High	Low			High	Low
EUR/USD	1.1365	1.1310		USD/ZAR	13.1397	13.0300
GBP/USD	1.5510	1.5459		GBP/ZAR	20.34	20.17
EUR/GBP	0.7336	0.7301		USD/RUB	69.40	67.31
USD/JPY	120.37	119.79		USD/ILS	3.9457	3.9020
GBP/CHF	1.4781	1.4726		S&P 500	1,953	1,938
GBP/AUD	2.1828	2.1672		Oil (Brent)	44.79	43.48

The more I look back at the volatility of the last few days, the more I am attracted to the idea that we have just experienced an October ’87 type event. And as much as most will recall that ‘Black Monday’ in 1987 turned out to be one of the great buying opportunities, my perspective is more in terms of the policy errors that occurred as a result of the stock market collapse at that time. Central bankers added liquidity into the market to counter fears of systemic collapse, and to boost confidence. Within a few years it was widely recognised that policy makers should have largely ignored the market moves and focused on the real economy which had been doing ok. Instead their actions encouraged a belief that central banks would always be there to bail them out, I can’t say they’ve been wrong – the ‘Greenspan put’ is part of the lexicon now! Today, the problem is not that central banks are going to take actions to soothe a fearful market, in fact volatility is slowly stabilising. What is most concerning is that the actions we – the market – had come to expect look further away now than before recent events. Deep down I’m not sure anyone really expects the Federal Reserve to hike rates this year now, but I believe that’s exactly what they should be doing. Bill Dudley the Governor of the New York Fed seems to have been pouring cold water on a September interest rate rise last night. Now he’s not exactly known as a hawk but there’s no reason to believe he isn’t communicating the majority view of the decision makers – plus ça change, plus c’est la même chose.

 

As I’ve mentioned many times before, during every great dollar rally there have been significant periods of time spent with correcting and directionless markets. The last 5 months, since the middle of March when the greenback started to give back some of its gains, might seem like a long time, but historically there have been periods 2 or even 3 times longer that have constituted a mere corrective blip in a long term upward trend in the dollar. That scenario still remains my base case, but there is no question that from an Elliott Wave Theory perspective EUR/USD has completed a beautiful a-b-c correction from the March lows. I must say, I find the bullish-dollar-into-the-end-of-the-year scenario highly appealing because (given the dollar up, equities up paradigm in place) it is consistent with strongly rallying equity markets for the final quarter, even if I don’t give much credence to Presidential Cycle theories, that scenario fits into my overall view of what could be taking place in the macro world at the moment. I am obliged to qualify that view with another possibility, one I don’t want to really entertain… this suggests that we are in for another bout of falling equity markets. While I understand the technical pattern that makes this a possibility, I can’t really find the narrative to support this. I should add that the bearish scenario would be invalidated if we see the S&P 500 up another 3% from current levels.

 

We get GDP data from the United States this afternoon. While it’s a lagging data point, it is very useful information, and one would expect market participants to focus on it. Markets continue to recover strongly, but volatility remains elevated. When you consider that even Chinese equity markets are not up over 12% from their recent lows it is reasonable to believe (hope?) that we have seen the worst already. All this translates into a currency market where the US dollar should continue to strengthen against its peers today, but it wouldn’t surprise me if the greenback lags behind emerging currencies, as improving risk sentiment will also be of benefit to the less liquid currencies.

 

 

 

 

 

 

 

 

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