20150828 – DID BLACK MONDAY REALLY HAPPEN

Good morning

High Low High Low
EUR/USD 1.1270 1.1231 USD/ZAR 13.1580 13.1070
GBP/USD 1.5444 1.5398 GBP/ZAR 20.30 20.20
EUR/GBP 0.7309 0.7286 USD/RUB 67.28 64.25
USD/JPY 121.32 120.86 USD/ILS 3.9462 3.9037
GBP/CHF 1.4905 1.4848 S&P 500 1,995 1,979
GBP/AUD 2.1561 2.1398 Oil (Brent) 48.83 47.15

So after witnessing a black Monday markets have brushed themselves off and back on the march. Was it perhaps in my commentary a couple days ago, “AM I CONCERNED, NO” that freaked people out 🙂 ….

The big news overnight and the reason why the USD rally (and stocks rose over 2.5%) reaffirmed itself was following the Commerce Department revised second-quarter US GDP growth upward to 3.7% from 2.3%. Could it be that the exceptionally strong growth in the world’s largest economy is deflecting from the bad news out of China and the second biggest economy globally. Granted countries that are heavily reliant on a strong China (Australia, Canada) will continue to see their currencies affected by the slowdown. But what everyone wants is a strong US economy, and that is something they are getting. Only a few days ago economists and analysts were saying the prospect of a US rate hike in September had dropped from over 50% to 26%….I wonder what those same people are saying now. I jumped into the fray and also wondered if the time was right and then after careful thought and my comments a few days ago about whether I was concerned or not leads me to think the US rate hike will PROBABLY still happen (albeit by a 0.25%) with the FED then holding to see how that rate hike feeds through the US and global economies. What they don’t want to do is spook the market and set things back by hiking too early, but if one looks solely at the US economy (which they can’t of course) then hell ye, the timing is ripe for a rate hike. But that decision lies with Pres. Yellen and her FOMC colleagues who no doubt will be having late nights leading up to the 17th September.

Oil had a rebound after stocks surged and 2 incidents affected oil production in Nigeria. With the price of petrol down to 1.079 let’s hope the spike doesn’t set back the recent falls at the stations.

A very good friend (Guenter) at a large Swiss bank wrote this morning in his daily commentary (I hope he doesn’t mind me quoting him) “In brief we expect the PBoC to continue defending the CNY with FX reserves for a while, before resorting to the tightening of existing controls and delay of some capital account opening measures. We believe this may not be very effective as the exchange rate has not been allowed to adjust sufficiently. Sometime next year we may see the CNY being allowed to depreciate again. We maintain our end-2015 USDCNY forecast of 6.5, but revise our end-2016 forecast from 6.6 to 6.8. As we expect a further decline of in China’s FX reserves in the coming year, we see multiple RRR cuts from the PBC to help stabilize domestic liquidity conditions”. I am glad to read these comments as these are fundamentals I have been talking about for months now, Rate cuts, QE, exchange controls and currency devaluations. The US did it and did it well….cast your mind back to the USD falling to over 1.60 to the EUR and over 2.00 ag the GBP not to mention the $50bn a month QE and rate cuts  to almost 0.00-0.25%. Took over 6 years but America is BACK. I think you get the point I am making (Greece are you reading this?). Short term pain –> long term gain.

On the FX volatility front, to be expected, EUR vols have fallen in line with the stock rally and USD rally with speculators coming out the woods to buy both GBP and AUD vol as the currency weakens back towards tipping levels. With the UK long weekend holiday expect fewer GBP buyers given the extra day in time decay. But as I have been saying, with the summer holiday almost over and traders back to their desks, liquidity is improving and more importantly positioning is taking place for the next 6 months. As far as my thoughts on the currencies, my view stays the same, EURUSD heading to PARITY and GBPUSD heading towards 1.40-1.45 despite the rate hike threats in Q1 2016. It is a USD rally not a GBP weakness.

And one last comment, remember what I said about the ILS and how strangely stable she was at 3.82/3.85 – well she finally took off and fell to 3.9250 at the time of writing. Good things don’t last forever and I fully expect over the coming months the ILS to weaken beyond 4.00 in line with other major EM currencies.

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