numbers the USD rallied as did stocks. In fact, Asian equities climbed towards one year highs, while the FTSE climbed to the highs of 2016.  Don’t be confused here with Brexit consequences. While Brexit WILL have an effect on the US economy the anticipated rate hike in the US is a global stocks shot in the arm. Despite Gov. Carney lowering UK rates, the US economy is really what everyone really cares about so a rate hike is a sign of a prosperous economy and that means stocks rally globally.

While things are looking good in the US, the UK’s labour market is not faring well. The UK report on jobs described somewhat of a freefall in the UK job market in July with permanent hiring falling to levels not seen since 2009. It is no wonder then the BoE cut rates and expanded its Asset Purchasing Facility to try boost the economy. It will take some time to see the true effects of Brexit once corporate earnings are published as well as the 3Q GDP that will then include Brexit. While the major banks located in the UK have not started to pull their people out just yet (it’s too soon) I am certain that with time they will see the advantages of locating within an EU member state and this will mean local employees will have to start moving east if they want to keep their jobs. Having said that, wages are higher in the UK than in mainland Europe so these same employees will likely have to take a wage cut if they want to keep their jobs. While I have not heard of this starting to happen just yet, talk has begun and banks will start to make their moves in the coming months.

China stills shows signs of weakness as July’s trade data was weaker than expected with imports falling markedly. Major commodity imports fells in both volume and value terms in July which shows just how fragile the economy remains. Cast your mind back, Pres. Yellen of the FED made it clear that a rate hike is both US data dependent AND global data dependent. So while I note above the strong US NFP data on Friday boosted the chances of a rate hike in September, the FED futures currently stands at a 30% chance of that happening. While the US economy can withstand a rate hike, the FED need to be sure that the hike does not tip the global economy into a recession. There has been lots of talk in the UK of that happening as manufacturing PMI and wage growth already showing signs of clear weakness post Brexit. The way to stop this is call another referendum and see what happens given people now have the full picture and aware of the lies the LEAVE camp used to convince people how to vote. I certainly hope PM May does just that and calls for another referendum early next year.

In the meantime I am afraid to say the GBP continues to teeter on the edge trading on the low 1.30’s vs the USD and breaking 1.1765 (0.8500) vs the EUR. In layman’s terms things are looking pretty grim. I just cannot see how things are going to improve especially with talk the BoE might have to cut UK rates again to 0.00. Prepare for negative interest rates.

Have a good day

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Another week another round of rumours.

This week sees the publication of the US NFP (labour/employment) numbers. Most commentators are pointing to a US rate hike in September (economic data dependent). While China is still showing signs of weakness (PMI numbers disappointed again) the FED has indicated they are more concerned about US data rather than global data…really? That’s a change of heart!! I have said that the US must only raise rates if they think the US data is sustainable and continuous (and global economic conditions) rather than one good months followed by a disappointing month followed by a good one etc etc. Additionally with US elections looming and both candidates being rubbished in the news the FED must tread carefully. I am still in the dark as to Trump’s foreign and domestic policy and Clinton has her issues too regarding the email saga (which can only be described as clutching at straws).

I wonder with Brexit now a month in, it will be interesting to see how the data starts to come out. The UK’s GDP numbers were pre Brexit so now we have to wait and see what the numbers look like for July and how the negativity surrounding Brexit is hitting manufactures and retailers alike and consumers spending their cash.

FX rates continue to trade sideways for the most part. GBPUSD ranging 1.30-1.33 while EURGBP 0.8350-0.8450 and EURUSD 1.0950-1.1250. Until we get a definitive confirmation on Friday that US labour market is indeed growing and sustainable one cannot help but think currencies will trade within the range. Stocks are thinking the number will be good given the recent rally, then again things can change at the drop of a hat. We saw this only too clearly in June. So let’s all be a little careful not to get too excited just yet.

As an interesting note, I am currently in Spain on vacation. Speaking to local agents, they have told me (and I have seen) the Spanish economy is well on the road to recovery and King Felipe VI has nominated Mariano Rajoy of the PP to form a government. This is seen as pretty positive. Property prices in Spain (Costa Del Sol) are up over 20% over the past year and with the drop in the GBP UK citizens looking to purchase in Spain are being hit hard. Nevertheless agents are telling me this has not stopped UK buyers entering the Spanish market with a view to moving to Spain. With holiday hotspots the victims of terror attacks families are coming to Spain in their hundreds of thousands further boosting the economy. In fact our favourite Pizzeria in Elviria is now heaving from 7.30pm…which I have never seen before. No doubt the recent terror attacks in the mid east, France and Turkey have had a severe effect on the local economies.

Have a good day   

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The FOMC announcement after the meeting makes clear that further rate rises are a possibility in 2016. It looks like the stronger than anticipated jobs data from the start of this month has persuaded FOMC members that the labour market is regaining momentum and near term risks to the US economy are diminishing. Rates were unchanged of course, no one ever expected them to do anything this time around. It was always going to be about the outlook of the Federal Reserve, and clearly Brexit concerns are receding. After the announcement the dollar initially rallied but quickly reversed.

For your guide, there are 3 more FOMC meeting left this year, and it is a reasonable bet to expect a rate rise at one of these meetings. Given the election later on this year, one would expect it to happen sooner rather than later, September would be my guess. The Federal Reserve is still likely to keep a close eye on the global economy and they have left themselves enough room to delay action if data in proceeding months turns out to be more negative than expected, so all eyes no doubt will be watching activity in the UK – don’t pay too much attention to the UK growth numbers yesterday, that relates to activity before Brexit.

It’s certainly interesting to note that the Fed has not reacted as negatively to Brexit as the IMF for example, as they have still maintained their growth forecast for the US economy. Surely if they were in tune with the IMF then the negative outlook for the global economy as a whole would have also impacted the US economy. Some FOMC members did however state that they would prefer to see more signs of an inflationary threat before hiking rates further.

I don’t see the reversal of the initial dollar rally as a sign that the dollar is going to get weaker from here. Rather it looks to me that the market, which was already starting to price in the possibility of further hikes this year, is seeing a bout of profit taking. Granted the dollar could sell off further in the coming days, but this only opens the way for a renewal of a bullish dollar trend. As I mentioned in a recent blog, the case for the dollar to appreciate versus its European peers remains strong to me, indeed it’s been reinforced by the Fed’s pronouncement. Look across the Atlantic and you’ll notice that both the Bank of England and ECB are far more likely to ease monetary policy in the coming months. Once again the major central banks are moving in opposite directions, it’s hard to see why that won’t see EUR/USD and GBP/USD eventually moving lower as well.

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Not much to report today. The post-Brexit data keeps rolling in, so far not great for the UK as expected, but all in all not terrible according to surveys for Germany and Belgium. This doesn’t mean that the Eurozone won’t be negatively impacted, but it’s what we’ve always known… the most direct impact surely has to be on the UK economy, and the second derivative impact on the Eurozone will be contingent on how bad the effects of Brexit will be on the UK economy.

Elsewhere we’ve seen some mixed data in Asia, with stronger than expected GDP data in Korea, but weaker industrial production data (and declining) in Singapore, and also weaker trade data in Hong Kong. While the trade balance in Japan does look better, this is primarily because of a slump in imports which doesn’t speak well for global trade. On the other hand, home sales in the US paints a picture of a robust economy, but again on the negative side, survey data for services in the US disappointed somewhat. A fairly mixed picture globally, but to be honest, mixed is better than some of the more dire predictions leading up to and following on from Brexit. It will probably take a few months of data to build up a case either way, on where the global economy is heading.

Major currencies still look to be trading in corrective complexes for the moment, but it’s worth noting that oil exposed currencies aren’t the best performers at the moment, whether you look at the Russian rouble, Nigerian naira or Mexican peso. For now, we maintain a slight bias towards a stronger dollar, if only because most of the easing bias is likely to come from central banks other than the US Federal Reserve. We’ll get to see that view tested later on today, with the FOMC decision in the European evening. The key question to come out of the meeting will be the Federal Reserve’s latest assessment of the US and global economies. That could set the tone for a currency market that has been largely range bound for the last week or so…

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When Natwest, one of the main UK High Street banks issues a notice to its corporate customers that there is the possibility of the bank applying negative interest rates to their deposits you can almost take it as a certainty that rates are going lower in the very near future. Most expect the Bank of England to announce a rate cut in August, and this is as clear an indication of that as you can get. The situation becomes even clearer when you hear the likes of Martin Weal, a member of the Bank of England’s monetary policy committee, having seen the negative business surveys published after the referendum stating that he now thinks immediate stimulus to the UK economy is necessary. We may have not seen the last of sterling weakness, brace yourselves.

Trading volumes have risen as the S&P has made new highs, this is normally a good signal that the trend is likely to be persistent and a genuine breakout has occurred. The post global financial dynamic of markets reacting positively to anticipated stimulus continues. As things stand it’s likely we’ll see stimulus from both the UK and Eurozone central banks. In a way it’s odd to see oil quietly retreating from the highs as has been the case in recent weeks, but perhaps the snippet I put into a recent blog – the US is now exporting gas to the Middle East – is a more powerful indicator of the state of play than the effects of more stimulus.

Elsewhere it’s clear that the Nigerian central bank has managed to bungle what seemed like a sensible devaluation plan. On reflection, an effective freeing of the naira should have led to a more rapid convergence of parallel and official market rates than we have seen so far. Certainly, with supply and demand reaching a balance of some sort, we would not be observing (and experiencing) such a severe shortage of dollars as is currently the case.

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The ECB, like the Bank of England before them chose a cautious ‘wait and see’ approach to the post-Brexit situation. It’s easy to see why, there hasn’t really been any significant data announced yet that gives us a clear picture of what activity has been like after the referendum. Perhaps that changes this morning with a raft of European country PMI data to be announced in the next few hours. If as feared it signals a slowing or even contracting of economic activity then all eyes will turn back to the central bankers. Both Governor Carney and President Draghi stated that they are ready and willing to take action if circumstances demand it, so we will watch to see if this bad data will be enough to convince them of the need for action. Both central banks, it should be pointed out, are already at or close to the zero bound so their capacity for action isn’t what it was before the global financial crisis, but still, they will surely be able to do something. My guess is that the solution, from their perspective will involve attempts to weaken their respective currencies, so the likely reaction to poor data later this morning will be a stronger dollar and weaker euro and sterling.

Elsewhere the dollar is already weighing on the Nigerian currency, the naira, following the publication of IMF forecasts for negative growth this year. It has been an extremely tough environment to sell naira in recent days as the chart below illustrates…

Finally, Donald Trump has officially accepted his nomination as the Republican candidate for President of the United States and gave a long, and sombre speech putting forward his case. One of the things I noticed was that he talked about ‘Americanism’ as opposed to ‘globalism’. In recent days he has talked about the US not necessarily supporting their NATO allies if there was ever conflict in Europe (Russia presumably being the threat in such a scenario). I can imagine that some world leaders are horrified by both of these points. All I can say, having observed the EU referendum, is that truth, particularly from “experts” or members of the elite or establishment is being ignored by electorates at the moment. What seemed like a publicity stunt a year ago suddenly feels very serious. It is ironic that his opponent, Hillary Clinton, as establishment and elite a personage as you could find, is probably precisely the wrong person to be waging this fight. The irony being that she may rightly be distrusted for many reasons, but the truths she will try to speak to defend America’s historic positions are unlikely to be heard because so many are unwilling to trust her. I await her speech at the Democratic convention, it will be interesting to see if she can put forward a case for hope, and an admission of past mistakes that will persuade enough of the American electorate to pull back from the abyss. Because as things stand, it seems that Trump can say what he wants and his followers will believe him, while Hillary will not be forgiven for any perceived untruths, that is one heck of an advantage.

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