Good morning

High Low High Low
EUR/USD 1.1206 1.1154 USD/ZAR 13.4900 13.4200
GBP/USD 1.5555 1.5485 GBP/ZAR 20.93 20.80
EUR/GBP 0.7221 0.7195 USD/RUB 67.45 64.89
USD/JPY 120.62 120.32 USD/ILS 3.9463 3.9254
GBP/CHF 1.5121 1.5063 S&P 500 1,976 1,968
GBP/AUD 2.1780 2.1669 Oil (Brent) 49.15 48.56

Despite the FED holding back on raising rates last Thursday, it has now come to light that the FED are insisting that they continue to target raising US interest rates this year. EURUSD in particular reacted to this news falling from over 1.13 to 1.1154 overnight. The EUR has failed to claw back its losses and opened at 1.1175 at the time of writing. FED futures are now pricing in a 44% probability that the FED will hike at either their 28 October (unlikely) meeting or 16 December (most likely). This Thursday sees the FED chairwoman Yellen speak and there is hope that she will drop a hint that this is indeed the case (and the reason they stayed put last Thursday). To take advantage of this, buying a risk reversal (buy a EUR put and sell a EUR call – zero cost) is the best way to take advantage of this scenario. By locking in your best and worst case scenario, you hedge against either move without the risk of locking in your rate (using a forward) at disadvantaged rates currently in the market.

Technical analysts have commented that should we break and close below EURUSD 1.1090, this would signify a fresh wave lower to 1.0500 and it is my opinion that as we head firmly into Q4, my prediction for the EURUSD to reach PARITY (1.00/1.00) is becoming more of a reality (I said back in January it would happen in Q4). It is for this reason that I made my comments above about hedging via a risk reversal. As I wrote last week, the FED were in my opinion, fed up that they were not able to hike rates last Thursday as widely expected. The US economy is now driving forward comfortably and securely, giving the FED the “ammo” to hike rates. Granted China is a real problem, but given the efforts by the PBoC to turn things round in China, I am certain the FED will now want to react sooner rather than later.

As far as the GBP goes, the move overnight in the EUR has seen the GBP rally vs the EUR from 0.7335 (*1.3630) to 0.7210 (1.3870) with all eyes now back on the 0.7000 (1.4285) psychological level. If the EUR(USD) does what we think it will do and break 1.1090 en route to 1.0500 the reality of 1.4285 becomes ever so nearer. With regards to GBPUSD, the horse has bolted, and the opportunity to buy USD at 1.56+ (in my opinion) have diminished for now. I think the next 3 months will see the GBP slowly but surely weaken vs the USD en route to our recent lows in the 1.46 handle. I know you are saying, but if the UK hike rates that’s GBP supportive, and yes you are right….but that is very much “priced into” the current GBP levels. For this reason I think if and when the FED do hike later this year, we will see the break of 1.5000, slowed down by the fact that Gov Carney is gearing for a UK rate hike sometime in Q1 (despite recent rhetoric that rates could actually FALL). No doubt Gov. Carney wants to keep his promise and hike when the time is right (wage growth growing, now all he needs is a tick up in inflation….and the rest is history).

Tomorrow sees the key Chinese PMI figure come in the early hours, followed later by Eurozone PMI and SA CPI numbers and then the SARB MPC decision in the afternoon. A Reuter’s poll shows only three of 31 analysts expect a SARB hike this week.


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