Ladies & Gentlemen,
We have heard it over and over again & now it is crunch time, where Economic theories come into practice and the Markets click to the tune of the Central Bank Announcements.
Here is what ING predicted at the start of 2015 and low & behold how the year has turned out to map the below
Over the last 12 months the Markets have remained bearish and the EURUSD has fallen from 1.40 to 1.05.. but why? And the concept is pretty simple to understand, as the FED stop QE at the same time of the ECB continuing their QE policies. This is known in the Markets as a "Divergence in Monetary Policy" and as the Markets price in their expectations of a FED non-hike, the divergence is set to continue... Implicating parity and if not parity, then sub 1.00.
Vamvakidis, head of G10 Strategy at Bank Of America calls for EURUSD to hit parity by December 15 and also the USDJPY to hit 125.
What needs to happen for EUR parity? Well, in order for this prediction to hold - the divergence needs to move further. If we get more QE by the ECB in December and the FED does not hike (which is very ikely) we could easily see parity. But the FED hike is a matter of time and could be as early as Jan 2016. The equilibrium of the EURUSD cross is around 1.15, however, the Euro zone still has a significantly large Output Gap compared to the US & if the ECB announces an "open ended" (or Infinity based QE) - that could stir up a recipe for disaster - as the Bears would then look to push down to 0.75.
How do I trade these markets? Volatility remains high and it is mainly the bears driving the markets, supported by the facts pushed from Central Bank data this month. Looking at the bigger picture, the FED will eventually look to hike rates but more than likely, it will not be until next year - even though Domestic data has improved in the US, I would not expect anything significant this week. Keep your eyes on the data A balance between Domestic Developments & External Developments is key for the FEDs decision & once we do see the hike... the bad news will hit hard & remain bad news!
Can I Jump on The Karoda Vs Draghi Trade? The international expectation is for more BOJ easing and if you look at the currently inflation rate in Japan, the BOJ should actually be doing more. The USDJPY currently is not that strong, either not that weak. However, it would be ideal to remain long the volatility as no matter what happens USDJPY will move!
I wish you the best of luck with your Trades & hope you keep your fingers on the right side of your mouse triggers!
Anish @ Atom8.com
