20150826 – AM I CONCERNED, NO

Good morning

High Low High Low
EUR/USD 1.1562 1.1464 USD/ZAR 13.2197 13.0768
GBP/USD 1.5721 1.5683 GBP/ZAR 20.75 20.50
EUR/GBP 0.7364 0.7301 USD/RUB 72.23 68.29
USD/JPY 119.84 118.44 USD/ILS 3.8869 3.8374
GBP/CHF 1.4847 1.4722 S&P 500 1,908 1,854
GBP/AUD 2.2125 2.1908 Oil (Brent) 43.99 43.09

So the PBoC cut interest rates as widely predicted and expected. At first the global stock markets rallied (over 3%) but then (go figure) the DOW gave up those gains and ended up falling 2% at the close. European stocks already on the back foot this morning expected to open up down an equal amount. Look, we are by no means through the worst and you can expect additional volatility and losses being experienced. However as my subject line says, I am not overly concerned. The reason, I truly believe the PBoC in conjunction with the FED, ECB, BoJ are going to do everything that is needed to get China “back on the map”. Stocks have for the most of the past year rallied handsomely on the back of the US recovery. However the US does not exist alone and therefore financial ripples being felt elsewhere will have a marked effect on the US economy. I have no doubt after the Greek fiasco that lasted for the most part of 2015, the FED were relieved to see that issue put to bed….then as soon as that happened another “leak” burst the bubble with China growth. The imminent FED rate hike that was widely expected to take place in September is now in serious jeopardy and if the Libor market rates are anything to go by that expected rate hike is now likely to be put on hold until the situation calms down in China (and globally) and markets stabilise. President Yellen must be having a terrible summer given that all the signs locally gave her and the FOMC the firepower to raise rates for the first time in over 6.5 years. But and this is a big but, given what has happened in China surely the FOMC are now going to have to wait at least till October (though this is doubtful as there is no press conference scheduled along with the FED’s interest rate decision that day) to see if the time is right.  That basically leaves December 16th as the next best date. There is absolutely no need to rush the situation and the last thing the FED need is to raise US rates which in turn have a ripple effect and send the markets lower (increased demand for USD and US assets > desire for Chinese productivity). In fact Mohamed El-Erian, chief economic adviser at Allianz SE commented “The window was open a few weeks ago when you had strong domestic economy, which you still do, you had pretty neutral international economy and the financial markets were in relatively good shape.” Adding (markets) “have turned violently against the Fed, so I don’t think the Fed will take the risk of hiking in this environment, because if it makes a mistake, it will end up making a mistake that will spill back on to the U.S. economy.”

After trading over 1.17 on Monday, the EURUSD has settled back to trade at 1.1480 as I write this. Volatility rates still remain on alert given the recent FX moves. With the Chinese issue still very much front page news, FX option traders will remain cautious about selling volatility on the expectation that the markets will calm down soon enough. Additionally with the 1m expiry date including the FOMC decision, market makers will no doubt be happy to own gamma, not to mention that traders are returning to their desks after the summer holidays thus expecting to add to the already prevalent volatility. As far as China are concerned, I think there will be ADDITIONAL RATE CUTS, INCREASED QE measures, and ADDITIONAL CNY devaluation. As growth and productivity improves in the US, local importers will take advantage of the depressed CNY to increase demand for local goods (selling USD to buy CNY). Additionally as US domestic demand indicators remain solid, this in itself will help China as the “feel good factor” spreads not only to China, but globally. Given what I have said above, you have to keep mindful of the fact that growth does not happen overnight and it could take many months for the Chinese markets to stabilise and return to growth levels that the latter so crave. Once the market has finished its recent sell off you can expect things to initially stabilise and then return to normality and that is the reason why i said AM I CONCERNED, NO.

The GBP has for most part stayed out the “party” though we did see GBPUSD rally up just above 1.58 yesterday before the PBoC announcement and is currently trading just shy of 1.5700. Vs the EUR however the GBP has weakened considerably and currently trading around 0.7325…overall my medium view remains the same for the GBP to fall to below 1.5000 and 0.7000



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