Good morning

Consolidation and patience. What we have witnessed over the past couple weeks is what can only be described as an “expected and healthy” reversal in the USD’s recent bull run. While Pres. Draghi has commented that the EUR was too strong and needed to fall, Fed Chairwomen Yellen commented recently that the recent strength in the USD has “hurt” the US growth or at least slowed it down. I am of the opinion that the USD, like it or not, is en-route to PARITY (EURUSD 1.000) given the vast difference in growth we are witnessing between the US and EU’s economies. While we can all argue that the strength of the USD (given its global importance) will affect some companies that rely on a weak USD, the writing is on the wall and the trend will come back strongly. Pres. Yellen, in my opinion, made those comments to SLOW things down and I am sure she and her fellow FED members have accepted the USD’s future.

Overnight Asian equities remained flat, while the JPY strengthened to critical support levels at 106.41…driven mainly after China reported Q3 GDP at 7.30% from 7.5% and a strong rebound in Industrial Production to 8% from 6.9%. There is a strong consensus that Chinese GDP could suffer over the next few quarters as a result of a slowdown in Australia and the EU.

The ECB began buying covered bonds yesterday as part of the securities purchase programme announced at its September monetary policy meeting. Average covered bond yields dropped to a new low yesterday after the ECB started to buy covered bonds issued by banks from Spain, France and Germany. The French and German ministers of Finance met yesterday in Berlin to discuss ways to revive growth in the EU. They agreed that Europe needed a boost from investment (ECB), although they remained vague on how to lift investment. The German Economy Minister suggested a target to raise the share of investment to 20% of GDP from 17% in Germany. Mr. Schaüble added that these policies must take into account the state of the public finances. Der Spiegel reported over the weekend that Germany would oppose penalizing France on its budget if the country commits to a precise and ambitious structural reform agenda.

The RBoA (Australia) retained its forward guidance of a period of stable interest rates and remains concerned about rising house prices.The RBoA minutes repeated forward guidance and a “period of stable interest rates”. The board also discussed macro-prudential tools, though these were not disclosed. I expect the RBoA will publish its plans before the end of the year, and think it may introduce these new measures before then too to cool the housing market and increase growth. We believe there is a possibility that a capital charge for investor home loans could be initiated, where doubling the risk weighting for such loans would equate to a rate rise for the housing market entrants/participants.

Gold has been steadily climbing (from below $1200) as the desire for safe-haven demand and the reversal in the USD’s bull run took effect. Recent “FED rhetoric” over the past week has been less hawkish, which has done little to benefit the USD and in turn give support to the metals. Gold and Silver are likely to benefit as long as the USD remains on the back foot and investors decide on their next move. Keep in mind Gold is seen as a safe haven in periods of high inflation, so with a global reduction in inflation I do not see the metal rising above the $1270/75 levels. 

Good luck and have a good day

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