Good morning

High Low High Low
EUR/USD 1.0645 1.0619 USD/ZAR 14.1600 14.0300
GBP/USD 1.5156 1.5116 GBP/ZAR 21.51 21.23
EUR/GBP 0.7036 0.7014 USD/RUB 67.38 65.26
GBP/EUR 1.4257 1.4213 USD/ILS 3.8885 3.8679
USD/JPY 122.96 122.66 S&P 500 2090 2084
GBP/CHF 1.5440 1.5389 Oil (Brent) 45.60 45.00
GBP/AUD 2.1054 2.0986 Gold 1073.0 1067.0

The message you would think is loud and clear. FED funds will rise on the 16th December. Or will they.

We have witnessed since late June a downward spiral of US economic data, only to see an impressive turnaround earlier this month when the NFP figure showed a jump from +142k in Oct to +271k in Nov sending stocks lower and the USD higher. From all the pessimism pre the number, suddenly everyone (just about) reversed their pre NFP FED rate hike opinions and stated actually, we were wrong, the FED will hike in December (FED futures jumped to over 70% probability). So here is some food for thought, we are approaching the “festive season” companies worldwide rely on this period to boost their coffers. Hence they hire hire hire (increased productivity and sales). What happens after the festive season (forget the January sales), you would think all those hires are let go. So my question is if the NFP number comes in at or around November’s data does this signify a real change in corporate sentiment or is it merely a seasonal change. Surely one should pay close attention to the June-November figures where trading is normal rather than based on an event/season. Hence be careful what you wish for because the FED I am certain are going to be super careful on the correct timing of the rate hike. As I have said previously a 0.25% rate hike is in the broader picture neither here nor there. What it does show is intent and that speaks volumes.

As a result of these rumours and expectations the USD has been given a new lease of life. Powering through 1.1069 (support) we find ourselves hovering around 1.06, as the market continues to buy and hold USD ahead of the 16th Dec decision. Any comments to the contrary by FED members will see USD holders cut positions and run for the hills. Alternatively, no comments from the FED will reinforce USD holders to “add” or at least run the position ahead of the decision. If they did hike, I would expect there to be profit taking followed by another round of USD buying as the question then is when they will hike AGAIN!! BUT and yes a big but, US corporates are already moaning that export earnings are hitting them hard. So can the FED risk corporates sailing into the Bermuda Triangle. The FED must manage the USD’s rally (through rhetoric) so as to avoid a USD rally that really puts a dent in corporate earnings (thus fewer hires and back to the drawing board).  In fact Chairwoman Yellen on Monday argued for a cautious approach to the pace of interest rises in an unusual exchange with U.S. consumer advocate Ralph Nader. In a letter to Nader, the Fed chair repeated recent statements that the central bank should only gradually raise interest rates. “An overly aggressive increase in rates … would at undercut the economic expansion, necessitating a lasting return to low interest rates.” Enough said!!

As for the GBP, we have already seen the currency move below 0.70 (1.4285) this week before moving back above on profit taking. However vs the USD the GBP has been quite “lucky” if one could say that. For the past few months the GBPUSD has ranged 1.5150-1.5800 which in FX terms is pretty tight. Even as we approach the FED meeting the GBP continues to trade in the 1.50handle (1.5150) giving up gains slowly. While I fully expect the GBP to “dump” towards 1.45 the pace is as slow as watching paint dry. No doubt the risk of the UK hiking has been depleted in recent days but the threat still lingers. Hence I still think vs the EUR the GBP will be singing and dancing, while vs the USD it will be a slow grind lower.



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