Good morning

EUR/USD	1.1224	1.1164		USD/ZAR	13.9800	13.8300
GBP/USD	1.5286	1.5240		GBP/ZAR	21.33	21.10
EUR/GBP	0.7350	0.7321		USD/RUB	67.50	54.80
USD/JPY	120.40	119.85		USD/ILS	3.9636	3.9278
GBP/CHF	1.4952	1.4878		S&P 500	1,947	1,928
GBP/AUD	2.1980	2.1707		Oil (Brent)	48.53	47.94

Forget China, forget Greece, yes this time it is about a “small” car manufacturer in Germany that is clogging all the headlines!! VW what were you thinking. Class action suits, CEO resigning, massive fine on its way in the USA and UK and who know where else…this event is likely to have a significant effect on the German economy and no doubt Chancellor Merkel must be absolutely fuming at the news (not to mention the “rumours” in some papers that SHE WAS COMPLICIT/AWARE – I hope not!!). Suffice to say the impact on the German economy will only be known once the numbers start to surface, with €5bn already set aside for the US fine…this is just the tip of the iceberg and that number will no doubt grow many times over. As the largest car manufacturer in Germany, VW contributes an enormous % to German employment, exports and imports (GDP).

“All of a sudden, Volkswagen has become a bigger downside risk for the German economy than the Greek debt crisis,” ING chief economist Carsten Brzeski told Reuters. “If Volkswagen’s sales were to plunge in North America in the coming months, this would not only have an impact on the company, but on the German economy as a whole,” he added. “Should automobile sales go down, this could also hit suppliers and with them the whole economy,” industry expert Martin Gornig from the Berlin-based DIW think tank told Reuters. In 2014, roughly 775,000 people worked in the German automobile sector. This is nearly 2% of the whole workforce. In addition, automobiles and car parts are Germany’s most successful export — the sector sold goods worth more than €200bn to customers abroad in 2014, accounting for nearly a fifth of total German exports. “That’s why this scandal is not a trifle. The German economy has been hit at its core,” said Michael Huether, head of Germany’s IW economic institute. The spill over effect from this is going to be felt in every industry that supplies parts to VW. VW has a war chest of €21bn that they will have to use to settle with the authorities and civil suits. It is the long term effects not only on VW but the entire German and Global car manufacturing industry that all eyes will be focussed on now. I mean if VW did it, was there anyone else? Time to come out and tell the truth now or be caught later and suffer even greater shame.

The PBoC added 80 billion yuan to the financial system on Thursday using 14-day reverse-repurchase agreements, double the 40 billion yuan supplied via seven-day contracts a week ago. Open-market operations injected a net 40 billion yuan for the week. As we have mentioned previously the PBoC will continue in her efforts to use QE to stimulate the economy, not to mention currency depreciation (USDCNY slides to 6.3850 mid from 6.3450 a couple days ago). No matter, this is not going to be a short term fix by any means, and therefore patience is called for. Overall with China, EU, Greece, and Germany (VW) now all on the rocks, the biggest winner – you guessed it the good old U S of A. I shudder to think how the markets would be behaving now had the US still been involved in QE herself and growing flat. The global fallout no doubt has added to the stress levels in the FED and with everything that is now going on i would guess the FOMC would be likely to postpone YET AGAIN the US rate hike.

Watching the GBP very carefully, as we wrote earlier this week, the weakness (GBPUSD) continues with cable trading sub 1.53 handle. Vs the EUR the pound has lost ground trading at 0.7335(1.3630) at the time of writing (from 0.7260 1.3775) just a few days ago. I do expect the pound to weaken more over the coming months as the USD trades stronger, though the weakness is likely to be slowed vs the USD (compared to the EURUSD)

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