Good morning

Going back to the day’s when I was trading FX derivatives, there was a misconception that December was the month to sit back and enjoy the festivities and more importantly to sell volatility and earn time decay. That I am afraid has been proved wrong time and time again. Looking at the various bourses over the past week one could only imagine what must be going through peoples minds right now (including mine).

Back in October stock markets globally got a proper beating. I for one did not like the look of it and decided to sell my entire portfolio. Then November came and the rally and I was left scratching my head thinking am I really seeing things? Alas last week and yesterday simply confirmed my feeling back in October that stocks were overvalued and due a correction. Now don’t get me wrong, this move could again be a “plot” to wash the market of the dead-wood, the day-traders and the weak. Or this could be the start of something bigger. Remember back in October, Oil was very much on the back-burner and we were talking about CPI, conflicts, EBOLA (unreal how quickly we forget), deflation and global growth. Those symptoms are still very much alive and thriving, only this time no one seems to want to write about them and vocalise them on Sky, BBC, CNN, Fox, CNBC etc. Apart from the USA and UK does any nation stand out (I am excl. China India etc.) as coming back from the dead? I think not. In recent weeks China, Norway and Poland all CUT interest rates to try spur on growth and only today Russia HIKED their rates to 17.00% (from 10.50%) but then again that’s a different story all-together.

So let’s quickly jot down a few key points: (1) China manufacturing PMI contracted to 49.50 from 50.50, (2) The RBA retained its forward guidance of stable rates with a dovish inkling, (3) Stocks are falling like a stone, (4) FOMC meeting tomorrow (17th) will shed more light on the path they are taking, (5) oil has been flushed down the toilet, (6) the USD while off the recent high’s is simply gathering its bullets for another push towards my target of 1.2200 by year end (remember my target was 1.2200 as previously noted), (7) the threat of the EU entering a period of DEFLATION edges closer and closer.

USDZAR, USDMXN, USDILS, USDTRY, USDINR, ALL UP THE CREEK WITHOUT A PADDLE. Only this time we can’t blame the strong USD. Just look at the 7 points I raised above and you will get an idea of why EM currencies have been swash buckled. For countries like S.A, Israel, Turkey, India the lower oil price has indeed been a blessing given they are net importers of oil (and thus inflation). The problem is when one goes THEY ALL GO. It is a domino effect. Once the currency broke key levels the rest was history. I feel the opportunity to reverse these losses has come and gone, and while we could see minor pullbacks the writing is on the wall. For the aforementioned nations above, a weaker local currency is AWESOME news given the increased revenue (potential) from the export market.

I will say this again, any CORPORATE WHO REQUIRES FX NEEDS TO HEDGE!!! These are trying times, these are volatile times and relying on lady luck is not really something I would bet on. I am SO CONFIDENT when I say this, the USD will drive below 1.2000 and head towards PARITY(FX) – now you know where our name is derived from – during 2015. The reasons are numerous, but the facts are simple. The US is the only western economy with growth in excess of 2% (their last GDP hit 3.9%). The rest of us are scrambling with a +ve number let alone something as mouth-watering as a 3 handle. So you see, when Gov. Yellen starts hiking rates in the summer of 2015, it will resemble adding a ton of gasoline onto the burning fire. While the rest of the EU/Scandy/Antipodean nations battle to stay afloat, the US will be off to the races and well ahead of the pack. So if you need to BUY USD (vs selling GBP, EUR, AUD, NZD, EM) you would be VERY WISE to put on a hedge now because leaving it until “a better level” is like going to the casino and putting your money on no. 23….what are the chances!!!

As I write this French PMI 47.90vs 48.40 while German PMI going to be published at 8.30am prev 49.50 vs anticipated 50.40….here is hoping it is not as bad as the French.


Wish you a good day ahead

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