Short one today. We’re now into earnings season. What happens in corporate US matters, as the US remains the largest economy in the world and it’s macro picture has a significant impact on perceptions of risk and sentiment in general. Data that surprises could cause short term spikes in volatility, but unless a theme can be divined from earnings or sales data that contradicts the current macro narrative we shouldn’t expect a broader impact. This is the ideal domain for range traders, a highly specialised market, that can be difficult to profit from.

Majors continue to trade within defined ranges. EUR/GBP looks to be approaching first minor resistance levels {0.7970ish}, and with cable (GBP/USD) bouncing off trend-line support, we could see sterling appreciating versus its main crosses, but all of this feels within the context of the ranges. USD/JPY also looks like it could bounce from supports {101.20ish}.

Bigger picture technicals continue to concern me, but I have enough self-awareness to appreciate my personal biases. Some traders are more comfortable in bull markets, others like me prefer bear markets for the winning trade. We all tend to “see” what we want to see. For now we need to continue to monitor the macro-scope, if we identify any factors that could impact the normalisation narrative that dominates then perhaps we (or I) can give in to bias! Rest assured if we spot anything we will update you in our blog.

Fears about Banco Espirito Santo (BES) one of Portugal’s largest banks did some damage to markets yesterday. Stocks were lower, EUR/USD dipped back below 1.36. It seemed like we were back to 2012 and with concerns about the health of European financials, but look where we are this morning – it’s like it never happened. Had this been back a couple of years ago – before Draghi put his foot down – the panic would have been feeding on itself by now, with senior figures across Europe announcing emergency meetings. But this isn’t 2012, this is 2014, and Draghi has been extraordinarily effective – a central banker not to be messed with. It seems clear the short term players were short euros when the rumours about BES got out, thus the dip was an opportunity for those guys to get out, take a step back and wait for better levels to get back in.

Yes the trend for EUR/USD looks to be down, but I’m guessing the smart guys will wait for the panic sellers of yesterday to capitulate and stop out of their positions. Where that level is could be 50 or so pips higher than where we are, it’s hard to be precise, but my sense is that there are stops a bit higher than where we are now. What that means is we should probably see higher levels today, but it will be a very short term thing with the pair moving back to pre- BES levels in short order. Personally I prefer EUR/GBP for expressing a short euro view… you take the dollar out of play. I wouldn’t be expecting major things to happen over the summer months though, it tends to be like that unless we’re in crisis mode. And it seems like Portugese banks are not enough to do more than momentarily perturb the market now.

In my view, we need to look out towards events like Jackson Hole in August – the annual economic symposium where central bankers often make key speeches; and the return of the big players from their holidays in September, for the market to make an assertive move in one direction or another. We could be in for a directionless market until then with ranges large enough to discombobulate, but not so big it makes us question the dominant narratives.

The recent release of the latest FOMC minutes was fairly dull to be honest, but it did strike me as interesting that both the Bank of England (BOE) and now the Federal Reserve have commented about the complacency of investors regarding when hikes are likely to start. Janet Yellen noted “pockets of increased risk-taking across the financial system”, well Janet…. who’s fault is that? The more easy money there is washing around in the system the lower volatility is likely to be. And folks? Vols are pretty darn low in aggregate!

Regardless of who’s fault it is though, major central banks are telling us that we’re at the beginning of the endgame of this zero interest rate policy (ZIRP) world we’ve been living in. Whether it’s the 3^rd quarter next year or the beginning of the year after, rates in major markets (Japan and Europe possibly excepted) need to start to go up. Markets and investing are obviously expectations based when in rational mode, but there’s the darker side of our collective consciousness which is dominated by greed and fear. Greed is definitely in the ascendancy right now, but if.. and this is what central bankers are worried about… the collective fails to properly factor in the end of ZIRP into expectations, we’ll get a negative surprise when the easy money disappears. When that happens fear will dominate and the mob is much harder to control or predict.

What can we take from this? I think markets need to have slightly more aggressive expectations of higher rates in the UK and US over the next 12 to 18 months. This will be a cushion for both GBP and USD. It doesn’t have to end in tears for risk. You can have rates going up and benign markets, as long as you have real sustainable growth.

Keep an eye on Japan. 2 months of ugly ugly machinery orders now. This is not good, yes it’s a volatile data point, but these are the core numbers that strip out the most volatile components. If you ever needed examples as to why QE may not be the panacea it’s cracked up to be, Japan is the perfect case study!

Anyway it would be unfair to pick on disappointing Japanese macro. Manufacturing data out of Italy, France and a few days ago the UK, hasn’t exactly been inspiring. We all want to think this phenomenon (poor manufacturing/ industrial production data) of the short term variety and not affecting the bigger picture macro. Too soon to tell. You’ll note I’m only mentioning today’s BOE monetary policy decision at the end of the blog. I really don’t see anything new coming from it and clearly the market doesn’t either, because GBP is not doing much of anything this morning!

You only have to look at the Galliford Try record profits from home building to appreciate that the UK economy continues to thrive, disappointing industrial production numbers yesterday cannot obscure this fact. In any case industrial production can be volatile, you need a few months of negative surprises to identify a change in trend. The bottom line is Galliford Try’s numbers surpass pre- 2008 levels and their construction order book has improved.

On a more sobering note, I’ve noticed stories from esteemed outfits – Bloomberg, Wall Street Journal and the like – openly discussing the possibility of a melt up in equities. Suddenly people are talking about average annual returns of 10.5% on the Dow and the industrial average reaching 44,000. For those who haven’t noticed it, recently achieved the 17,000 level a new record. Why am I cautious? When a consensus builds that markets are going one way… and one way only… the smart investor should be cautious! One of the great investors once said (and forgive me if my quote isn’t verbatim) “be greedy when others are fearful, and fearful when they’re greedy”. I’m not saying it’s that time yet.. markets can persist for a long time before the trend changes, but I always try to keep an eye out for the warning signs. Technical analysis can probably help identify specific levels to keep in mind, but a general feel for sentiment and the underlying macro-picture can alert you to when you need to start looking.

What does this mean for currencies? I would expect the trend of sterling strength and euro relative weakness to persist. I would also expect the more risky (higher yielding currencies) to perform well. But shorter term pullbacks are a part of the game, markets don’t move in straight lines, as we can clearly see from recent equity market pullbacks (the Dow is back below 17,000). I don’t expect weakness to persist for long (and we are coming up to earnings season after all), but these are the lazy summer months, the big boys are out in the Hamptons, or on their yachts so don’t expect too much excitement for the next while. What goes for equities and risk in general goes for currencies as well.

Good day

Firstly apologies for the late posting of my commentary.

Following the US holiday last Friday in the US, the market has opened and trading sideways today with a number of interesting Economic numbers due this week.

UK Industrial Production (Tuesday 8th expecting +5.6% from +4.4%),  US Redbook (Tuesday 8th), China CPI (Wednesday 9th expecting +2.4% from 2.5%), FOMC minutes meeting (Wednesday 9th), BOE QE total and interest rate decision (Thursday 10th, unchanged), are the most important ones that come to mind.

All in all I think the market will continue on its current path given that we do not see any material changes amongst CB’s and the market in general. While the market overall anticipates the USD to mount a challenge, I think this challenge will come later (perhaps August/September) rather than over the coming month. The reason I say this is with the next NFP meeting on 01 August I would imagine the market wants to see if there will be a follow through from the awesome number we saw last week (+288k). No point loading up on USD only to see the NFP number come back somewhat muted. In other words there are a number of unsettled issues that still need resolving before the next real move happens.

So while I am still a firm believer that EUR/USD will head south (stronger USD), I am happy to wait until there is a more progressive move to rubber stamp the move. Even now the EUR/USD is teetering around 1.3600 (from 1.3580’s) telling me there is a chance we could see another attempt to take the EUR back to the 1.3675 resistance level.

GBP (USD and EUR) and given up some profits with v USD trading at 1.7125 from 1.7150 and v EUR at 0.7935 from 0.7920. Again this move has not surprised me given we have seen a strong robust and quick move down from 0.7970 on Thursday. Ask any trader and they will say the same thing….it is always a good sign when the market rebounds after a strong move showing healthy profits were taken. Overall the market is still prepared to wait and take GBP stronger…HOWEVER and it is a big HOWEVER, the NFP number on 01 August will be crucial as to what GBP will do next. I think vs EUR there is still a strong trend to take the EUR down towards 0.7750 (1.2900) and this could happen quite possibly throughout the coming month as long as the economic number in the UK remain on course for new highs. This week sees some important announcements so we will be watching the market closely to see what the next move will bring.

Looking at the FX options market, now that the US holiday and weekend roll is out the way, vols have climbed a little…EUR/USD 1m 4.5/4.75, 1y 6.00/6.10, GBP/USD 1m 4.5/4.7, 1y 6.3/6.5 and EUR/GBP 1m 4.55/4.70, 1y 6.25/6.375….basically all in line with expectation. No doubt the market still content to sell gamma and vega especially with Summer upon us. While one would expect the Summer to be “quiet” given lower liquidity, it sometimes turns out to be the opposite and catches the market unaware. Personally Summer 2014 is going to be flat and for this reason I see vols remaining offered (sellers market).

Wish you a pleasant day ahead.

Good morning

WOW WOW WOW. There is a fire in GBP’s belly.

I wrote in my blog yesterday how I predicted EUR/USD and GBP/USD would fall from 1.3650/1.7150  to 1.3600/1.7100  respectively. That happened alright, but then GBP/USD left the EUR/USD behind and rallied back all the way to 1.7150 leaving EUR/GBP the ultimate winner FINALLY (as I predicted) breaking the psychological 0.7950 level. Currently trading at 0.7925 this represents another crucial level for EUR/GBP and a close under this level opens up 0.7850-75 as the next big trigger point. This is a monumental move, make no mistake.

What is interesting to note at this point is how the FX vol (options) market has reacted, or in this case NOT!! 1m EUR/USD LOWER at the open quoted 4.05/4.35 and the 1y 5.85/6.05 (curve steepening), GBP/USD 1m 4.30/4.50, 1y 6.20/6.45 and EUR/GBP 1m 4.20/4.35, 1y 6.20/6.35. If you follow the vol market like I do you will know that this fall (remember it is a US holiday today and there is the “weekend roll” effect, still the extra 1/10 of a vol still leads me to believe that overall the options market is probably LONG overall and thus happy to offer vol out to cover their positions. That and the summer holidays and the complete lack of volatility overall (THANKS YOU CB Governors) leaves the options market at their all time lows (and making news lows daily).

EUR/USD needs to break 1.3500-1.3475 for us to see a change in vol sentiment. Until that happens be rest assured, things are likely to stay the way they are and anyone long vol/gamma will be hurting (pay theta/decay).  I remember back in 2005 when vols in EUR/USD came down to roughly these levels for the summer. It was a disaster. Traders did not know what to do with themselves and trading revenue collapsed. Welcome back to 2005. Pretty it is not!!

I will repeat what I have said a few times previously. If you are a seller of GBP, buyer of foreign currency you would be well advised to look to hedge a “portion” of your book and lock it is. Having said that in EUR/GBP I have eaten humble pie. While I was confident of a break of 0.7950 I never saw it coming this aggressively.  Then again the NFP number yesterday was AWESOME (+288k vs expected +215k) a number the stock market loved and a number the USD loved. The rest as they say was history.

So what for today, well the US holiday will dampen things somewhat. I expect the USD to continue fighting back (vs the EUR) though I would imagine somewhere behind the scenes the CB’s have other ideas. I would be surprised to see the EUR/USD crack 1.3475/1.3500 over the coming weeks. My gut tells me it is not the right time…but hey I have no crystal ball…

EUR/GBP is a winner through and through. GBP traders love GBP and strong PMI numbers and recent rhetoric of rate hikes reinforces the desire to hold GBP (amongst G7 currencies). So I am of the opinion that the rally vs both the EUR and USD and AUD and JPY (etc) will continue unabated for now. There is some serious firepower behind GBP that much is obvious from the price action we have seen in this week especially.

Have a great weekend, good luck and take care

Good morning

With the impending ECB meeting and conference (thereafter) and NFP out of the US, the FX market is gearing itself ahead of the 4th July holiday tomorrow. While I am not expecting any fireworks from either, I do expect Gov. Draghi to comment on jobs, inflation, interest rates and finally the “strength” of the EUR and perhaps its implications on the Eurozone in general. While it is rare to actually come out and say it out loud, i do nevertheless think there will be some reference to the FX rate and what it implies. For this reason and this reason alone, I think the FX market will be looking to BUY the $ vs the € and the £. I have stated previously I thought it was too early to do this, now I am thinking (especially today and US holiday tomorrow) there will be profit taking today and squaring of positions. In other words I see EUR/USD and GBP/USD going south (EUR/GBP slightly weaker).

I am not shifting stance here. As many traders will agree any US holiday generally means volumes are down and currencies generally trade sideways. There will be many traders squaring up and locking any profit they have away allowing themselves respite and a chance to enjoy the long weekend (hey we traders are human after all).  EUR/£ 1.3660, appears to be ready for a correction perhaps down to the figure, GBP/USD 1.7160 also correcting down to the figure, leaving EUR/GBP pretty much where it is, 0.7960 or slightly weaker to around 0.7975/0.8000 area.

Momentum still strong in EUR/GBP and the expectation is that GBP will continue to make advancements ag the EUR given the better economic growth seen in the UK.  Having said that the market has had a pretty decent move over the past 48 hours so some kind of reversal is generally always welcome and expected (in some way). I still recommend (as an importer) if you are in a position that you need to hedge, you would be well advised to do at least 25% now and lock in these favourable rates.

Overnight, Dovish RBA Gov. Stevens resumes talking the currency down. Speaking this morning in Hobart, Governor Stevens unexpectedly spoke at length on the economy and monetary policy. His main message was that the RBA was comfortable with keeping rates steady for an extended period, while he resumed talking the exchange rate down, warning of a “significant” fall as he made the most expansive comments on the currency. AUD/USD fell from 0.9445 to 0.9360 after the comments. This is a lesson for all CB Governors. Sometimes you need to come out and SAY IT. Not to talk in riddles, just come out and say, hey our currency is to weak/strong and something needs to be done. The market will in turn do that for you. The ECB and Gov. Draghi should say just that. The EUR will collapse and save him the trouble.

I read a great article this morning in the Telegraph newspaper regarding an interview with FED Gov. Yellen and interest rates. Here is the link   http://www.telegraph.co.uk/finance/economics/10941966/Janet-Yellen-interest-rates-the-wrong-tool-to-address-financial-stability-risks.html

This morning Nationwide revealed house prices rising at fastest pace in 27 years. You know what, forget about raising interest rates, instead drop the amount a bank can loan you against your salary (currently 4x), stop cheap rates, and most of all require a minimum of 50% deposit. JOB DONE!!! yes there are certain people who will still be able to afford that, but on the whole how many really. That will stop things in their tracks and slow this housing bubble in one swoop of the wand. Will never happen of course but hey at least when Gov Carney reads my blog he will think…that’s not a bad idea…

Have a great day ahead and good luck

Good morning

Get in there!!! GBP on fire and trending in line with the recent market expectation. How many times over the past 2 weeks have I said (and I am in good company) that as long as the UK outstrips the US and EU, GBP will be in focus and “the one to hold”.

We have opened this morning with UK (and the rest of the world) stocks rallying which in turn is giving GBP a lift. The high so far in GBP/USD has been 1.7182 and in EUR/GBP 0.7949 (1.2580). So for all intents my target of 0.7950 has now been reached, currently trading around 0.7960 as barriers at 0.7950 taken out. I am confident we have not seen the end of this rally, BUT PLEASE KEEP IN MIND BIG DAY TOMORROW there is NFP and ECB (+conference) which could shed some light on the next EUR and USD moves. Given this I expect the spot market to remain glued to the current range unless of course some unsubstantiated rumours start to surface about tomorrows meetings and numbers.

i noted in yesterdays commentary that EUR/USD is reaching levels which the market seeks to enter LONG USD positions. 1.3675/1.3725 is the area that has been touted. While I am happy to go along with this I personally think it might be a little too early to reverse positions and go long USD only because with the summer holidays about to start liquidity will somewhat dry up and moves will be more pronounced. Having said that I think we are likely to see a deeper rally in the EUR and it is not until August-September that I feel will be the “right time” to position for a move to 1.3000….

In GBP, well very hard to position against GBP strength. I do believe and I am sure I am supported on this view, that GBP will in all likelihood shed some recent gains as market makers take profit ahead on the long weekend (4 July) in the US. Tomorrow is likely to see a more pronounced move given the importance of the ECB and NFP events.

Have a good day ahead and good luck

Good morning

As many of you will have read in my previous commentaries over the past few weeks, there is an overall plan to try weaken the USD to a level where it will then be possible to re-enter and initiate LONG USD positions. I have stated previously that 1.3725-1.3750 (€/$) is an area where this appears TO BE THE MAGIC NUMBER. Trading just shy of 1.3700 at the moment and with the ECB and NFP to be published on Thursday it is my belief and opinion that the markets will continue to push ahead especially as there is a press conference after the ECB announcement which usually adds an extra spice to their decision. So for now the trend is your friend and it is worth holding on for additional gains. I do not think we will see a reversal of gains over the past 24 hours especially with these 2 events on Thursday. Additionally having a look at the FX Options vol market, there is nothing there to suggest otherwise and 1m vol remains around 4.4/4.5….continuing to steepen vs the back end (1y 6.10/6.25). Keep in mind while there has been a “decent” move over the past 24 hours this does not mean you should be looking to buy “gamma” because of the limited follow through that’s likely to occur. So the Options market is still happy to be a net seller of front end vol and trade its negative gamma.

The RBA (Australia) left their interest rate unchanged at a record low of 2.5% and repeated its forward guidance of steady rates. As expected, the RBA kept the cash rate steady at a record low of 2.5%, having last cut rates in August 2013. The RBA repeated its forward guidance that “on present indications, the most prudent course is likely to be a period of stability in interest rates”.  The RBA did however reword its complaint about the higher exchange rate, noting that “the exchange rate remains high by historical standards, particularly given the declines in key commodity prices and hence is offering less assistance than it might in achieving balanced growth in the economy”.   The RBA noted firmer growth at the start of the year, but “still expects growth to be a little below trend over the year ahead”.  Growth (GDP) is expected to be between 2.50-3.10% going into 2015. The RBA also mentioned that credit growth is picking up “most recently [for] businesses”, but left it there and made no further comment.

GBP remains “on fire”. How many times have I said how attractive GBP is right now to the FX community. With all the rhetoric of late regarding interest rates and when they likely to start going up, it is no surprise to see GBP so bid (vs USD & EUR). I still think with regards to EUR/GBP, the level to break is now 0.7950/0.7955 (low of 0.7958) if we are (and we will) to see the next leg lower. However as far as I am concerned while GBP/$ remains bid, the catalyst to see the break will therefore come from a weaker €/$. I am confident that these moves will materialise in the coming weeks.

Only yesterday I said to you if you are an importer looking to BUY foreign currency these are GREAT levels to get involved. That synopsis has not changed and I continue to recommend and suggest you take advantage of the GBP strength to AT LEAST PART HEDGE and lock in these levels. The option of course if you are allowed and want to do FX Options is BUY a GBP/USD Risk Reversal.  In this case you would SELL a GBP CALL (best case) and BUY a GBP PUT (worst case). With the risk reversal trading around flat (you do not pay away much vol) you would be able to secure very attractive strikes ALL FOR ZERO COST. The same applies to EUR/GBP though here you are BUYING a EUR CALL (worst case) and SELLING a EUR PUT (best case). This is better value because the risk reversals are currently SKEWED in favour of EUR PUTS so in effect you are “getting paid” to sell the EUR PUTS. Again this is ZERO COST.

I personally am a big fan of Risk Reversals especially to hedge. Let me know (david.rosenberg@parityfx.com) if you need further clarity and I will be happy to help.

So good luck, GO THE GBP!!!!!

Good morning,  hope you had a good weekend

Having spent my entire career in the Financial Markets and witnessed financial events that could only be said happen once in a lifetime, I find the current environment one that leaves people scratching their heads wondering where the next “inspiration” will come from.

Let me put your mind to rest. While I have no input or the like from those in power, I do know one very simple thing. FX markets are driven by the CB’s to a large degree. I say to a large degree because when I have witnessed CB intervention for what ever reason, it is generally doomed to failure purely because at times there is just not enough reserves to take on the market. While intervention is short lived and has the desired effect, after a number of days or even hours, the momentum is lost. Then there is verbal intervention and more importantly “faceless/invisible” intervention. Basically the CB all get together and quietly agree where they want their currency and then use other Organisations/Large Banks to quietly put this in motion.

Where am I going with this, quite simple really. Look at EUR/USD…whats wrong with it? I’ll tell you, the BIG FIGURE!! 1.3655 as I write this is laughable. Not to mention every trader out there is looking to short the EUR from 1.3675/1.3750, I just question why the EUR remains so “strong”. It ain’t  doing the EU any good that’s for sure.  So to accomplish this let’s say hypothetically the FED and ECB agree that while the US get’s back on it’s feet let’s leave the EUR propped up and then when the time is right let the USD fly giving a boost to EU exports (that are so crucial right now). The point I am trying to make is if one study’s the FX Options market you will know that current levels of volatility (all time lows) represents an environment of limited opportunity and trend. The more difficult it is to second guess the move the more stable the currency. The more stable the currency the easier it is for the CB to control the flows. So I salute the CB Governors for doing an exceptional job. They should all be knighted for their contributions economic stability.

This Thursday (3rd July) sees NFP/US Employment report and ECB meeting. Intra week volatility will be buoyed by this especially with vols are critically low levels. Teh market will generally behave like sheet and try ride whatever wave (big/small) to make money. I do not think we will see any “out of the ordinary or shock” numbers on Thursday and therefore remain cautiously optimistic that the EUR will remain trading sideways within a narrow range. 1.3750 is my top. My bottom, well you know what it is…and what it should be.

GBP/USD will in all likelihood follow the EUR but not in as much vigour. This will keep EUR/GBP on the back foot all week before seeing a resumption of the GBP strength.  As I have suggested previously if you are a buyer of Foreign Currency (EUR, USD etc etc) I still think these are very attractive levels. If you can wait as it is not urgent, I think you will get a better opportunity. Then again a bird in the hand is worth 2 in the bush!!!

Have a GREAT week ahead