Good morning

With the Scottish referendum out the way, the FX markets will now re-focus on fundamentals. Today sees Gov.Draghi talk at 2pm to be followed by FED member Dudley speech at 3pm. While we are not expecting any surprises, these speeches always seem to bring with them some level of FX volatility. I am almost sure Draghi will be pressed on the disappointing LTRO number from last week (82.60bn taken up by the banks) and his thoughts going forward.

As I have noted previously what we are seeing is an unsynchronised global growth recovery, in that the US/UK is powering ahead, while the EU and China have slowed down. This in itself supports further divergence in global monetary policy and interest rate policy in general. The data we have witnessed over the past few months continues to support our view of a medium term bearish EURUSD, not to mention the recent ECB action to do “whatever is necessary” to address the deteriorating economic and inflation outlook in the EU as a whole. The disappointing LTRO last week was (tremendously) lower than expected  and which again highlighted the difficulty the ECB ius facing in stimulating the EURO zone. While ECB interest rates are already at an all time low (Bank rate 0.05% and Depo Rate -0.20%), there is talk that these rates could fall even lower!! Not to mention the fact that over the past few months Gov. Draghi has openly called for a fall in EURUSD siting the strength of the EUR as a reason for the deteriorating economic climate in the EU. For these reasons (and you have to admit they are pretty strong), we continue to recommend being short EURUSD (and EURGBP) our target being 1.2000 and 0.7700 by year end.

FOMC member Dudley (NY Fed President) will deliver his speech later today. A revision higher in FOMC Fed Funds rate will provide further support to the USD this week, building on the theme of generally better-than-expected economic data and gains in short-term interest rates that have seen the USD index appreciate more than 5% since early July. While Dudley is one of the more dovish-leaning members of the committee, we continue to expect the first rate hike in late Q1 early Q2 2015 (versus Fed Funds Futures, which imply September), which reinforces our strong USD view.

With the Scottish referendum behind us, the market will re-focus on economic fundamentals, and relative economic/monetary policy outlook favouring short EURGBP. We saw after the referendum the spot rate fall to the low 0.78 handle (recovering somewhat to 0.7860/1.2722 presently).  The consolidation phase of the past two months has resolved bearishly, in line with the prevailing downward trend and our greater bearish view, and we expect further weakness towards 0.7755, the lows of 2012. A break below there would allow room towards the 0.7700 area and further out towards targets near 0.7250, the former range highs from 2003. It would take a move above 0.8075 – 0.8140 to suggest that the bear trend is running out of steam. Having said that, for the latter to materialise, a move above 1.3000 (EUR/USD) would have to be seen.

In Israel, Bank of Israel (BoI) cut its policy rate in the past two meetings due to downward surprises in growth, however, we expect BoI to remain on hold this time (today 22/9), as the policy rate is already quite low at 0.25%, and USDILS has sold off considerably (3.62-3.66) since August. In our view, the BoI wants even more currency weakness and will likely cut its base rate one more time in Q4 2014 to help the economy and continue with FX interventions. With the fall in the EUR, you will continue to witness depreciating EEMEA (Eastern Europe, Middle East, Africa) currencies given that for many of these EEMEA countries, the EU remains their largest trading partner.

We have also commented on Twitter many times over the past few weeks that GOLD has lost its shine after recent inflation numbers showing a falling trend. We know that GOLD has always been viewed by investors as (1) a hedge against inflation (2) a safe haven. Given that both (1) and (2) and largely under control, we put out a view (Gold was trading at £1240) that the metal will drop to $1025. We have already seen $25 per ounce knocked off the price, with Gold currently trading at $1215 with more to come. The next target remains $1180, after which the flood gates should open all the way to $1025. By the way our Twitter name is @parityfxplc should you wish to follow our tweeting.

Following up our comments Friday on USDZAR “And developing economies with a weaker current account balance will be especially vulnerable, as we saw yesterday with the South African rand which weakened against the dollar following the decision by SARB, the central bank, to maintain the current base rate at 9.25%. It will be worth monitoring USDZAR, particularly with gold prices posting a significant drop over the last month, and general emerging currency weakness, this is a currency pair that is primed for a sustained bullish trend USD up, ZAR down”.  Further BAD NEWS for the ZAR was on Thursday when it was announced that Gill Marcus South Africa’s respected central bank governor, announced she would be stepping down from the post when her five-year term ends in November. No successor has been announced. The bank’s deputy governors, who include Daniel Mminele and Lesetja Kganyago, are likely to be considered front runners to replace Ms Marcus, who was the first woman to hold the post.  USDZAR opened weaker this morning trading up to 11.1400 and we expect further deterioration in the ZAR following a flurry of bad news.

Good luck today and the rest of the week


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