Will 2016 Mark The Fall Of The Emerging Markets?

Ladies & Gentlemen, 

Brace yourself for a complete change in dynamics for 2016 and of course, the FED hiking cycle will become the catalyst. 

So should I still stay long the USD in 2016? Well in theory - Yes! In practice however, as the FED raises interest rates the USD will strengthen but these persistent increases (during the proposed cycle) will worry investors - especially for companies with Overseas Investment & for Industrial corporates (with the continued decline of commodities). It could be very expensive! 

A stronger USD now becomes a touchy situation. Mainly because the majority of Emerging Market Countries hold USD debt and this puts a stranglehold on the USD rallies. The probabilities of larger outflows from Countries like China, India is likely and will be the epicentre of pressure. It will be interesting to see how these Push/Pull Economic factors react next year.. Will it help their continued debt? 

The stage for 2016 has been set. 

China is an almost perfect author to this story. With recent trade numbers declining (6.9% yoy) and a staggering 18.8% decline in imports - Other Asian nations who once so heavily relied on China could now look elsewhere.  As the commodity boom slows, the GDP growth required for China to maintain its growth pattern could also fall off the charts! Instead we see a Global Deflationary Threat.

How will the USD react to each FED Rate Hike? - Looking at the past 11 Rate Cycles and in particular more recently when the FED moved from neutral to tightening, the USD fell 7% and to tell the way the USD could react now - one would have to look at the yield curves. Whenever it has been steep (and right now it is steep) it falls over double digits! But again, that would also depend on the forecasted tightening cycle... but really how long could it be? 

What about the Equity Markets? You want to be really focusing on Industrial, Tech & Energy stocks, because they will benefit from the inflationary cycle of the US Economy. But really does the public trust equities anymore? There are currently huge disparities in the major US indexes as during the past 5 years the Public have not really put any money into the equities, it has all been primarily driven by the FED & a lot of these position builders could effectively price in the first hike. 

Next stop... December 17. 

Trade Smarter
Anish8FX @ Atom8.com 

The Exaggerated Importance Of Today's NFP

Ladies & Gentlemen, 

One piece of Data that the Markets have been hanging onto (for the last fortnight now) is today's US Jobs Report. But has the Data release been overblown? Will this Data release really decide if the FED will hike in December or not? 

I think it is bizzare that we come to this point, after such a long time of FED Rate Hike talk and in fairness, we should of really started hiking back in September. In fairness to the FED, they have been transparent and the bar has been pushed lower - if yesterday's ADP result was considerably weaker the Markets would of considered changing direction, but it remains firm.

In my view, anything above 142K will be enough. My call is for 230K plus, but Markets may be focused on revisions, as it is about the "Nirvana" of finding a "Full Employment" level & Yellen more recently has stated that the "Excess" employment number has been diminished. 

So how strong is the USD? Well if you look at the Labor Participation Rate, which points to the strength of an Economy it has not really been up to par. However, these could come down to more structural demographic issues, which the FED could not really be judged on... but more-so on the "Excess capacity" of the market. 

The fact is the USD is on a tear and investors are still building more positions.. Looking at the chart, don't really see any stop in the way? Especially as Consumer Spending (which makes up 70% of GDP) is on the rise & this is also translated into incomes. The problem may come from mixed data, especially on the Manufacturing side, but if you strip this out the USD is the most bullish I have ever seen.

Best of luck today

Anish8FX @ Atom8.com

As Australia drops knights and dames from their honours system the other topical question is will the RBA drop interest rates?

The decision takes place tomorrow at 03.30 London time. Out of 30 economist polled by Bloomberg 40% of economists are looking for a 25 basis point cut from 2% to 1.75% Recently the CPI data has been weak and there have been concerns about Chinese demand for natural resources resulting in a sluggish domestic mining sector.

On the other hand local banks have recently hiked residential mortgage rates to cool an overheated housing market and to recoup the cost of increased capital requirements

I am adopting the ‘wait and see approach’ towards the RBA believing that any drop in the Aud/Nzd cross is a buying opportunity from the present 1.0550 level. Fundamental rate spreads between the two countries are arguing for this pairing to be trading closer to the 1.10 than parity level.  Last week the RBNZ was dovish with an explicit easing bias repeated, “Some further reduction in the OCR seems likely”.

There is a lot of data this week, the RBA tonight, the BOE on Thursday and then the NFP on Friday

Good Luck

Anish S. Lal @anish8fx

FX & Precious Metals, Atom8 Financial Services LLP

2nd Floor, Centenary House, Palliser Road, London W14 9EQ, UK

T: +44(0)20 3405 3910 | M: +44 (0)7983701816 | anish.lal@atom8.com | www.atom8.com

Risk Warning

Trading on margin (spread betting, CFDs and FX) carries a high level of risk and may not be suitable for all investors.  The high degree of leverage can work against you as well as for you.  Before deciding to trade your live account, you should carefully consider your investment objectives, level of experience and risk appetite.  You could lose more than your initial investment and should not trade with funds you cannot afford to lose.  You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Could Monetary Policy Divergence cause EURUSD to hit parity by December?

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 

Event Risk - ECB Meeting

Ladies and Gentlemen,

 

This Thursday the European Central Bank meeting takes place on the Mediterranean island of Malta, there is strong belief that there will be hints at further fresh stimulus to ward off the threat of deflation in the press conference following the Governing Council congress at 14:30CET

 

Last month Eurozone inflation fell below 0% to -0.1% this is the first time since March. Presently the ECB is currently committed to buying €60bn of government and corporate bonds each month until September 2016. But as Ewald Nowotny, an ECB Policymaker, has been quoted as saying it is “quite obvious” that additional instruments would be needed, as the ECB is “clearly missing” its inflation target. It is not if, but when.

 

What tools are available to the ECB? The obvious answer is it could boost QE to €80bn a month and/or further extended the programme beyond next September 2016.

 

Will they announce further ECB Stimulus? We believe there will be hints but no action.

 

One of the consequences of the Fed delaying ‘lift off’ has been a strengthening €, this is an unwelcome development adding deflationary pressure.

 

We believe the tone to this meeting will be dovish a weakening currency is the other unquantifiable tool that can help the Eurozone

 

Good Luck

 

Anish Lal 

 

Atom8 Financial Services LLP www.atom8.com

A new month, a new quarter and the first event risk is upon us - NFP!

Ladies and Gentlemen,

A new month, a new quarter and the first event risk is upon us.

Tomorrow at 13:30 BST we get the US Non-Farm Payrolls.

At the Philip Gamble Memorial Lecture at the University of Massachusetts on 24^th September Janet Yellen said “Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year”. There are only 2 meeting left, the next FOMC decision is 28th October and then the final meeting of year for the open markets committee takes place on 16^th December.

It is well known that the Federal Reserve do not like to surprise the market, Larry Summers former Secretary of Treasury, stated in his blog that in the last 20 years the Fed has never tightened without guiding the futures market to at least a 70 percent chance of a tightening, presently there is an 84% expectation of a December hike. Will tomorrows’ data change the market view?

Bloomberg have surveyed 93 economists and the estimates vary from a lowest approximation of 149,000 and a highest evaluation of 255,000

The average is 202,000 whilst the median is 200,000.

In August 173,000 jobs were added, down from 245,000 in July, whilst the unemployment rate fell to 5.1%

A strong number and I assume that we will see further confidence in the $ trade and whilst the commodity markets are under pressure, prefer to express this view against the commodity currencies.

Good Luck

Anish S. Lal @anish8fx

FX & Precious Metals, Atom8 Financial Services LLP

2nd Floor, Centenary House, Palliser Road, London W14 9EQ, UK

T: +44(0)20 3405 3910 | M: +44 (0)7983701816 | anish.lal@atom8.com | www.atom8.com

Risk Warning

Trading on margin (spread betting, CFDs and FX) carries a high level of risk and may not be suitable for all investors.  The high degree of leverage can work against you as well as for you.  Before deciding to trade your live account, you should carefully consider your investment objectives, level of experience and risk appetite.  You could lose more than your initial investment and should not trade with funds you cannot afford to lose.  You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Will NZ Interest Rates be cut by 25 basis points tonight?

Ladies and Gentlemen,

At 10 pm tonight, as the End of Day Reports filter through, the RBNZ announce their interest rate decision.

All 17 economist surveyed by Bloomberg believe they will cut interest rates by 25 basis point, however in recent days the currency has rallied from 0.6250 to 0.6425, why?

It looks as if this particular story is more about will they cut 25 basis point and infer the cutting cycle is over or will bearish Central bank rhetoric continue, Governor Wheeler holds a press conference immediately after the announcement.

The recent Chinese meltdown is not good news for NZ, the June trade date in NZ was the worst in 6 years and the main reason was exports to China slumped 29%, with Dairy exports falling 24%.

The Dairy industry in NZ is not in a good way, employers hiring is at the lowest pace for 2 years, there is falling consumer confidence, weaker retail sales, softer manufacturing PMI and poor business confidence. Altogether this makes for a gloomy picture. Asset price inflation via the housing market is about the only positive, but not strong enough to avert a cut.

I personally believe a cut is on the card and that technically 0.6425, 0.6458 and 0.6550 act as good resistance levels

Good Luck

Anish S. Lal @anish8fx

FX & Precious Metals, Atom8 Financial Services LLP

2nd Floor, Centenary House, Palliser Road, London W14 9EQ, UK

T: +44(0)20 3405 3910 | M: +44 (0)7983701816 | anish.lal@atom8.com | www.atom8.com

Risk Warning

Trading on margin (spread betting, CFDs and FX) carries a high level of risk and may not be suitable for all investors.  The high degree of leverage can work against you as well as for you.  Before deciding to trade your live account, you should carefully consider your investment objectives, level of experience and risk appetite.  You could lose more than your initial investment and should not trade with funds you cannot afford to lose.  You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.