Good morning

Gov. Draghi failed (yesterday) to add anything new to what we already know about the waning Euro-zone economic recovery. As they say, “the cat is out the bag”. We know the mighty EU partners (Italy, Spain, France and to some extent Germany) continue to lag behind the US and UK in growth terms (GDP) and while the ECB plays a dangerous game, investors continue to lose patience with the efforts the ECB are applying in trying to stimulate an asymmetrical EU.

Opening rates: EURUSD 1.2855, GBP/USD 1.6355, EUR/GBP 0.7860/1.2722, USDJPY 108.60, AUDUSD 0.8900, USDZAR 11.1300, USDILS 3.6650, GBPCHF 1.5360…..pretty flat in terms of open/open from yesterday to today in spite of Pres. Dudley (NY Fed) and Gov.Draghi speeches yesterday. Central Bankers generally have to be very careful what they say and how they say it as any “wrong/right” word could spook markets. So they tread carefully and simply confirm what has already been said and known to the general public.

What we do know and what I have been bleating continuously is the strength of the USD and my views of what to expect next. I am finding it more and more difficult to find reasons why and how the EURUSD could mount a sudden recovery and rally above 1.2975 (resistance) en-route to a 1.30 handle (and for that matter GBPUSD to break 1.6525 en-route to 1.6700 handle). As i mentioned yesterday, the market is now focused on fundamentals rather than event risk and these fundamentals offer little in the way of EUR or GBP support. That is not to say that the GBPUSD will move in the same way that say the EURUSD does. I think if anything GBP could very well keep showing signs of life while the EUR gets mauled.

From as early as June this year (EURUSD 1.3700) I argued that the USD will mount a monumental rally into the year end. Already we have seen 6.60% drop in the EUR and my views (reinforced by some large global Banks) remain that the EURUSD will continue to slide into year end, my target being 1.2000. Of course there will be pot holes to manoeuvre around before we get there, but overall my views and opinions are unlikely to change. Furthermore the rally in USD Treasuries (10 year 2.66% high, 2.55% now) is giving the USD a lift and will continue to do so especially as rates traders are forecasting 10 year yield to rise to 4% medium term.

The HSBC China “Flash” PMI was published overnight at 50.50, easing market concerns of a slowdown in China. The AUDUSD was the biggest winner rallying from 0.8850 to 0.8900 given their trading size. China, like the EU, will need to support their economy and cuts are likely, but that is one of the best kept secrets as you can imagine.

ECB President Draghi said that the ECB stands ready to use “additional unconventional instruments” if needed to counter “risks of a too prolonged period of low inflation”. These statements reinforce our view that the ECB will initiate a new asset purchase programme of central government bonds, most likely in Q1 2015.

Bank of Israel kept rates on hold at 0.25% as expected.

USDZAR is likely to remain volatile ahead of the appointment of the new Central Bank Governor. Gold and EURUSD will also continue to weigh heavily on the ZAR given strategic economic importance of those 2 (Gold for obvious reasons and EURUSD given that the EU is SA’s biggest trading partner). The ZAR has recovered somewhat this morning trading around 11.1400….

Wishing you a great day ahead and good luck


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