After fending off one blow from the SNB and another, albeit positive, surprise from the ECB, investors’ focus will, naturally, shift to next week when the Federal Reserve’s rate decision will take place. “What will Yellen say this time?” markets want to know. Can the Fed Chairman really stay hawkish while the rest of the world is plunging into a new cycle of easing? These questions have loomed over Fed meetings for a while now, especially as Oil prices plummeted and inflation expectations lowered. Yet to the surprise of many Fed watchers and investors, Janet Yellen, “the dove,” continued to press forward with a hawkish tone, giving an upbeat assessment on growth and stressing the Fed’s conviction that disinflation (low Continue reading "Fed on the Brink of Dovishness?"→
By now you’ve heard the news; a Swiss tsunami has hit FX markets. In a historic move that took even the most seasoned investors and experienced brokers by complete surprise, the Swiss National Bank (SNB) has removed the 1.2 floor for the EUR/CHF, effectively eliminating the Swiss Franc’s peg to the Euro. The Swiss Franc, as a result, surged a jaw dropping 38% vs the Euro and 29.7% vs the Dollar in only a few hours, leaving Swiss equities tumbling and Swissie bears crushed. Undoubtedly, this aggressive move and the volatility it generated will be talked about for years. But what does this SNB move say about Switzerland, about the Euro and, more specifically, about the Swiss Franc’s future? Continue reading "The Ramifications of the SNB Move"→
This week, investors believe that they may have finally gotten the green light for ECB easing. With Eurozone inflation officially turning to deflation, investors believe that Mario Draghi and the ECB have been backed up into a corner with no escape, thus they will be forced to initiate a Quantitative Easing program that will balloon its balance sheet. In fact, the buildup towards this move started a few months back with Mario Draghi sending ever clearer signals of the ECB’s intent toward a full blown QE that will probably involve purchases of government bonds in a Federal Reserve-like manner.
If you will recall, Mario Draghi had also outlined the ECB’s intent to balloon its balance sheet back to its 2012 record of roughly €3.1 trillion. With the ECB’s current balance sheet at €2.216 trillion that means an estimated €884 billion in additional liquidity coming to the markets. As would be expected, the Euro has been in utter meltdown over the past few months, sliding to a low not seen in more than 9 years; of course, all this comes on the back of the impending liquidity injection and especially now as deflationary fears were confirmed with the Eurozone’s CPI at -0.2%. So far, this is par for the course, yet for me, this dredges up old memories of 2012.
The Big Mistake
Just by stating the obvious, that the ECB has to increase its balance sheet by a jaw-dropping €884 billion in order to increase its balance to the size it was a little more than two years ago, shows just how big a mistake the ECB has made in its policy since then. Across the “pond,” the Federal Reserve’s balance sheet has been growing since 2012 and its size has only now stabilized, as the US enjoys above-trend growth, a hair’s breadth of full employment and core inflation at a decent 1.7%. In the meanwhile, as the ECB was aggressively shrinking its own balance sheet, Eurozone growth came to a virtual standstill, unemployment remained stubbornly high, exports slowed, manufacturing weakened and, of course, the Eurozone moved into deflation. Continue reading "Can The ECB Learn From Its Own Mistakes?"→
The 16th of December will be remembered by investors across the globe, and Russia specifically, as “Black Tuesday;” a day when investors got a quick and unwelcome reminder of the 1998 crisis during which Russia was bankrupted. On Black Tuesday, the Ruble tumbled by 21.1% in less than a day and hit 78.51; Credit Default Swaps (CDS) for 5 years have priced in a 8.8% chance for a Russian bankruptcy. Black Tuesday was, simply put, an utter meltdown; investors were in a panic, Russians were running to the banks and the risk of a total collapse of the Russian economy hung in the air. Yet two weeks later, as some of the chaos from that Black Tuesday began to dissipate, some stability has emerged and with it the Ruble has regained some lost ground. The two questions which beg to be asked and answered; Is it the calm before the storm or perhaps a step toward stability? As we attempt to answer these questions we will also, hopefully, shed some light on the Ruble’s possible trajectory as a consequence.
What Ignited the Chaos?
Although it is still debatable as to what exactly was the last straw, there are clearly two very big contenders. The first was Rosneft, the Russian oil giant, was effectively bailed out by the Russian State through the tapping of the country’s emergency reserves. Continue reading "Is The Ruble Meltdown Over?"→
This week was undoubtedly a busy week for FX traders, with the utter meltdown of the Russian Ruble followed by Putin’s speech, the across-the-board selloff in emerging markets and the surprise negative rate announced by the Swiss National Bank. What this week won’t be remembered for is a Pound Sterling turnaround, yet I intend to illustrate in this article that that might just be in the cards.
Across the Channel
The fact that the Pound Sterling has shed value against the almighty Dollar might not come as a surprise; after all, the Dollar has rallied across the board as the Fed turned hawkish and the economy accelerated. But what is a surprise is why the Pound Sterling, the currency of an economy which has grown at an annual pace of 3%, has been essentially flat versus its European peer, the Euro? In short, after a robust performance from the UK economy, investors are beginning to get the sense that rather than continue accelerating the UK is been dragged down by the woes across the Channel with Europe pulling UK growth potential down. Below, the two major charts that made investors ponder and Sterling stagger.
Core Inflation Tumbles
The first and foremost piece of data is inflation, but not just headline inflation which is also affected by external factors such as Oil prices (which, as we all know, happen to be collapsing) but core inflation that isolates external volatile factors including energy and food. As you can see in blue, UK Core Inflation just took a nose dive, hitting 1.2%, just 0.5% above the Eurozone’s 0.7% core inflation rate. With such a collapse in inflation expectations investors are beginning to question the UK recovery, wondering instead if growth is about to slow rather than accelerate, or perhaps that wage growth is not just around the corner as the pundits have said, and that maybe the Eurozone’s own stagnant growth is dragging the UK down along with it.
Thereafter, comes job market data; although unemployment has fallen to 6% it’s stubbornly fixed at this level and the claimant count rate, which measures the fall in unemployed (as seen in our second chart) has slowed down in pace. That had led investors to ponder that perhaps the job market is about to reverse some of its earlier job gains and that unemployment could nudge a bit higher.
Claimant Court Reverses
This has all led to one very basic question; are rate hikes in the UK really on the table next year? What with inflation in a nose dive, wages failing to rise and unemployment perhaps on the verge of a hike? Certainly, the possibility of a rate hike being pushed back into 2016 seems, especially after those readings, more probable. And that pretty much explains the flat performance of Sterling even against a battered Euro.
Retail Sales Changes the Game?
So what is the game changer? We have established the reason(s) why Sterling has been stagnant thus far but what makes investors think the game has changed? In two words: retail sales. The robust retail sales figure coming out of the UK on Thursday, a 6.4% (YOY) gain, surprised even the most optimistic investors. That unexpectedly positive figure has resulted in yet another possible scenario for Sterling watchers; say, the one in which the recent mild UK data was just a temporary bump or a minor glitch, and that the UK is actually gearing up towards another fall in unemployment, a rise in wages and maybe even a rate rise in 2015.
Matching Technicals and Fundamentals
As seen in the chart below the reaction in the market was not too late to arrive and the EUR/GBP quickly took a nose dive amid renewed Sterling bets. This could very well be the start of another push south for the pair, especially considering the formidable resistance the pair has generated and how this resistance pattern was reinforced today. But, and although this could be the signal for the start of another bearish push in the pair, more needs to happen. Next week’s final Q3 GDP reading may very well provide that fuel, that impetus, which can push the pair below the 0.777 level. However, most investors are eying December’s CPI data and 4th quarter GDP which is due out next month. Because if those two readings follow suit after the robust retail sales numbers, the 0.777 support could be broken, and as the chart illustrates below, the next support for the pair may be quite distant, creating a potentially long bearish cycle for the pair and taking the Sterling bullish bet back into the game. So, if you are in it for the long haul, be patient; Sterling just may surprise you for the better.
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
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