Simon Smith

Tough going for the dollar in 2015

Ever since central banks started emergency easing measures back in 2008-09, policy-makers have struggled to know what the post-crisis world would look like. Many have called this “the new normal”. This matters for FX, because we’re at the point where we are starting to see divergent central bank policies (which have increased both volatility and trends), but if they are to continue, then it requires current assumptions to be proven correct. This has rarely happened over the past few years. ...

Simon Smith

Looking back at FX during 2014

You don’t need me to tell you that FX forecasting is one of the hardest games in town. I say that as someone that has spent a lot of my career in the rates and macro environment. But I also know that looking back is an important part of learning from the past and also from the logic one applied 12 months ago. Like many, I was looking for dollar strength in 2014, although it was labelled ‘conditional dollar strength’. By this I meant that the dollar was not going to run away to the upside and ...

Angus Campbell

UK Wages Rise Faster Than Inflation, But Bank of England to Keep Rates Low

Good news – the UK economy is still creating jobs and there are now more people in work than ever before. Even better news, real incomes are now rising as Wednesday’s wage data showed the rate of average earnings for September was 1.3% which is higher than the current rate of UK inflation at 1.2%. If you thought things couldn’t get any better, the Bank of England (BOE) also reduced their inflation forecasts expecting price rises to drop to below 1% within the next six months. If wage inflation ...

Angus Campbell

Continued decline in indices and dollar bounce sets investor risk aversion in stone

If ever there was an indication of risk aversion you only have to look at today's price action in the FTSE 100 and the dollar's bounce. To start with this morning investors initially thought this was a good buying opportunity and we saw the London benchmark jump seventy points on the open, following a strong rally by US indices off their lows in last night's session. But it only took fifteen minutes to realise buyers simply weren't ready to return to the market yet and a full blown reversal saw ...

Angus Campbell

After good UK unemployment data where now for interest rates?

The rising concerns over the global economic outlook of the past few weeks and yesterday’s fall in UK inflation have put shot to many rate expectations and you can certainly kiss goodbye to any rate hikes by the Bank of England this year. In the US, the correction in expectations has been most pronounced as pointed out by Simon in his note this morning where he talks about how the US 2 year bond yields have plunged. The Federal Reserve remains clear and consistent in saying that its decisions ...

Angus Campbell

Nonfarm payrolls give dollar a boost

Today’s US non-farm payroll has exceeded expectations and shown a good bounce from last month’s unexpectedly weak figure. The labour data that we’d seen so far this week complements today’s good data as we saw a better than expected ADP figure on Wednesday and yesterday’s weekly initial jobless claims were well below the four week average. The US economy is steadily improving month by month and investors have been readying themselves what’s coming in the form of higher interest rates, as the ...

Angus Campbell

A Win Win for Scotland

Investors are voting with their trades as they show their relief at the no vote winning in Scotland’s independence referendum. UK’s benchmark stock index the FTSE 100 is heading higher and not far off its all-time record high and sterling is getting a boost having been even higher in the overnight session. The markets had been steadily pricing in a no vote throughout the week and more so on Thursday’s polling day as investors were buying sterling. For many short term traders a tidy profit has ...

Angus Campbell

Sterling’s Reaction to Scottish Yes or No Vote

I hope for Betfair’s sake that the Scottish Referendum turns out to be a No vote otherwise their early pay out they’ve just made on tomorrow’s vote it going to have been a costly one. It reminds me of one of their competitors that paid out early on Manchester United winning the premiership in the 2011-12 season only to see them slip up in the last stretch and get beaten by Manchester City on goal difference. As mentioned in my last blog on the subject, this vote is going to be very close and ...

Angus Campbell

Scotland Vote Moving Towards Heart Over Head

The Scotland referendum vote is going to be closer than we think come 18th September. The Yes Campaign has the wind in their sails but is it going to remain blowy enough to see them actually split from the UK and if they do, what will an independent Scotland mean for the UK and the new country? Uncertainty will reign to start with as protracted negotiations get underway ahead of their first parliamentary elections which are not planned until May 2016. Uncertainty is the one major thing that ...

Angus Campbell

Worse than expected nonfarm payrolls do little to allay concerns over interest rates

Today’s nonfarm payroll has come in at 209k and the unemployment rate increased to 6.2%, but more importantly, the average hourly earnings did not increase as much as was expected staying flat at 0.0%.  This is a key metric watched by the US’s Federal Reserve and it comes as little surprise to see the dollar giving back some of its gains from recent days.  Even equities have bounced with some relief following a couple sharp sell offs. It will be interesting to see how long this very short term ...

Simon Smith

UK CPI surge

The thing that stands out regarding the UK inflation numbers is that the rise from 1.6% to 1.9% was owing to a fairly broad-based increase in prices. Of the twelve main categories, only one saw a decline in the YoY rate.  The main upward push came from clothing and footwear prices (adding 0.18 to the 0.3 increase in headline CPI), with food, together with transport also adding to the upward pressure.  It can be that the timing of sales can affect shop prices this time of year, so we may see ...

Simon Smith

The Aussie – defiant

The following is an extract from our quarterly outlook, published 23rd June 2014.  I’ve included a table of forecasts at the foot of the blog. We’ve long been of the opinion that both carry and also commodity prices were becoming less key for the Aussie. These two factors had been defining factors in explaining the Aussie performance over recent years.  Returns from carry trades have struggled for most of the post-crisis period as the Aussie had looked increasingly over-valued, but the carry ...

Simon Smith

The yen – better behaved

The following is an extract from our quarterly outlook, published 23rd June 2014.  I've included a table of forecasts at the foot of the blog. The yen fell into a relative slumber in the first half of 2014, USDJPY falling to trade in the 101-104 range for the most part.  The momentum towards policy induced weakness waned together with the government’s inability to follow through on the much heralded structural reforms.  The BoJ, having done its bit, stood back whilst the consumption tax hike ...

Angus Campbell

Nonfarm Payroll Boosts USD

Going into today’s US nonfarm payroll release expectations were for a strong number with many believing there’d be a better figure than the expected 215k and more towards the three month average which stands at 234k.  Yesterday’s ADP number helped the optimism in the market and ahead of the release the dollar appreciated slowly.  That dollar strength followed through more impressively after the release which came in at 288k just below some of the highest estimates. With the unemployment rate ...

Simon Smith

The euro – fighting deflation

The following is an extract from our quarterly outlook, published 23rd June 2014.  I’ve included a table of forecasts at the foot of the blog. We went into 2014 relatively bullish on the euro. The interest rate angle to the single currency was a lot more complex than many were making out. It was not a case of a rate cut would automatically lead to a lower currency, as proved to be the case with the November 2013 easing.  There were other forces at play, notably the repatriation of funds ahead ...

Simon Smith

Sterling – self assured

The following is an extract from our quarterly outlook, published 23rd June 2014.  I’ve included a table of forecasts at the foot of the blog. Many factors affect currency valuations, but interest rates, both actual (principally via carry) and expectations for future changes (e.g. via 2 year rates) are the one thing that invariably stand the test of time.  Back at the end of 2013, the prevailing view was that the US would be putting up interest rates before the UK, thanks in a large part to the ...