Good morning

A very well respected Elliott wave technician (and good friend) sent us his thoughts yesterday on GBPUSD and just like I mentioned in our comment yesterday, the outlook for the GBP DOES NOT LOOK ROSY. And I quote: ” GBP sits on the cusp of a massive breakdown as it coils against key long term levels. 1.5160/80 has held 5 months of spike (bullish) price action in which the market has established a love affair with the pound. I interpret this as an energy build capturing a B wave and waves i,ii of the next trend leg lower. I look for a decisive fall in GBP as we continue to break levels across the board from EURGBP to GBPJPY. This should be a third wave and 1.45 is the immediate target on a transition into the long term targets in the 1.30’s”.  As you can see the market has fallen out of love with the GBP in recent weeks having risen to over 1.58, the GBP is now under serious threat of breaking down. I mentioned yesterday that despite the risk of a rate hike in Q1 2016, FX traders nonetheless think the GBP is overvalued and due a correction en route to this year’s low of 1.4566 which all things considered will not be a surprise. For weeks during the GBP appreciation many of us were wondering why the GBP was rallying to such an extent on the back of nothing obvious. Yes, wage growth exceeded expectations and there was talk that inflation had bottomed giving rise to an imminent rate hike. However with the situation in China, EU, Greece and now Germany all likely to seriously hamper global growth, the US has put their rate hike on hold and in turn delayed the hike due in the UK. For this reason alone, I think the GBP has come and will continue to come under pressure.

A sure sign (as I mentioned yesterday as well) that rates in the US were due to rise later this year, were CONFIRMED by FED chairwoman Yellen last night. The Federal Reserve is on track to cut rates this year, despite recent dips in inflation, she said. In Spite of the FOMC anticipated rate hike last week, the FOMC voted by -1 to hold rates as global market volatility, largely led by tumbling shares in China, overshadowed a stronger domestic picture in the US. However, Yellen said US economic prospects “generally appear solid”, and as long as inflation remained stable and employment numbers continued to move higher, conditions would be right for a rise later in the year. She added recent inflationary weakness in the US was the result of short-term factors including falling energy prices and a strong USD. Yellen said it is unlikely to affect the path for US monetary policy. Rates are currently at a seven-year low of 0-0.25%. “Most policymakers including myself, currently anticipate… an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter,” Yellen told students at the University of Massachusetts. She added keeping rates at ultra-low rates carries financials risks when the US is showing signs of sustainable economic growth. “Continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability,” the FED chair said. However, a rate rise, which would be the first hike in nine years, is not set in stone. “If the economy surprises us, our judgments about appropriate monetary policy will change,” Yellen added. Analyst expect the Fed to raise rates by 0.25% in December. YOU HEARD IT FIRST AT PARITYFX (in our commentary yesterday!!)

All the above spells bad news for EM currencies in particular the ZAR, MXN, BRL (who have their own internal problems), TRY, RUB and of course CNY. Talking about the recent CNY depreciation an official with the PBoC  said on Friday that the nation’s exchange rate reform was rolled out at a good time. Sheng Songcheng, the head of statistics at China’s central bank said in a speech that large yuan depreciations will be unlikely in the long-term given the country’s relatively high economic growth, large current account surplus and relatively high domestic interest rates. He also said that markets had experienced volatility as a result of the relatively slow pace of China’s exchange rate and capital account reforms over the years compared with interest rate liberalization, adding that volatility shouldn’t delay the pace at which China’s financial system opens up to market forces. He also said the PBoC’s decision the devalue the currency was timely given that China’s domestic interest rates were falling, thus limiting the impact on the economy.

VOLATILITY IS BACK WITH A VENGEANCE – embrace and enjoy!!

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