Apparently the winner of X-Factor has been announced. Nope i don't have a clue either. We have a likely historic week in the currency markets coming up with the Federal Reserve expected to raise rates. If they don’t, well, it would be as surprising as the fact that Strictly Come Dancing is still somehow on television. It would also be just as irritating. On that festive note…
All the noise has been that Janet Yellen is expected to raise rates by 0.25% on Wednesday. I expect rates to be increased. If the Federal Reserve doesn’t raise rates then all their credibility is surely shot. Wednesday will bring in the long awaited monetary policy divergence between the US, the Eurozone and the UK.
Once we have had the initial rate rise (I think it's 80% certain now) the question will then become when and how fast will rates rise. Factor in that most other major economies have zero or negative rates then the divergence starts to become more pronounced with economies outside of the US pushing down the value of their currencies to stimulate growth through export (take Japan as an example devaluing the yen and the influx of Chinese tourists buying their products despite ongoing tensions) whilst the dollar strengthens. A strong dollar can be viewed as a curse for emerging market economies - they borrow in USD and when repayments need to be made it costs them more with a double whammy of a strong dollar and their weaker domestic currency. It can also lead to a dumping of the domestic currency with everyone piling back into the US dollar for safety, hence the dollar being known as a safe haven. It will be interesting to see how the markets and the global economy react and cope with the new landscape once rates rise and continue to rise in the US after Wednesday.
Do you have a GBP/USD exposure? What is your plan for this week and going into Q1 ’16? I would expect the downtrend to resume on Cable post Wednesday with a test of 1.50 the figure. Indeed, there has been renewed demand for the dollar overnight in the Asian session as investors look towards Wednesday. We also had Chinese data released over the weekend that has eased some market jitters. We reached a high of over 1.52 although have since dropped off with a further push to the downside likely in the coming days. If you are a USD buyer I would consider achieving anything over 1.50 the figure as a good level to achieve in current market conditions. Going into next year the question of the Brexit will come into sharper focus. The S&P has said the UK will lose its triple A credit rating should the UK leave the EU. If you are planning for next year please do consider 1.45 as a more than realistic level that Cable (GBP/USD) could be trading at. How would this affect your business? Is it worth covering off a large portion of your exposure on a Forward Contract to mitigate your risk?
Please contact myself or one of the trading team to discuss executing your remaining 2015 exposure. If you are a US Dollar seller I would consider staggering market orders to the downside at 50 pip intervals going into Wednesday. Please contact one of the team at Aston to implement market orders.
The main focus will of course be the US although we do have other data released this week. Today we have Draghi speaking and on Wednesday we have inflation data released from the Eurozone that will be keenly watched. We are light this week on Sterling data though.
This week could be extremely volatile with significant moves likely in the major currencies. Please make sure you have a plan in place for this week.
Have a fantastic week.
Written by Liam Alexander