Apologies for the delay in publishing this blog. I know for many of you followers, your breakfast is incomplete without reading our comments…
So would you not think that the subject of this blog pretty much says it all. WHAT A RALLY. The biggest 1 weeks gains seen in the US and European bourses for 2014. It was only a few days ago when the S&P was languishing at 1985 that people were thinking this is potentially the start of a BIGGER move lower. And then Pres. Yellen of the FED dressing up as Santa came bearing gifts….whoosh!!! S&P 2071 (high 2079, 1 unit off the all time high’s). What a wonderful present for stock holders. There is no need for me to elaborate any further on what the FED delivered on Wednesday eve as I said it all yesterday. Suffice to say they have opened the door to “we will raise rates at any time and not necessarily at a FOMC meeting”.
EURUSD continues to be dragged lower, trading as I write this at 1.2260 (2014 low 1.2247). My target of 1.2200 is now a stone throw away and if I might say so myself I am pretty chuffed with my call from July when the EURUSD was trading at 1.3650. Ok originally i said 1.2000, but that was raised 6 weeks ago to 1.2200. Like I ended off my blog yesterday would you HONESTLY reject EURUSD at PARITY(FX) – EURUSD 1.00:1.00. I think not. Ok I am not saying it will happen tomorrow, but if I was looking for a punt why not look to buy a EURUSD one touch with a trigger at 1.00 expiry 31 December 2015. If the FED are going to start hiking in the summer of 2015, it is likely they will probably hike 3 times over the course of Q3-Q4 meaning everyone and their dog will be pilling into the USD.
USD/NGN (Nigeria) – In an effort to reduce foreign exchange speculation by local banks and support the Naira, CBN has stipulated that dealers must reduce the percentage of shareholder’s funds held in dollars from 1% to zero. I fear this policy change will be counterproductive. Starving the market of liquidity is exactly the opposite of what you should do in this type of situation, as the market will find its fair value no matter the obstacles. All this will do is increase the level of volatility and if anything the naira is likely to trade at a discount to fair value as price discovery will be more difficult to achieve. Some analysts are now predicting the naira could find its level around NGN 195 in the short term.
USDZAR (South Africa) – After the rally in the USD on Wednesday eve into Thursday, you would have expected the ZAR to trade weaker as a result. Instead the ZAR rallied from 11.70 to 11.50 catching EM traders by surprise. The ZAR has opened weaker this morning at 11.62 and it our opinion that the ZAR is sitting on a pretty slippery slope, ready to slip off at any time. The proposed electricity blackouts announced by Eskom for 2015 is not doing the economy any favours. Can you imagine if the power went out (often) in NY, London, Tokyo or Moscow. It would not be acceptable. The costs of installing generators is immense and an unnecessary cost to businesses. Call me a cynic, but I really have a bad feeling about the future prospects for the ZAR to recover. Great news if you are an exporter (buying ZAR), bad news if you are an importer (selling ZAR – like SAA!!) – As I have said over and over again, in a trending (against you) market YOU NEED TO HEDGE YOUR FX OR YOU WILL SUFFER LOSSES.
The SNB (Swiss National Bank) has decided to introduce a NEGATIVE interest rate on deposit account balances that exceed a given exemption threshold. This move HAD to come in order to protect the “floor” of EURCHF 1.2000 that the SNB set. The rate of -0.25% will kick off from the 22nd January 2015, and mean that any deposit in excess of the set amount levied on the bank will result in a charge to the bank of 0.25%. This is effect will make holding excess CHF LESS desirable and hopefully reduce the pressure on the CHF. Only a few days ago the EURCHF FX rate was trading at 1.2010 before moving up to 1.2060 currently. As the ECB has often said, and what the SNB has adopted, “we will do whatever it takes”. Actually I think Pres. Putin said pretty much the same thing at his year end conference. It is going to be a cold winter in Siberia that’s for sure.
Last but not very least, our beautiful POUND (GBP). It has held up over the past 24 hours trading at 1.5625 vs the USD while rallying beautifully vs the EUR from 0.7940 (1.2600) to 0.7850 (1.2740). If you are a SELLER of GBP to buy foreign currency (excl EUR), PLEASE PLEASE think about hedging NOW!!! These levels will not stick around for too long. If you are SELLER of GBP to buy EUR, I would say you are sitting pretty and wait it out because as per the market, we see the GBP continuing to strengthen (through 2015) vs the EUR. If you are an exporter and converting your USD (for example) into GBP, again the market is moving in your favour. Needless to say, if you feel uncomfortable, simply HEDGE. You will sleep easier.
Have a great weekend and be well