Good morning

High Low High Low
EUR/USD 1.1108 1.1051 USD/ZAR 12.9500 12.8900
GBP/USD 1.5597 1.5563 GBP/ZAR 20.17 20.08
EUR/GBP 0.7114 0.7093 USD/RUB 66.05 64.44
USD/JPY 124.52 124.26 USD/ILS 3.8480 3.8171
GBP/CHF 1.5266 1.5211 S&P 500 2,107 2,098
GBP/AUD 2.1231 2.1100 Oil (Brent) 48.91 48.30

Just a few days ago I mentioned where EURUSD and GBPUSD volatility rates were trading. I am afraid to say since then FX volatility has been carved up as the spot market remains well entrenched in a tight range. EURUSD 1m fallen by 1% to 9.60/9.85, 3m 9.85/9.90 and 1y 9.55/9.75 while GBPUSD vol has equally fallen with the 1m trading at 6.75/6.95, 3m 7.20/7.50 and 1y 8.00/8.30.. What’s happening is the market has really come to terms with the US raising rates in September and thus the “insurance” contract for hedging against volatility has come down dramatically. The 1m expiry date is the 17th September so the options contract expires at 10am NY and thus misses the announcement from the FED at 1pm NY. The premium for the 18th though is +0.30% at 9.90/10.10 but what is quite obvious looking at the rates is the shape of the EURUSD curve….the reason being there is a chance that the FED raise again either in Oct (unlikely) or December (most likely) this the curve goes up and then slopes down again as the pace of the rate rises will be a case of wait and see how the past 1-2 hikes have affected the US economy.

I still think the likelihood of us reaching PARITY remains high for 2015 especially if the FED does go ahead and hike again in December. One could argue that the EU is showing signs of growth and sustainability. Go and tell that to the millions of people in Greece and surrounding countries and they will laugh at you. And then Greece announces amazing GDP numbers out the blue…go figure, perhaps austerity DOES WORK after all. Then you have the small problem of the thousands and thousands of migrants. The EU no doubt will have to accommodate them but the economic implication is less known. Only time will tell how they will integrate and where they will end up. But that is a political debate and one which I will not get into.

Emerging market currencies remain under pressure with USDMXN falling from 15.00 in June to 16.50 at present. USDZAR equally trashed from 12.00 in June to just shy of 13.00 at present. Not to mention GBPZAR which has finally broken the psychological 20.00 barrier. In FX circles that is a MONUMENTAL break and one which for the past 18 years has been on everyone’s lips….The recent losses can of course be attributed somewhat to the Chinese devaluation, but then again lets face facts, EM currencies were always going to devalue in the face of falling commodity and metals and oil prices not to mention the imminent rise in US -UK interest rates. We have been talking about the Chinese problems for months now and the cracks in the EM space are starting to widen as productivity slows in the world’s second largest economy.

Inflation is the focus in the UK today. It is forecast for inflation to show  -0.1% y/y (-0.4% m/m) in July, following a flat reading in June. Interestingly, MPC external member Kristin Forbes has said that waiting too long to raise interest rates risks “undermining the recovery” (The Telegraph 16 August). She argued that the temporary forces pushing down on inflation could “burn off quickly.” These remarks confirm Ms Forbes among the more hawkish members of the MPC and suggest she may join Ian McCafferty in voting for a rate hike before too long, having voted to hold policy in August. I tend to disagree because hiking rates too quickly (as the ECB tried a couple years ago) will end up destroying all the good work that has been created and send the economy back into a recession. Be Careful what you wish for Ms. Forbes.


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