It was back on the 2nd September I wrote the following: “I have spoken MANY times about this subject. In fact back in July I commented that the USD was due a massive reversal from 1.3750 given the state of the EU. This is now starting to gather more strength and the general feeling is this is JUST THE START. I have further stated (later backed up by Gov. Draghi of the ECB) that the EUR is too strong and is making European manufactured goods “more expensive” and hence less competitive. The bottom line my dear reader, is the EUR HAS TO FALL and fall hard!!! I have no doubt that come December you could quite possibly see the EUR/USD SUB 1.2000. Sounds like fiction? WHY? Looking at the numbers you cannot escape the facts. Growth, wage growth, retail sales, manufacturing PMI, unemployment, labour laws….the list goes on and on. The biggest problem facing the EU is you have 18 countries (of the 28 EU members states) all pretty much in DIFFERENT levels of healthiness and growth yet all dictated and cut by the same cloth. It is like playing Barnet football club (Conference League) in the same league at Manchester united (I tried to find the best match in terms of ability)”.
The US economy continues to be the bright spot for global growth (together with the UK). Friday’s final estimate of Q2 GDP came in at 4.6%, in line with consensus. But the report showed more investment and less consumption than anticipated. As a result, the USD continued to strengthen against the EUR, JPY, and GBP and most EM currencies on Friday. A number of key FOMC members now putting out “signals” that the FED COULD hike rates as early as Q1 2015 (WHAT I HAVE BEEN SAYING ALL ALONG) rather than Q3-Q4 as Fed futures indicate (and the market).
Later this week, September Non-farm payroll report should give an updated view on the labor market. We expect a strong report, with a 225-250K gain in payrolls and the unemployment rate to decline to 6%. As Fed Chair Janet Yellen noted at the September FOMC press conference “If the economy proves to be stronger than anticipated by the Committee, resulting in a more rapid convergence of employment and inflation to the FED’s objectives, then increases in the federal funds rate are likely to occur sooner and to be more rapid than currently envisaged”. At the Jackson Hole symposium, she noted that the Fed was looking beyond just the headline payroll numbers to gauge the progress in the labor market. This rhetoric is otherwise known as “verbal intervention” where little snippets are released getting the market ready for the main event. It was just last week that Gov. Carney (BOE) said the same thing, indicating that rates in the UK could also rise earlier than expected given the robust state of the UK economy. When people go to the polling booths next year, perhaps before they decide on where to place that tick, they should look at their bank accounts and feel pretty pleased with themselves. That is all down to the austerity measures initiated and carried out by the Govt. Of course there are other issues when deciding, but as far as I am concerned as long as the ruling party has a “game plan” and will continue to support business, I am voting with my wallet. Look at the recent article published by Alister Heath in the Telegraph newspaper where he specifically makes mention of how business has fallen out of love with Labour.
The upcoming data-heavy week will continue to show the divergence in economic fundamentals between the US and EU, lending more support to the USD and our view of a continuing USD strength. The USD index breaks 85.00 which in itself is a very bullish statement.
The consequence of the above has seen a SHARP fall in EM currencies and Commodity currencies (CAD, AUD). USDZAR trading at 11.2700 (from 11.1400), AUDUSD 0.8720 (from 0.8800), NZDUSD 0.7765 (from 0.7925), USDILS 3.6870 (from 3.6650) all pointing in the same direction. Stronger USD. I cannot say it enough times, the USD is on a roll!! and the roll is likely to stay with us for a medium – long term. We have to get used to the fact that changes are coming and with the prospect of higher rates, it is advisable to start making the necessary adjustments to coincide with these higher borrowing costs. The cat is out the bag. Lets not cry over spilt milk!!
Have a great week ahead