Good morning

High Low High Low
EUR/USD 1.0691 1.0649 USD/ZAR 14.3967 14.3000
GBP/USD 1.5207 1.5165 GBP/ZAR 21.86 21.71
EUR/GBP 0.7034 0.7013 USD/RUB 66.36 54.50
GBP/EUR 1.4259 1.4217 USD/ILS 3.9200 3.8875
USD/JPY 123.43 123.16 S&P 500 2057 2049
GBP/CHF 1.5368 1.5335 Oil (Brent) 45.05 44.55
GBP/AUD 2.1462 2.1383 Gold 1087.00 1076

News overnight that there is now a very high probability that the ECB will push through with additional QE and easing of monetary policy has pushed the EURUSD lower overnight as the market gears up both for this event and a (70%) hike in US interest rates. No doubt if things carry on as they are the EUR is likely to break through the years low 1.0459 en route to PARITY (WE SAID IT IN JANUARY!!). US corporates and the FED/ECB will be watching the USD closely given how the strong USD has impacted on corporate (foreign) earnings. With the cat out the bag, the only way to slow the USD rally is verbal intervention and that has been absent. So for now the trend is your friend. ECB’s Praet said the ECB sees a risk
that investors and consumers will lose faith in policymakers makers’ projections for reviving inflation. “It’s key for a central bank to keep inflation expectations anchored, especially in a period of slack in the economy, and we have some signals that these inflation expectations are still fragile”. Mechanically updated projections suggest that the risk is present that we may again have to extend this horizon, and even if it’s slightly, it’s a repetition of a past pattern. And then you go into the question of credibility of monetary policy. Our own experience with a negative deposit rate was more favourable than we initially thought. There is no decision which has been taken but it is true that, given the experience that we have seen, we thought in the Governing Council that there was the case to re-discuss the lower bound.”

UK PPI and CPI at 9.30am this morning. remember only a couple weeks ago the imminent UK rate hike was deemed to be off the table for now and should CPI especially come in as expected you will likely see the GBP drop some more. We have been saying for the past month (GBPUSD 1.55/1.57) the GBP strength is unsustainable and looking for the GBP to drop below 1.50 any day now en route to the 1.45 handle target rate. This is not to say the UK economy is faring badly, rather the USD is in play and therefore not immune from the falls experienced by the other “major” currencies.

EM currencies are being hit hard as a result of the USD rally. USDZAR for example is now trading near the year lows and it looks pretty sure the ZAR will continue to be hit hard as a result. ZAR speculators have taken the short ZAR positions to the highest levels in over 2 years which gives you an idea of what is in the pipeline. Again we are expecting the ZAR and other EM currencies to fall in line with the USD rally.

The CB of Nigeria revealed yesterday why it refused calls to devalue the NGN further, citing a deval would not have had a direct impact on Nigeria’s economy…stating ” The simple idea behind devaluation is that you make your import expensive and make your export cheaper. The whole essence is that people can now produce because your export is cheaper, but the question we need to ask ourselves is what do we produce and what do we export as a nation? Our major export commodity which account for more than 80 percent of our income is crude oil and here that the crude oil price is determined, we don’t have a control over it. So, if we devalue, it has no impact directly on your major export, and what is supposed to be the non-oil export, we are not producing effectively. It means that for the industry which is also import-dependent means they have to pay higher prices for those goods which will translate to higher inflation.” In line with the ZAR the NGN has fallen over 2% in the past week as a result. More to come? Market forces and demand will have their own say in the matter.


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