High	Low			High	Low
EUR/USD	1.1074	1.1020		USD/ZAR	12.9227	12.8670
GBP/USD	1.5685	1.5654		GBP/ZAR	20.25	20.17
EUR/GBP	0.7065	0.7038		USD/RUB	66.36	64.84
USD/JPY	124.44	124.21		USD/ILS	3.8705	3.8367
GBP/CHF	1.5320	1.5279		S&P 500	2,102	2,088
GBP/AUD	2.1421	2.1298		Oil (Brent)	48.96	48.55

 

Despite the persistent strength of the pound sterling and falling energy prices, core CPI rose to a 5 month high in the UK. One can be forgiven for suspecting that inflationary pressures are taking root. This will clearly be a concern for the Bank of England, and the market reacted with a strong surge in the value of GBP, numbers like these will bring the time for interest rate normalisation much closer. The expectation had always been for inflationary pressures to pick up towards the end of the year as the steep falls in petrol prices last year come out of the calculation. For price pressures to be evident already will surely be food for thought for Governor Carney et al. I must say I am close to capitulating on my view that the pound sterling is destined to weaken somewhat, perhaps my capitulation is a necessary requirement, the markets have been that cruel to me in the past!

 

Today we get inflation data published in the United States, it will be very interesting to see whether the same occurs in the U.S as in the U.K, it wouldn’t shock me. There has been a perceptible rise in volatility over the last few weeks and many emerging market currencies have weakened significantly, not just because of the Chinese devaluation. By the way, there’s a great article in the Financial Times today which argues that the Chinese over the past few years have actually allowed their currency to appreciate quite strongly against a basket of currencies – the well written piece points out that the developed economies that have engaged in quantitative easing have a great deal more to answer to if ever the accusation of ‘currency wars’ is thrown about. On reflection I have to agree with this. Perhaps China gets a bum deal when it comes to currency manipulation theories because it’s… China?

 

Taking a step back it’s worth noting that the current bull market – there is a case to be made that we are still participating in the bull market that commenced in March 2009 – must be quite mature. I was looking at a chart recently which shows that company earnings are starting to stagnate. This doesn’t mean that equity markets cannot continue to rally, but it could put into question the fundamental basis for such a market rally. At the moment I am unable to identify a narrative that could see such a thing happen, but when you consider that the trauma of the global financial crisis is only now being left behind. It is possible that over the next year we could see market highs even as the corporate earnings continue to struggle, and ordinary retail investors look to boost their wealth. I only bring this up because those sorts of conditions have preceded market tops before. The good news is, that it implies that we have some time left before we should get really concerned, but what I find terrifying is that with interest rates already at zero, and central banks reluctant to normalise interest rates, authorities could be left with very few tools to fix a new crisis.

 

Given my recent struggles to divine a short term path for currencies, I have decided to take a step back and try to re-assess the bigger picture. I will expand on my findings in the days and weeks ahead. I am reminded that the confusing events of the last few months represent a relative minor sample as illustrated by the long term chart of the USD basket I showed some months back. The chart clearly shows that during every major dollar rally there have been periods of months, even as long as a year where the market has been directionless before the major trend re-asserted. Considering this current situation started in March this year we can still call this ranging market a blip. Nothing has happened yet which should challenge our thesis that a major dollar bull trend is in play.

 

 

 

 

 

 

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