Beginning on a sombre note our thoughts go out to all those affected directly or indirectly in the atrocious attacks in Paris on Friday.
Regrettably, these attacks have far reaching consequences and one of those is on the economy. Global markets have been at best choppy and investor confidence will plummet once again. The global economy is in a state of flux with the Chinese slowdown, oil prices lower, and an expected divergence in monetary policy between the Federal Reserve and the ECB due in December. What does the aftermath of the Paris tragedy do to the Eurozone and the single currency? I would expect the Euro to lose ground immediately against Sterling and the US Dollar on Monday. The French economy will of course be directly affected due to a curfew being put in place, residents staying indoors and not going to work or spending in the shops. Sentiment is a main driver in the currency markets and should this fear spread then it may impact on other economies in Europe.
The Euro is already trading lower against both the US Dollar and Sterling and I’d expect this trend to now continue into the New Year. What does Mario Draghi, the ECB president, do to revive the Eurozone? The phrase throw money at the problem comes to mind. I don’t think Draghi has any other option other than to pump a substantial amount into the Eurozone in new money (QE). France may lurch back into recession and to me Draghi has no other options. He was already expected to announce 900M Euros in additional stimulus at the December meeting. I’d expect this to be well into the Billion figure after Friday’s event. In addition, he will cut deposit rates further into negative territory. Compare this action to the US where interest rates are widely expected to be raised by Janet Yellen in December. Indeed, this will be the first time since the single currency was launched (1999) that the US has raised rates and the ECB has lowered theirs. Quite a telling divergence.
Are you a Euro buyer? Please do consider covering off some of your exposure off on SPOT at current levels whilst allowing yourself room to take advantage of market orders. Contact a member of the Aston team to discuss appropriate levels. If you have a good idea of your exposure over the next 3 months it may be an idea to consider a forward contract. If you haven’t utilised this before it is a good way to protect yourself from any pullback in GBP/EUR. Feel free to get in touch and we can discuss this in greater depth.
Looking at the US and the US Dollar I would suggest USD is going to be the winner for the rest of 2015 and into 2016. I expect to see Sterling de-couple from the US dollar when the Fed raises rates in December. What does this mean? Over the past few years Sterling and the US Dollar has to a degree mirrored and tracked each other with economic growth moving in the same direction and crucially monetary policy. This is about to change. The US will raise interest rates and I don’t think the UK will follow anytime soon. Due to this I see Sterling coming off against the US Dollar, and potentially quite substantially. Could it possibly test 2009 lows of 1.35? It would take a shift of some magnitude for that to come to fruition although I would expect us to be in the 1.40s early 2016. If GBP/USD sits at 1.45 early next year how is this going to affect you if you are a US Dollar buyer? Please contact myself or one of the trading team to discuss a strategy to mitigate this risk going into next year.
Dollar seller? I would look to fill your boots at anything from 1.52 to 1.50 before year end. Stagger orders to the downside at 1.52/1.5150/1.51 and then 1.50. Please contact me to discuss implementing these for you.
We have a lot of data out this week so expect a volatile week in the currency markets. On Monday we have Draghi speaking followed by a raft of data released on Tuesday. We have inflation data out of the UK in the form of CPI (YoY) (Oct) and GBP inflation report hearings. We also have sentiment data out from the Eurozone in the form of the ZEW survey. We then pop over to the US for inflation data. Wednesday is the key one from the US perspective with the FOMC minutes in the calendar. Thursday we have the ECB monetary policy meeting followed by Draghi speaking again on Friday morning. As you can see this week is very data heavy. Please do make sure you have a strategy in place and if you have any currency requirements please get in touch at the start of the week.
Have a great week
Written by Liam Alexander