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    While the clock ticks down to BoJ’s July 31st Monetary Policy Statement, where officials could be expected to debate policy changes to sustain, not tighten, their stimulus program, 10-Yr JGB continue rising. On Monday the 23rd of July and following the announcement for policy speculation, 10-Yr JGB improved by 4bps and were markedly boosted cumulatively higher hitting a daily top 6bps higher, at 0.09%, amid BoJ’s conclusion to offer unlimited amount of bonds purchasing at fixed 0.11% rate. But note, BoJ has been forced to prop-up the yield cap before, although, followed through with purchasing bonds only once.



    Although bank officials ought to remove speculation as a driving force of market direction, “maintaining stimulus” allows the major elements of inflation and negative interest rates come into discussion in the July meeting, which require JGB and ETF buying added on the agenda. At this periodical stage though, any adjustments of the target JGB, or buying of ETFs, would have to remain limited to talks only, as any hasted adjustment could harm the yield control, rather than mitigate market distortions. Despite the naysaying, note that BoJ’s unorthodox policies and practises since the initiation of QE in September 2016 have held back Japanese Yields from rising along with US and European yields and kept the 10-Yr JGB Yield target near zero. This allowed Japan to gradually reduce its asset purchasing program without having investors think it is “tapering”.



    Considering Japan’s slowing in Core Inflation from an anticipated 0.6% to 0.4% (0.7% YoY) at the July 24 report, the lowest since November 2016, it would most likely be unorthodox to even consider changes to Japanese interest rate targets before the Core index inches higher towards the 2% target. An extreme option would be to lower the inflation target of course, as the aggressiveness in bond buying hasn’t really pushed the CPI higher like it did in Europe for example. Another strong option would be to change the target for 10-Yr bonds in order to accommodate for a wider trading range. Of course, this will most likely be determined in the July meeting but as a softer approach BoJ could examine guidelines to increasing the long-term yields and hence inflation more naturally.

    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


    Euro recorded its largest weekly loss in 19 months after June 14 ECB news conference and, although EU President Mario Draghi reiterated an end of QE in December, he added that interest rates will be changed depending on what is the state of the convergence process and as long as “inflation remains aligned with ECB’s current expectations of a sustained adjustment path”. Interest rates were held steady in June 14 meeting.


    German Yields started trading downwards following the announcement, dragging US Yields back below 3.0%, at 2.90%, while German Yields fell to 0.39%.



    For the period until summer 2019, the ECB has to keep sufficient flexibility. This signals that a rate hike may not be seen before Q4 2019, unless if in September meeting, as the final decision will depend not only on a “sustained” inflation but also on other downside risk factors, such as trade tensions and other risks linked to economic slowdown.


    On June 15 and following the ECB’s announcement, Eurostat reported Eurozone’s Final CPI figures for the month of May. Eurostat posted a final inflation number of 1.9% compared to a previous figure of 1.2%, reviving the possibility for tightening, while since then, markets welcomed June’s reading as inflation hit the 2.0% inflation target YoY on the July 18 event. With inflation supporting ECB’s plan to end QE by end of 2018, ECB’s goal in order to effectively hike rates would be a close to 2% inflation rate over the medium term. That of course contains other implications, such as the price of Oil and the rise in energy cost, which may not be a good driving factor in the medium term.



    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


    The Bureau of Labour Statistic’s Nonfarm Payroll report was published last week, just a few days after the US Independence Day and a rather noiseless week on the economic calendar. Although NFP showed that the US economy continues to hire at a robust rate markets were surprised by an overshoot in Unemployment Rate to 4% and a slower than anticipated wages growth pace. Average Hourly Earnings rose by 5 cents to $26.98, a 2.7% YoY, or 0.2% MoM versus an expected 0.3%, driving Dollar down.

    With inflation increasing 0.2% last month, marking a May 2012 record and a change of 2.9% YTD, Fed remains indeed on track in delivering another interest rate hike, but with Dollar having been knee-jerked lower following the NFP it is certain that a good CPI report in July will have FOMC members returning back from the nascent sell-off more confident and anti-pressured.

    A positive Consumer inflation report this Thursday could see the markets returning back to pre-NFP levels and the probability of two more hikes increasing further. This should enable buck-dominated pairs to decline and position Dollar for decent longs as higher inflation will bring more pressure for hiking rates and drive Dollar’s value higher ahead of August 1st FOMC Meeting. If Core Inflation jumps from 2.24 to 2.3% then Core PCE, the Fed’s favourite inflation measure, will most likely reach the 2% target as it currently stands at 1.96%, lagging only 0.28%. This would imply a much stronger boost on the buck and further gains on increased chances of interest rate hikes, reiterating the Fed’s path to gradual policy normalisation.

    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


    According to the Bureau of Labor Statistics, Nonfarm Payroll employment increased in May, reaching 223K, while Average Hourly Earnings rose to 0.3% (0.1% higher than expectations), and Unemployment Rate declined to an 18-year low at 3.8%.

    Analysts had anticipated a headline number of 189K while BLS reported a much better figure, which may be revised during Friday’s NFP release.

    Employment continued to trend up in several industries, including retail trade, health care, and construction.



    US Change in Nonfarm Payrolls is currently up from 159K last month, up from 155K one year ago and up from 191K average over the past twelve months, marking the second-best report in Q2 2018. With headline numbers becoming more and more solid, the number of jobs added becomes less important and significance shifts to wages as they drive inflation. Investors are patiently waiting to receive clues and the headline numbers. But headline numbers are certainly not all that matters.


    What to focus on in June’s report…

    1. US and EU Interest Rate differentials shift further following June FOMC: With Fed Funds rising to 2.0%, FOMC members reiterated the strong US economic outlook and widened the spread between US and EU rates. As a result, shorting EUR/USD to earn interest now seems even more profitable for carry traders. Euro is 190 pips weaker than it was on June 13 as of 02.07.18, 16:11 (GMT+3).


    3. Oil multiyear high and Fed’s favourite inflation indicator, PCE: With Crude Oil prices increasing continuously, cost-push inflation also rises and economic growth may come to a temporary slowdown until investors start repositioning themselves when price becomes cheaper. Fed’s move to curb inflation by hiking rates, even four times this year, may be indeed justified. However, when it comes to surpassing the so-long desired PCE target, data shouldn’t be ignored as hikes don’t seem to be holding back oil prices.


    5. Equities and international fiscal policy effects – The “Trade War”: The recent US plan to restrict Chinese investments in US, and the fresh investigation on up to $350B tariffs on Chinese auto-imports, had US stocks sliding over the past days, not to mention the decline over the past few weeks, while the Dollar Index was gradually rising. Regardless, the fresh concerns over escalating trade tensions with China and EU, the NAFTA trade renegotiations and Mexican politics are likely to weigh in. Since equities performed poorly, confidence in USD may falter.


    7. Wages figures expected to match yearly high, lack of growth worrisome: With wage figures rising to 0.3% last month, risk appetite was solid enough to take the Dollar higher and keep this narrative amid trade war concerns. The fast-growing wages have supported and have also been justified in interest rates, yet the question of whether this month’s guidance should drive US interest rates further remains valid, as trade war fears saw businesses cutting back on hiring.


    In case you want to learn more about Nonfarm Payrolls and how to analyse the market technically and fundamentally pre-NFP, join us at our live NFP webinar:


    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.



    European & Asian shares rose on Wednesday, helped by unexpected strong earnings updates especially from the technology sector where Apple exceeded weak expectations. Most investors are now focused into euro zone GDP figures and the U.S. Fed meeting, expecting rate hikes, that also gave a boost of confidence in the markets that helped shares to rise.

    Trading on margin products involves a high level of risk


    Apple shares rose 8.1% after earnings came stronger than expected, surprising investors. Also, other technology companies such as STMicroelectronics, Infineon, BE Semiconductor and ASML gained between 1.1 to 3.8 percent on the back of rising Apple shares which boosted confidence in the markets.

    Trading equities as CFD's mean you can trade on some of the world's most popular brands and diversify your trading portfolio. Enjoy our extensive collection of informative tutorials on Stocks here


    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


    "March employment report released on April 6 provided markets with a downward surprise, a surprise that missed expectations by 85K, while the unemployment forecast also disappointed as economists had forecasted a 4.0% figure.

    Analysts had anticipated that employment change would stand at 188K but instead a figure of 103K was seen.

    The unemployment rate remained unchanged at 4.1%, marking the sixth constant month in a row.

    Wages were also steady, printing a 0.3% growth.

    Employment rose in manufacturing, health care, and mining.

    US Change in Nonfarm Payrolls is currently at 103K level, marking the best quarter since the great recession, yet, March jobs numbers disappointed. The Employment Situation for the month of April is scheduled to be released on Friday, May 4, 2018, at 12:30 p.m. (GMT), and investors are patiently waiting to receive clues and the headline numbers. But are headline number all that matters? Certainly no.

    What to focus in on April’s report…

    1. US and EU Interest Rate differentials shift: Since the beginning of April the 10Yr US Yields rose from 2.7298% to a high of 3.0315% yesterday, while short and long-term Treasury Rates narrowed. With the US Yields rising marking a 4-year high the interest rate differential between the US and EU, since EU rates are steady just below 0.0%, increase the odds to favouring Dollar. Note rising Yields indicate rising interest rates to curb inflation, hence, investors believe Fed may rise rates four times in 2018.

    2. Oil multi year high and inflationary pressures: With Crude Oil prices hitting a fresh record high Fed’s prospects for 2018 policy may be changing sooner than anticipated, a narrative long forgotten since the last FOMC meeting as policy makers signalled that the bar for four hikes is set high, albeit, rates will most likely continue coming gradual. Consensus does indeed shift as high Oil prices add inflationary pressures, which in turn, rise interest for another hike.

    3. Equities and fiscal policy effects: Considering the recent quarter-end in equities and the relationship between company-specific news, macroeconomic events and geopolitical factors, volatility spikes were moving in tandem despite historic irregularities. With fiscal policy changes supporting economic activity and spending so far, a good jobs growth print may be right in the corner as positive business results increase demand for workers in businesses.

    4. Wages expectations grow as economic activity makes case from another hike: Despite the labour market report showed an average hourly earnings figure of 0.3%, as economists expected, hourly wage development over the first quarter rose 2.7%. The print was the key element of overshadowing the poor March report and increased hopes than Fed may increase the rates another three times this year, not two. With Yields and inflation rising, as identified above, higher wages certainly add to the consensus.

    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


    "Crude Oil prices surged to a high of $67.60 per barrel last week amid rising geopolitical risk, the highest level since 2014. Oil’s breakout for a third consecutive day could either take price to a new ranging territory, making the breakout quite significant or retreat back below within the former trading range.





    With demand increasing for over a year now and US growth supporting growth markets seem to have reacted, and also moved, accordingly up to date. The supply component is what is most likely to set the tone long-term as it seems to be doing for the short-term too as Middle East tensions are not something new and regular flare-ups are expected.



    The next few days will confirm whether this break is significant or if the recent price action was a result of speculation pressures.

    You are advised to cautiously monitor your account in order to maintain your margin level."

    Trading on margin products involves a high level of risk

    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


    "Over the past few days we have noticed that the Hong Kong Dollar has fallen to the weaker end of its permitted band, trading at 7.85 on three separate occasions!

    Pressure on the HK Dollar is tremendous as we speak as the foreign currency is pegged to the US Dollar at 7.8, with the top of its permitted band being the 7.85, the bottom being 7.75, a level reached in 2015, where the monetary authority last intervened.

    The weak-side of the trading band introduced back in 2005, defined as the weak-side convertibility undertaking (CU), had Hong Kong Monetary Authority buying 2.42 billion Hong Kong Dollar from the exchange market yesterday during the US session, and again, another 816 million as the interest rate gap between Dollar and the Hong Kong counterpart widened.

    With market participants looking at the situation with interest it is likely that activity will remain at increased levels as the interbank rates in Hong Kong soared 4.1 basis points for the day, the largest increase since November 29.

    According to analysts’ price could stay around the 7.85 per US Dollar for the rest of 2018 but since the Hong Kong Monetary Authority is obligated to defend the level and stands ready to fulfill any requests from banks to support the currency something big may be coming ahead that has a lot of commonalities with the 2015 Swiss Franc."

    Trading on margin products involves a high level of risk

    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


    Total Employment increased by 313K in February while Unemployment held firm at 4.1% for the fifth running month. Economists had expected a pick to 205K, a tad higher than January’s 200K, but to everyone’s surprise the NFP reinforced a positive momentum for the US economy, yet, action in the currency markets was not impressive as wage growth grew with a slower pace.

    With a 42-Month record high on added jobs and three consecutive upward revisions of the jobs number Fed’s decision to raise interest rates last month was fairly justifiable.

    Wages and inflation boost amid low unemployment supported an economy expansion in January and February which did in no way materialise on the US Dollar. Instead, forex rates fell in March as President Trump’s tariffs weighed in.

    Employment rose in construction, retail trade, professional and business services, manufacturing, financial activities, and mining.

    US Change in Nonfarm Payrolls is expected to be 190K in March, down from 205K expected in February. Most importantly, economists expect the Unemployment Rate to decline to 4.0%, a figure not seen since December 2000. The Employment Situation for March is scheduled to be released on Friday, April 6, 2018, at 12:30 p.m. (GMT).

    What to look for in March’s report…

    1. US and EU Interest Rate differentials: The Fed rose the interest rate from 1.5% to 1.75%, Powell’s first hike, as markets had expected since last January. Markets do expect another two rates hikes for 2018, or even three, however, remain tuned to Powell’s words as sensitivity to a tighter Fed plays a key factor for directional activity. The hike and any further expectations for a hike would be moving the spread in the Dollar’s favour.

    2. ISM Manufacturing and Non-Manufacturing Employment Index: The ISM Manufacturing Employment Index registered 57.3%, a decrease of 4.02% from February reading of 59.7% while the ISM Non-Manufacturing Employment Index decreased 6.6% in February to 55% from the January reading of 61.6% despite the strong new orders on Trump’s metal tariffs panic buying. Both reports account for more than two thirds of the US’s economic activity, hence, it is important to focus on upcoming ISM Services PMI on Wednesday.

    3. Volatility and the Equities Market: The Volatility Index (VIX) rose 81% in Q1 2018 showing fear is back in the markets big way. Equities came under pressure and saw a 2-year correction following the panic sell amid reports that US wages increase more than expected, indicating expanding inflation, which in turn signals interest rates increases. And the rate hike did indeed occur in March’s FOMC, but fears of rising inflation subdued amid lower wages numbers published in February’s NFP.

    4. Unemployment Claims: The Unemployment Claims fell to a fresh 45-year low last week while market expected 15K more people to claim. The 4-week moving average was 12K lower from the previous week's average. The release produced the 158th successive week in which claims come out below 300K, supporting a strong labour market. Fed’s target for Unemployment by year’s end stands at 3.8%, thus, investors will eye the week-to-week volatility.

    5. Oil price and inflation figures: Oil corrected below $60 per barrel last month while the Core CPI fell at 0.2% (exp 0.2%, prev 0.3%) as expected. Without necessarily this being bad news the recent pickup near $66 is likely to challenge Fed as a strong inflation will require tighter policy.

    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

  • Last month BLS reported a 200K change in the number of employed people, picking up from December’s 160K (revised from 148K) and printing a higher figure than economists’ expectations as the US economy accelerates.

    Unemployment rate remained steady at its 2000 low for a 3rd consecutive month while average hourly earnings rose 0.1% compared to the previous month and a 2.9% compared to last year, a 2009 record, confirming accelerating inflationary pressures which may weigh in on Fed’s rate hike expectations.

    With a spike in Yields market participants sent the equity markets plunging following the Friday event yet S&P is still up 3.2% year to day (YTD).

    US Change in Nonfarm Payrolls is at a current level of 200K, up from 160 last month and down from 259 one year ago. Despite US published a good headline number one would remember that the surge was partially contributed to market’s reaction on the wage appreciation as investor believed Fed’s rate hike view would change, and the likelihood of course of another rate hike has now increased.

    What to look for in February’s report…

    1. US and EU Interest Rate differentials: The Fed kept the interest rates steady in the January 31st FOMC with little change in the statement. The data was still, and is still, positive as Fed combined strong ongoing data with the continued downward pressure on unemployment, however, the differential is not yet affected, but could have a small weight on the Euro. Note that ECB is expected to deliver their rates on Thursday this week.
    2. ISM Non and not Manufacturing Employment Index: With US getting closer to full employment it seems that February’s increase of 5.5% and 5.3% (Non-Manufacturing) will keep adding pressure to labor market as employment is expanding at a much faster rate than production. This sets a positive outlook for hiring considering the gains in 2017 payrolls and could lead to further raise in wages and boost demands given the recent tax changes.

    3. Consumer Sentiment and the Stocks Market: US Consumer Sentiment rose to 99.9, a 2004 record, despite inflation expectations remained the same as employment gains and the implementation of the Trump-Tax plan sent Yields spiking and equites to their first correction in two years. Note that sentiment is likely to fall in the coming months following the upward tilt in borrowing cost.

    4. US Treasury Yields:Yields and the Dollar gained while equities subdued, however, over the past few days Trump’s agenda on metal tariffs have had a negative impact on all the above, yet, not as much on the Yields as Powell’s speech was marked as bullish. US Yields fall while Treasury Rates go up.

    5. Unemployment Claims:The Unemployment Claims give us a glimpse of what the employment situation looks like o n a weekly basis. Unemployment Claims fall to 45-year low last week while the figure for the week before was also revised downward. The 4-week moving average was 2,250 lower from the previous week's revised average. The previous week's average was revised down by 250 only.

    6. Oil price and inflation figures:Oil prices are a major input to the US economy and have a direct impact on inflation. OIL prices corrected below $60 per barrel last month while the Core CPI remained unchanged at 0.3% (exp 0.2%, prev 0.3%) but better than expectations. Without necessarily this being bad news the pickup is likely to be a challenge for Federal Reserve as a strong inflation will require tighter policy.

    In case you want to learn more join us on our live NFP webinar:

    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


    The gains for December’s payrolls came out less than the median anticipated projection of 190K and also below the 2016 total payrolls yet above 2 million and the yearly expectations. Based on the payroll headline figures for the month of December the U.S ended 2017 marking one of the most remarkable hiring streaks, a 7th consecutive year where the US hired more than 2 million workers. With this, the US generated nearly 18 million new jobs since 2010.

    With Unemployment Rate remaining steady at 4.1% for a 3rd consecutive print, a 2000 low, many economists expect a tapering in 2018 hiring as running out of workers now seems possible.

    Despite wage growth improved in December economists see the 2017 expansion limited as this betides way below the average of 6.22, at 3.22.

    December’s headline provided a bad read, hiring was kept back due to a drop in retail trade while the growth was predominantly seen in education and health care, manufacturing and construction.

    US Change in Nonfarm Payrolls is at a current level of 148K, down from 252K last month and down from 155K one year ago. Despite US published a second-class headline number FX rates were soon discounted.

    The main reasons a weaker than expected headline was immediately discounted were:

    • Jobless Rate remained steady for a 3rd month, June 2017 revised down from 4.4% to 4.3%
    • Average hourly earnings increased 2.5%
    • November headline print revised 24K up
    • ISM Non-Manufacturing employment improves by 1.81%
    • Participation rate maintained a 62.7% figure while Baby Boomers retire
    • ADP reported early 70K added jobs in December
    • Job cuts annual report lowest since 1990, employers announced 20.5% fewer cuts

    What to look for in January’s report…

    Along with the aforementioned updated figures that sparked last payrolls’ discount…

    1. Actual vs Consensus divergence and Average Divergence: For the past year, economists’ estimations of the actual headline were out by a total of -153K. Think the average of this figure added to the forecasted number in January’s expectation. As for the previous versus the actual print, this figure is only -5.8K divergence.
    2. US and EU Interest Rate differentials: The Fed raised the interest rate in December’s decision increasing the differential against the Euro by 25 basis points (1.25% to 1.50%) by moving the spread in the Dollar’s favour while capital inflows widen. But note, the Dollar has been driven by sentiment lately rather than interest rates.

    3. ISM Manufacturing Employment Index: The relative weakness of the Employment Index could suggest a weak reading, especially when taking into consideration that this is the 4th consecutive month the Index comes out worse than the previous month. The 5Yr correlation between the Index and the Non-Farm Payroll numbers is 0.66 while the Non-Manufacturing Employment Index vs NFP correlation for the same period is 0.63. The ISM Manufacturing PMI report on the 1st of February should provide investors more clues.

    4. Consumer Sentiment and the Stocks Market: Despite the rise in stocks does not prove that Consumer Sentiment will follow, over the past 10 years prices have more or less moved up and down at the same times. Nevertheless, the UoM Consumer Sentiment is an important indicator to look into as it disappointed investors last month, as NFP did, making the release pessimistic.

    5. US Treasury Yields: Since the relationship between US Treasury Yields and the nonfarm payroll is negative an acceleration in the payroll growth has a negative impact on the 2-10Yr spread. Note that the intercept for the 10Yr Yield is higher than the 2Yr Yield, hence the intercept for the 2-10 spread is positive.

    6. Unemployment Claims:The Unemployment Claims give us a glimpse of what the employment situation looks like o n a weekly basis, not monthly as the NFP. Unemployment Claims have so far increased ~23K and decreased ~6K in the three January reports (a total of +17K). Against the payroll this should imply somewhere near a 7K increase in non-farm payrolls, although this correlation is missing one more week of data.

    7. Oil price and inflation figures: Oil prices are a major input to the US economy and have a direct impact on inflation. OIL is on a bullish rally so this could be a signal for a bad NFP. But note that the US Dollar is also very weak, a weak economy may mean lees Crude Oil demand.

    In case you want to learn more join us on our live NFP webinar:

    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


    Currency Outlook 2018 (YTD)

    Economy & Currency Outlook 2017 to 2018

    United States – US DOLLAR

    The US DOLLAR struggled to perform on the offensive for most of 2017 amid growing political, geo-political and environmental related risks, moving nearly 6.20% lower year-to-date (YTD).

    Trading was characterised by a broad bearishness surrounded by Trump’s policy which prompted investors to shift to better opportunities until uncertainty subsided. Opportunities for short-term investors though were indeed decent; they switched the US 10-15Yr Bond Yields and the US Dollar Index to a reverse course up until early September and October respectively mainly due to delays around fiscal policy.

    After a period of not so good nine months, expectations for rate hikes and considerable fiscal stimulus strengthened the US economy. Real GDP grew at 3.3%, a 3-Year high, Core Inflation remained moderate at around 1.7%, and Unemployment remained at 2001 lows.

    Keeping in mind a risk appetite that reflects Fed’s hiking cycle and a substantial policy boost, along with Powell’s Yellen-like accommodative stance of gradual normalization, I believe 2018 will push the Dollar Index lower to 88.00 - 85.00 levels.

    Europe – EURO

    While most banks expected EURO to range on both risks of steepening rates and politics, anticipating a low of $1.05 versus DOLLAR, EURO saw a tremendous c. 12% gain mainly driven by ECB’s announcement to taper its Quantitative Easing (QE) programme as well as owed to a weaker US and GB counterparts.

    With ECB’s particularly accommodative monetary policy stance continuing to improve sentiment indicators, Q3 Real GDP Growth confirmed at 0.6%. Driven by a robust domestic demand, an expansionary private sector and favourable bank lending conditions, expectations of future interest rates supported the economic recovery in the Euro area.

    Under my base case, ECB’s decision to recalibrate the asset purchase program from 60 to 30 billion Euros a month from January 2018, with an extension of the period the stimulus runs, is likely to stoke inflation and boost the economy. Despite the tapering came at a period were EURO was not appreciating - making the announcement quite dovish –, I believe that the slow pace in policy normalisation will support inflation into 2019 but not considerably in 2018.

    On the above basis therefore, and with low rates to remain the case in 2018, I forecast that EUR/USD will extent to $1.278 - $1.311

    Great Britain – BRITISH POUND

    Despite the 1st quarter of 2017 found Cable vulnerable following a period of significantly low liquidity and exposure to “flash crashes”, triggering Article 50 shifted investor sentiment. This was also attributed to global growth and the optimistic outlook of the euro area. On the contrary, STERLING did remain markedly below pre-Brexit levels for all 2017, and pre-Flash Crash level for nearly ½ of 2017.

    While GBPUSD seemed to be, and still seems to be, a victim of political rage short positioning has failed to extend the pair strikingly lower, which added value to the currency’s medium-term worth, yet, inflation rose to a 6Yr high rate of 3.10%. This leaves the British Pound far away from the annual inflation rate target of 2.0% set by the government in order to maintain price stability.

    In addition, the flat-(ish) wage growth combined with very soft Retail Sales challenge investor confidence as consumer demand and growth are likely to remain under pressure.

    Afar from balance sheet susceptibility and an exit bill price tag, POUND volatility will be driven massively by Brexit trade negotiations and whether a “soft” or “hard” Brexit is achieved between UK and the EU.

    Keeping in mind the consequences of Brexit, diverging interests in the UK parliament, a rate hike after a long 10 years and the possibility for early elections, my view should be bearish. In the hope of formulating a deal and a probable light-weighed hiking cycle I am expecting GBP/USD to remain above 1.27 for all of 2018 and possibly head towards $1.39 - $1.41. Moreover, I do expect weaker macro-fundamentals.

    Japan – YEN

    With Abe winning the 2017 Japanese “snap” general elections there is little to no room for changing BoJ’s monetary policy stance, thus, inflationary pressures are likely to remain below the 2.0% YoY target, hence, markets are probably going to be driven, as they did in 2017, purely on external factors, i.e. risk sentiment.

    Acknowledging increasing vulnerability amid geopolitical concerns, their effect on short and long-term Yield Spreads, and the firm global growth I believe that speculative rallies will move USD/JPY sideways between 108 and 118 with the price ending 2018 closer to the higher end of the range.

    Commodity Currencies


    Following a prosperous 2017 BoC is likely to maintain its hawkish rate shift in 2018 as fundamental-based criteria support.

    Despite the fact that raising exchange rates and wages drove investor sentiment in 2017, next year, downside risks due to NAFTA negotiations and fiscal policy effects, whether by the US or CA, may be in play.

    Furthermore, considering the effects of the increasing US Shale production CAD could be worse supported by Oil. On the contrary, OPEC’s extension of the production cut to 2018 end, an extension that has benefited the Canadian Dollar in 2017 (see figure above), could offer some support next year.

    Given all the above, I believe Loonie will continue its bullish rally into 2018 against the US counterpart, although, in much weaker scale than 2017. I expect that USDCAD will not hike above 1.3500 and that it will fall towards 1.185 - 1.192 levels by year end.


    For most of 2017 Aussie improved gradually on RBA’s accommodative monetary policy with headline inflation easing to 1.80% YoY. I expect RBA to maintain the same path to policy normalization at least for the first half of 2018 while I also expect some inflationary pressure for the same period in the wake of solid wage growth.

    This being said, AUD/USD is likely to experience some slight downward pressure during the first and maybe second quarter of 2018 but nothing that could move price below 0.7360.

    Despite Iron ore prices in China are pricey and the Chinese economics add some bearish bias, vulnerability is likely to subdue by year’s end amid a probable RBA hiking cycle starting between End Q2 – Beginning Q3 of 2018. My view following this is that a long-term rally with first stop near 0.8400 is quite feasible.


    Amongst the commodity currencies, Kiwi also performed well for most of 2017 taking advantage of Oil prices, however, with RBNZ Governor Wheeler stepping down and the raise of the National party in Q3, NZD/USD weakened near January 2017 lows. In addition, Oil’s effects on Kiwi were not as great as Aussie or loonie.

    At the same time, it’s worth mentioning that New Zealand saw a building boom which adds to increasing labour supply and lifting low wages up, as well as that NZ is top output performer between G10 countries.

    Taking into account weighing Yields surrounding carry trades and picked inflation expectations I believe that prices will move higher towards 0.7560 and higher. This, assumes RBNZ raises interest rates in Q1-Q2 2018.


    US OIL – WTI

    The first half of 2017 found WTI prices plummeting below $40 per barrel amid oil oversupply and rising US Shale production.

    For the second half of the year demand for Oil increased due to an acceleration of consecutive inventory declines, taking price to a 30-month high. In fact, tightening supply came as a result of OPEC’s recent decision to extend output cuts.

    With a possibility to experience a supply restriction throughout all 2018 I expect a strong demand growth as the recent extension till May 2018 has traders responding already. I see volatility easing off, yet I expect price swings to be a victim of supply versus demand battle while the market goes through fundamental changes.

    This being said I foresee oil prices hitting a high of $68 per barrel, while my prediction for the lower end stands at $51 - $52 per barrel. I expect WTI to close 2018 above $57, and range bound with an average of $62.


    Gold held onto 2017 gains following a bullish rally since January 1st while Dollar depreciated owing to significant deterioration in the political and economic situation in the US. Gold appreciated nearly $85/oz in Q1 and a total of 10% until the end of Q2.

    Expectations that Fed would hike rates gradually, not aggressively, along with heightened geopolitical risks in the Middle East and North Korea, and the uncertainty surrounding US fiscal policy tilted Gold even higher by end Q3. Over the last quarter sentiment shifted as the Stock markets became very bullish.

    According to Gold’s chart and given the recent hike and lower US long and short-term Bond Yields in Q4 2017, I expect Gold price to experience a moderate mid-year upside move towards $1400 - $1450 and a reversal towards the low of $1245/oz by end 2018.


    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.



    Central Banks to Set the Tone for 2018

    With little to support the economic calendar, today markets are concentrated on a number of Central Bank meetings following this week, meetings likely to set the stage for 2018. Any monetary policy adjustments and the last interest rate decisions for 2017 commence on Wednesday at 19:00 GMT, starting with the widely anticipated FOMC, and are followed by ECB and BoE decisions on Thursday.


    Fed to Raise Rates, Wednesday December 13th

    On Wednesday, markets are expecting Fed Chair Yellen’s last announcement of the Fed Funds rate as she is to be replaced by Jerome Powell in February. Markets are also expecting, with a 92% consensus, that the rate will increase 25 basis points, to 1.50%. With the latest NFP exceeding the forecasted employment figure, however, with the average hourly earnings not, and core inflation slowing at 2.0% YoY, the US economy seems ready to rate-hike once again. The graph below shows that Real Average Hourly Earnings fell less than Inflation, indicating consumer spending is likely to increase, hence, Fed’s decision to hike in order to control inflation may be taken at an appropriate time.

    Since Policymakers rose the 2017 GDP Growth outlook at the latest Summary of Economic Projections back in November, but also in September, most analysts would agree that Fed has been too optimistic about the US economy, increasing the risk for a 2018 Yield inversion.


    BoE to Keep Rates Steady, Thursday December 14th

    As anticipated in our previous BoE rate decision special report, MPC members settled rates at 0.5%, an increase of 25 basis points. It is now widely expected that BoE will not hike rates soon and markets anticipate at least two more hikes to occur gradually over the next 3 years.

    With inflation way above the 2.0% target (currently at 3.0%) and higher than the long term average of 1.80% a rate may be appropriate at this time in order to curb inflation, however, the lackluster economic growth is likely to put a hold to any rate hike for now. The chart below provides a view on the relationship between the booming change in inflation and the economic growth, which seems to move at a very slow pace.

    Let’s not forget that the UK’s economic performance largely depends on any Brexit negotiation developments between Britain and the European Council. Despite an agreement was struck last Friday (yet to be voted upon) phase two of the negotiations are likely to cause another setback.


    ECB to Hold Rates Near Zero, Thursday December 14th

    The EURO has fallen 0.60% over the past week yet on a monthly view it is trading 1.14% higher against DOLLAR. ECB is in no rush to raise rates for the time being maintaining its expansionary stance as inflation remains stuck around 1.0%. ECB is inching towards normalisation despite it maintains a substantial degree of accommodation as it shrunk down its asset purchases to 60 billion per month and agreed to halve commencing 2018.

    Monetary policy divergence between Europe and the US widened and is likely to inch higher following Fed’s hike in December due to FOMC’s decision to withdraw some monetary accommodation twice, and probably x3, in 2017.

    With hopes that economic activity will remain improved and headline inflation tilts higher ECB seems on the right path to unplugging monetary stimulus sooner than anticipated and seeing a hike of 2 basis points within 2018. The current policy meeting is likely to unveil Europe’s economic outlook through to 2020 and provide signals on the future monetary policy divergence.


    Stavros Tousios,
    FX Market Specialist.

    Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.



    RBNZ Official Cash Rate (OCR), Wednesday November 8th

    Based on economic and monetary analyses RBNZ decided to leave rates unchanged at 1.75% in line with the Policy Targets Agreement (PTA) of 1%-3% and reiterated its view for a consistent accommodative monetary policy as emphasis on a weakening construction sector was given.

    Q2 GDP Growth expanded 0.8% quarter on quarter, albeit, RBNZ’s outlook on GDP Growth seems to have changed while inflation raised to 1.9% (est. 1.6%) YoY.

    Subsequently, a report showed that over the past 10 years housing cost increased 50.5% and household income rose a mere 42% while for the same period inflation rose 20.2%. However, when looking at it on a year on year basis, lower rates have helped house prices acceleration slow down as lower mortgages became cheaper, hence, housing investing is likely to expand.

    A weaker construction sector when housing investing is likely to expand indicates that the construction sector lags intrinsic cyclicality in this sector and its higher sensitivity to interest rates is a result of lower demand. The slight lag seems to be generated by the activity in the sector versus the change in prices.

    With the bank expecting growth to “maintain its current pace going forward” instead of expecting growth “to improve” it would be an overstatement to suggest that a rate hike is likely to be seen anytime soon.


    RBA Cash Rate Decision, Thursday November 7th

    Key RBA ‘cash rates’ were kept unchanged on October 4 monetary policy statement, the 14th consecutive decision about cash rate in which RBA decided to hold rates steady to 1.50%. The economic conditions that influenced the Board’s decision became public one day after data showed that house prices in Sydney slipped after a period of 17 months, with median house price falling nearly 4.0% in the said area while in other capital cities prices increased, albeit, only marginal.

    Considering the tightening conditions in credit and the slow pace in borrowing the housing debt to GDP is now growing faster than the growth in gross national income, as the following chart indicates.

    With no official cash rate hike since November 2010, and with investing credit growth and the acceleration in the housing market having both noticeably improved due to a cash rate cut in the past, experts are likely to be correct on their prediction for a no change in November. Economists though predict (est. 73%) a rate hike within the next 6 months mainly attributed to the growth in jobs market and also in business conditions, which in return are likely to support higher wages.

    Wage growth has remained at low levels along with inflation, albeit, the Australian Dollar has appreciated amid a weaker US counterpart. The higher exchange rate is likely to add pressure in the economy as prices increase and hence exports may decline, but still remain at high levels without having a direct impact on exports to OECD countries (apart a noticeable decline in January 2017).


    RBA maintains a positive stance on growth and persists that the economy will gradually improve within 2018, where an interest rate hike is most probable.


    Stavros Tousios,
    FX Market Specialist.

    This special report is provided as general market commentary and does not constitute investment advice.




    Based on the the payroll headline figures for the month of September a somewhat different reaction was seen in the markets instead of a broadly weaker US Dollar. While economists had anticipated a job growth of 80K the greenback climbed above the 113.00 key resistance level versus Yen, albeit, the US economy lost ~40K jobs. A rather unusual reaction considering also the risks associated with the North Korean crisis and concerns surrounding the impact of hurricanes hit the US.

    The US economy lost 95K (revised to -41K) jobs in September 2010, which marks a 7-Year record, and despite the divergence from the expectations back then was -96K growth compared to the recent -115K, Dollar fell 500bp to session’s end against Yen. Admitting market players were concerned during the release of the latest NFP numbers the headline was rapidly discounted on a 16-year (February 2001) record low Unemployment Rate and an upward revision in August’s NFP while the Average Hourly Earnings rose to its highest level since February 2016.

    Furthermore, stronger than anticipated ISM Manufacturing and Non-Manufacturing data and Fed’s hawkish comments on monetary adjustments towards the end of fiscal 2017, a hike probability of which increased from 70% to 77%, helped Dollar shoot sharply past above 113.00.

    With wage growth expanding, manufacturing, services and the retail sectors accelerating, a budget bill for fiscal year 2018 having been approved and the US Yields propelling above 2.33% economists believe October’s NFP could provide the necessary boost to the US Dollar in order to maintain a bullish spot above 114.00 versus Yen. This is supported by the increased confidence that payrolls are indeed going to be revised in the upcoming Friday November 3rd NFP.

    September’s report showed an increase mainly in health care (+23K), transportation and warehousing (+22K), professional and business services (+13K) and financial activities (+10K), while employment in food and services fell the most (-105K) due to the recent hurricanes as many employees were off payrolls. The following table illustrates the Employment Change by Industry for September:

    Despite hurricanes had a small impact on data collection from most areas in September compared to August - the current employment statistics were affected for Texas, Florida and other areas -, processing errors in estimates for women employees and production and nonsupervisory employees series in five smaller industries within financial activities, professional and business services, and leisure and hospitality were discovered.

    US Change in Nonfarm Payrolls is at a current level of -33K, down from 169K last month and down from 249K one year ago. This is a change of -119.5% from last month and -113.3% from one year ago. The main reasons a weaker than expected headline was immediately discounted are:

    1. Wage growth rose from 0.2% to 0.5% while economists anticipated a growth of 0.3%.
    2. Unemployment Rate fell to a 16-Year low to 4.2%
    3. Participation Rate also increased to 63.1%
    4. August’s payroll was revised from 156K to 169K
    5. Challenger Job cuts fell 4.4%

    A closer look at those key five points…

    1. Wage growth rose from 0.2% to 0.5%: Despite a consensus of 0.3% the average hourly earnings rose to 0.5%, significantly higher than the expectations and than Fed’s inflation target of 2.0%; Fed emphasises on the PCE as it covers a range of household spending and has the ability to reveal underlying inflation trends. US Average Hourly Earnings is at a current level of 26.55, up from 26.43 last month. This represents a monthly annualised growth rate of 5.45%, compared to a long-term average annualised growth rate of 2.45%. Median weekly earnings of full-time workers are $859 in the third quarter of 2017, $767 for women, $937 for men. This is 3.9% higher than a year ago.

    2. Unemployment Rate fell to a 16-Year low: While the Unemployment Rate declined to 4.2% reaching a 16-Year low the Inflation Rate increased 2.2% YoY in September, albeit, missing the consensus figure of 2.3%. US Inflation Rate is at 2.23%, compared to 1.94% last month and 1.46% last year. This is lower than the long-term average of 3.26%. On the other hand, the US Unemployment Rate is at 4.20%, compared to 4.40% last month and 4.90% last year. This is lower than the long-term average of 5.80%. Since the relationship between Inflation and Unemployment is negative, demand for labor by employers exceeds supply - hence why wages rise (see chart below). According to BLS there was no discernible effect on the national unemployment rate caused by Hurricanes Irma and Harvey.

    3. Participation Rate rose to 63.1%: The US Labor Force Participation Rate rose to 63.10% compared to 62.90% last month and 62.90% last year. This is higher than the long-term average of 62.88%. Most importantly, it supports the fall in Unemployment Rate as Unemployment Rate can fall when unemployed are no longer looking for work and hence the recent rise indicates a strength in the job market.

    4. August’s NFP was revised: Despite a negative Payroll’s report was published during the last NFP release Dollar grew stronger on an upward revision of August’s data from 156K to 169K and the expansion of the average hourly earnings. As deflation has been one of the biggest concerns recently wage growth provided to investors a reason - along with the revision - to buy Dollar irrespectively of the headline numbers. For that, hopes over a rate hike till year end rose.
    5. Challenger Job cuts fell 4.4%: The Challenger’s report is at a current level of 32.346, down from 33.825 last month and down from 44.324 one year ago. This is a change of 4.4% from last month and -26% from one year ago. With this report the Q3 Average totalled 94.478 jobs compared to 100.799 of Q2 2017 and 121.858 of Q3 last year. This quarter marked the lowest third quarter total since 91,784 job cuts were announced in the third quarter of 1996.

    Key Indicators to Focus on for the Upcoming Payroll’s Report


    • Actual, Consensus divergence and Average Divergence
    • Unemployment Claims (4-week average) and if they support Unemployment data
    • ISM Manufacturing reports
    • Job Cuts report


    • GDP and UoM Consumer Sentiment (revision)
    • Core PCE Price Index
    • Personal Spending
    • CB Consumer Confidence
    • ADP Employment Report

    For more details check our economic calendar at:

    A closing word…

    Remember that sharp spikes occur across many currency pairs, with a lower impact than the spikes on EURUSD due to weaker volatility. For example, opportunities may arise on USDJPY, USDCHF, Gold etc., depending always on your risk appetite. In addition, the price normally retraces back to normal levels by the end of the day, so, investors may look to take advantage of the market once the market have started settling down.






    BoC Rate Statement, Wednesday October 25th

    “The Bank of Canada raised its interest rates by 25bp back in September 6th following a 25bp rate hike in July 12. The rate hike took Loonie 82 cents higher versus the Dollar while economists were expecting another raise in the upcoming October 25th economic event, rather than as early as July. BoC raised interest rates from 0.5% to 0.75% in July for the first time in 7 years, and set a record by raising rates to 1.0% again in September.

    An accelerated economic growth of 4.5% YoY in Q2 and the best economic performance amongst G7 countries was supported by an expansion mainly in Exports and the Energy sectors. Despite some analysts did see the second rate hike as aggressive the data were encouraging and BoC’s stance on policy seems to be pretty stimulative, albeit, inflation lingered below the 2.0% target, but is currently slightly improved.

    Canada’s Inflation is at 1.43%, compared to 1.13% last year. This is lower than the long-term average of 3.89%, although, lower than the 1.50% expectation. While inflation raised the Change in Real GDP also raised some 20bp, compared to 0.90% last quarter and -0.30% last year, which is higher than the long-term average of 0.59%.

    With the Housing market starting to cool off from high debt, revisions on tax policies, housing policies evolving and the CPI tilting 0.2% higher in August, BoC’s decision on the 25th may depend on the upbeat view on growth and the performance of the Canadian Dollar. However, the labor market conditions, the economy’s potential and whether it can withstand another rate hike for the year, signal that the current level of stimulus may be most appropriate for now.


    ECB Minimum Bid Rate, Thursday October 26th

    The Euro raised c. 12.25% since January against Dollar, partially in the wake of US fiscal and political uncertainty but mainly on Eurozone’s consecutive quarters of growth and a post-crisis pick of the GDP to 2.3% YoY in Q2 2017. Real GDP rose by 0.6% in the same quarter while the EU GDP Annual Growth Rate has expanded consecutively over the past 14 months. ECB says that inflation is expected to decline in the short-term as a result of the appreciation in the Euro exchange rate before rising to 1.5% again, however, this will be also influenced by the time ECB decides to decrease its monthly asset purchases. ECB’s stance and Euro’s rally reduced the possibility of a rate hike this year.

    For the period of January 2015 and up to today, ECB has maintained a zero-interest-rate and despite this does not imply that ECB is well prepared to hike rates owed to the continuous economic expansion, it signals that a dampening of the ultra-low interest rates and a reduction in the monthly bond purchases may be in play soon. In fact, Reuters published a poll supporting that ECB is likely to announce a reduction in its monthly bond purchases in the October’s press conference.

    At his latest Introductory Statement to the Press Conference, ECB President Mario Draghi said that the net asset purchases “are intended to run until the end of December 2017, or beyond, if necessary” and until a sustained path towards inflation targets is achieved. President Draghi added that “inflation will gradually head to levels in line with ECB’s inflation aim”, providing welcomed information to investors. Yet, the accommodative monetary policy stance may be a sign of a long-waited hike.

    Looking at the Consumer price inflation (HICP), this is at a level of 1.50% for the month of August, same as last month, and 0.40% last year. This is lower than the long-term average of 1.68%. In order for the ECB to maintain stability the HICP inflation rate must remain near the 2.0%, over the medium term. ECB’s macroeconomic projections for the Eurozone foresee a depreciation towards 1.20%, as Draghi indicated, by year end/start of 2018 reflecting the current futures prices for oil and effects in energy and commodity prices.


    BoJ Policy Rate, Tuesday October 31st

    In the latest July 20 policy announcement BoJ left rates steady and it seems that Abe’s recent national electoral win paves the pathway for a persisting ultra-loose monetary policy. While the Japanese economy grew by 0.6% quarter on quarter, inflation remains stubbornly lower than its extraordinary 2.0% target and still far from the 1.0% expectation.

    At this rate, it’s now the sixth time that BoJ pushes back the projected timing for reaching its inflation target. Japan’s GDP growth back in June was the strongest since Q1 2015 as a result of BoJ’s decision to introduce a policy framework in February 2016. A framework that imposes negative short-term interest rates at -0.1% and the 10-Year Bond Yield near 0.0%. Since then, the Japanese 10-Y JGB interest rate fell from 0.45% to 0.07% today while inflation plummeted from 2.60% in February ‘15 to 0.5% in August ’17, albeit, at a 29-Month high.

    With Abe winning the elections BoJ is likely to maintain its ultra-loose policy and keep offering negative yields. In return, Japanese capital will keep seeking for higher returns elsewhere but Japan and that way Japanese investment in foreign countries will help sustain global interest rates, whereas, Japan could perhaps remain a source of capital exports.

    In September, Japan’s Exports rose by 14.1%, although, lower than the 14.9% expected. This marked the 10th consecutive increase mainly boosted by exports in cars. It’s probable that the receipt of export proceeds will allow Abe to push his consumption tax reform soon and stimulate government spending. Thus, it is plausible that consumer spending and economic growth expand but this could be in return for Yen as the negative yields and aggressive monetary easing are still in play.

    With consumer confidence being below the long-term average of 42.14 since August 2015 and an all-time high government debt to GDP ratio of 250.40, with a forecast for 2021 of 251.70%, Yen is likely to remain under pressure in the near-medium term. That assumes no geopolitical tensions.“ Stavros Tousios, FX Market Specialist. This special report is provided as general market commentary and does not constitute investment advice.



    “Japan’s Abe Poised for a Big Victory According to Forecast

    Prime Minister Shinzo Abe announced a snap election back in September 25th, taking full advantage of a weak and disorganised opposition, while his approval ratings climbed higher, near 44%, on his hard stance against North Korea.
    Despite opposition – the centrist Democratic Party (DP) - replaced its leader Murata with Maehara, approval ratings did not improve, and as a result DP dissolved bringing to life a bigger threat for Abe; Yuriko Koike’s Party of Hope. Luckily for Abe, the newly rival party’s entry to the ‘competition’ did not last as Koike decided not to run for parliament, not to abandon her position as a Governor, allowing Abe’s Liberal Democratic Party (LDP) and its partner Komeito to strengthen the ruling coalition’s election forecast to over 300 seats.

    LDP is likely to win 280 seats alone, while Koike is expected to hang on to 57 seats, more than the 40 seats of the Constitutional Democratic Party (CDP) and the 21 seats expected to be won by the Japanese Communist Party.


    Possible Economic Consequences of the Snap Election

    Despite Abe’s decision to call a snap election was a result of his intention to prevail tensity with North Korea, another important reason for Abe was to gauge voters’ approval for his scheduled consumption tax hike which is due in October. His plan is to use 40% of the additional tax proceeds to invest mainly in spending, education and nursing care services instead of pensions, topping a total investment of 2 Trillion Yen. The government’s plan for the excess 5 Trillion Yen the newly proposed tax plan is expected to generate was to allocate 4 Trillion Yen to fiscal consolidation and 1 to improve the social security system. Abe’s plan is to use 2 Trillion Yen instead. Consequently, the government might have to suspend its target for a primary balance surplus by the fiscal year 2020; a possible cause of reflation.

    As a note, mind that the last consumption tax increase did lead to the end of deflation, however, a change in the direction for BoJ could spell a rally for USD/JPY.


    Abe’s Challenges and Concerns

    As Abe readies for another win voters still remain concerned about the consequences of the consumption tax increase on the economy as well as their livelihoods. Abe’s policies are most likely to be carried out by his successors, taken that he is replaced by another party leader as this could be a case, however, the child care and nursing services sector are not too large to have a big effect even if the planned stimulus packages are immediately approved.

    Abe’s plan to divert funds for social security spending will most likely extend the timeline of repaying back the country’s swollen debt, which may be comforting to investors as aggressive public spending, monetary easing and a weak Yen is what investors have grown to know Abe for. At the same time, ditching aggressive public spending and monetary easing is what Koike’s agenda entails, and with the spike in her popularity, an anti-Abe division is being born.

    Aside economic and political concerns, the North Korean crisis is the biggest challenge for Abe and Japan. While tensions between Japan and North Korea reached a boiling point amid a threat from North Korean missiles in the course of Abe’s campaign, Abe announced his proposal that the nation amends the Constitution and fully legitimate Japanese forces in preparation from probable national security risks.

    Regardless, Abe desires a mandate and to implement official sanctions against North Korea, a move supported by US president Trump, as the current nuclear problem inflates the lingering geopolitical situation. Both opposition leaders Koike and Shii encourage dialogue and not pressure.” Stavros Tousios, FX Market Specialist. This special report is provided as general market commentary and does not constitute investment advice.



    Merkel Poised to Win 4th Term as Chancellor

    While polls show Angela Merkel’s Christian Democratic Union (CDU) party heading the German Election with a 16% lead over follower Martin Schulz’s Social Democrat (SPD) party amid a televised debate the latter “failed”, German police dealt with an increased number of election-related crime against the far-right Alternative for Germany (AfD) party. Polls show that AfD will come comfortably around 10% as the party attracted more supporters from anti-extremists and anti-nationalists, the same as opinion polls give to Die Linke, while the FDP and Grune are given 9.5% and 8.2% respectively.

    Potential Coalitions and Parties representations

    Despite Merkel’s CDU is likely to win the elections and most of the seats in the Bundestag, she will have to form a coalition with another party, as done before with its Bavarian Sister (CSU), as the probability of falling short is high. The polls suggest a Grand Coalition; the current government, is in play. The question remains, will CDU and CSU team up with FDP if necessary, or decide to go for a “Jamaica Coalition” with the Greens? Another option is a CDU-FDP government as this would overpass the threshold target for a majority. The only risk for Merkel would be an SPD-Left-Green coalition, led by Martin Schulz.

    In the current Bundestag system of 631 seats CDU and CSU represent 309 seats, followed by SPD’s 193 seats, Die Linke’s 64, and the Green Party’s 63 seats.

    Investor Opinion

    For the best part of 2017 political jitters, geopolitical tensions in the North Korean Peninsula and the recent raise in Digital Currencies brought economic prosperity and stability in the Eurozone as Dollar weekened. While Macron and Merkel agreed to fix the Eurozone as Euro is still holding strong, without having finalised any details on how, investors believe the chances to normalise monetary union deficiencies and to reform Eurozone are great. With Merkel in the lead, stability and prosperity are believed to continue not only in Germany, as the electorate desire, but also in Europe, since Europe is leading investor sentiment to be more bullish about Eurozone.

    Forthcoming Challenges

    On an accelerating German economy pressure is still on. Top of the issues faced by the current, and future coalition, are immigration, genre and economic inequality. According to Reuters immigrant population has hit a new record high with new waves coming from the Middle East and Africa. More than a million migrants were allowed in the country after Merkel’s decision to open the borders, a reason AfD popularity was boosted. With more women working in worse conditions than men, and earning up to four times less than men, genre and economic inequality has risen, government figures show. In addition, economic inequality expanded as a result of ineffective income redistribution and structural changes in the labor market. A solution for greater genre and economic inequality is calling for Merkel and the new Coalition.




    August NFP Special Report

    A more important than usual report came out on the 4th of August as doubts over a rate hike increased following a slowdown in inflation. Along with the Fed’s approach to reducing the $4.5 trillion balance sheet, July’s job figures did matter the most to the central bank and investors.

    The figures for July’s NFP resurfaced very positively as consensus expectations was for a 183K increase in employment change while the actual jobs created reached a figure of 209K. The unemployment rate was little changed to 4.3%, and the number of Total Nonfarm Payrolls up from 146.41M to 146.62M, a monthly growth of 1.71%.

    The actual report showed an increase mainly in Leisure and Hospitality (+62K), Education and Health Services (+54K), and Professional and Business Services (+49K), while Manufacturing (+16K), Financial Activities (+6K), Wholesale Trade (+6), Construction (+6K) and Government (+4K) realised a smaller appreciation. The following table illustrates the Employment Change by Industry:

    US Change in Nonfarm Payrolls is at a current level of 209.00K, down from 231.00K last month and down from 291.00K one year ago. This is a change of -9.52% from last month and -28.18% from one year ago. Despite the number of employed people hit a new high of 153.5 million wages remained unchanged. In fact, we should pay attention to the following numbers and events for the upcoming jobs report:

    1. Unemployment Rate fell from 4.4% to 4.3%.

    2. Participation Rate raised from 60.1% to 60.2%

    3. ADP jobs growth fell to 178K from 187K expected while BLS report filed an increase from 182K to 209K

    4. Euro hit a fresh 2 ½ year high against Dollar after last week’s Symposium at Jackson Hole

    Now, let’s take a closer look at those key five points…

    1. Lower unemployment rates: Despite the small decline in the unemployment rate to 4.3%, the lowest since May 2001 which was also reached in July, most jobs added in the workforce came from low income sectors and strongly the ones of the part-time basis. This gained 349K, while full time fell by 54K.

    These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job – so a falling rate means that more people are employed but they work much less hours and earn less, hence the increase in the participation rate too. Note the average weekly hours remained unchanged to 34.5 hours per week.

    2. Increased participation rate: The participation rate was little changed over the month but is up by 0.4% percentage point over the year. 1.6 million people were marginally attached to the labor force, 321K lower than a year earlier. Discouraged workers, a subset of the marginally attached who believed that no jobs were available for them, numbered 536K while employed persons saw a raise of 345K

    3. June’s ADP jobs growth came in for 178K, worse than 187K expected: The ADP report hinted a possible above expectations jobs report as the 9K increase increased the prospects of a positive NFP report however this shouldn’t have been the case as over the last 12-Month period ADP private payroll growth averaged above 200K. This estimated was the first in a while that came out expected below 200K, and NFP showed amazing results. Investors have been losing confidence over ADP reports as the divergence between ADP and BLS widens further. June’s report was also revised from 222K to 231K, however May’s was revised down from 152K to 145K.

    4. Debt ceiling sends Euro to the roof: Despite both Yellen and Draghi did disappoint investors last Friday as they did not touch monetary policy Euro broke the last high of 1.1913 technical resistance. Fears over debt ceiling as well as over Harvey hurricane and a possible weakening of the US economy took the pair to its highest levels last seen in January 2015. The move occurred after a 3-Week consolidation and could be the beginning of the next wave up in Euro’s rally. Looking at the monthly chart, things become a little clearer.

    A closing word…

    Remember that sharp spikes occur across many currency pairs, with a lower impact than the spikes on EURUSD due to weaker volatility. For example, opportunities may arise on USDJPY, USDCHF, Gold etc., depending always on your risk appetite. In addition, the price normally retraces back to normal levels by the end of the day, so, investors may look to take advantage of the market once the market have started settling down.

    Any opinions, news, research, analyses, prices or other information contained on this email or linked to from this email are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


  • I’d like to discuss my general expectations for what’s likely to happen in the FX markets this year. Much depends on how the Trump presidency and the Chinese economy work out. In general, I expect the dollar to continue to gain and for the yen and pound to weaken further.

    The dollar

    We’ve seen the dollar soar after the presidential election as market participants expect the incoming Trump administration to cut taxes and boost infrastructure spending. Alas, those expectations ignore the way the US government actually works: the president submits a budget but Congress has to pass it. The Republican Party has been willing to pass tax cuts but is generally less enthusiastic about increased spending. In fact, the current plan among Congressional Republicans is to shrink the government’s budget, not expand it. The gap between what Trump is looking for and what Congress is planning currently totals many trillions of dollars. The wrangling over US fiscal policy is likely to be the main risk to the dollar in 2017.

    Nevertheless, I still expect the dollar to strengthen further. There’s likely to be some fiscal boost, if not everything that Trump hopes for. Moreover, in December the Fed boosted its interest rate forecasts without even assuming a more expansive fiscal policy. Thus the monetary policy divergence that’s kept the dollar rising for several years now is likely to continue into 2017, albeit with perhaps more volatility as US politics weighs on the outlook.

    The yen

    The outlook for the yen is to a large degree the mirror image of that for the dollar. Not only has the Bank of Japan pushed short-term rates into negative territory, but it’s also capped long-term 10-year rates at zero. So even if rising US Treasury yields exert an upward pull on long rates elsewhere in the world, they won’t have the same impact on Japan. The widening yield gap between Japan and the rest of the world should keep the yen on a depreciating trend during 2016. On top of that, the Trump administration’s focus on countries that run significant trade surpluses with the US is likely to be to Japan’s detriment, as it runs the fourth-largest surplus of any single country.

    The euro

    The outlook for the euro is particularly clouded. I expect the currency to be weak in the beginning of the year as the market worries about political risk. Elections in the Netherlands in March and France in April and May are likely to keep the specter of euro disintegration haunting the market. In addition, the Italian banking crisis is another centrifugal force for the currency union to deal with.

    However, I expect the elections to pass without much lasting impact and the pro-EU establishment parties to continue to govern. In particular, I don’t expect the National Front to come to power in France. That should mean less political tension in the Eurozone after May, just in time for people to start worrying about Britain again.

    The pound

    After plunging in the wake of the Brexit vote, the pound has had a respite recently as the British economy has proven more resilient than the pundits expected. Moreover, Britain has benefited through the contrast with Europe: the challenges Britain faces are now well known, while the impact of politics on Europe is more difficult to assess. That’s caused some selling of EUR/GBP. But by the late spring, concerns about European politics should be waning just as the wrangling between Britain and the EU over Brexit begins in earnest. At that point, the full impact of this historic move is likely to hit the markets and the pound is likely to suffer another leg down, in my view.

    The commodity currencies: AUD, NZD, CAD

    The outlook for AUD and NZD is tied to China, and the outlook for China isn’t that great, in my humble opinion. The Chinese government has been using every monetary and fiscal technique in the book to boost growth, but 2017 is likely to be the year that the book ends and the economy has to face reality. Moreover, Trump’s plans for revamping the global trade system are aimed squarely at China, which will compound an already difficult situation.

    AUD is likely to be the main victim of slower Chinese growth. China takes 32% of the country’s exports and developing Asia overall takes 48%. A slowdown in China’s growth, particularly in its property sector, will hit Australia’s commodity exports. Moreover, the global supply of iron ore is set to increase (and the price fall) as new mines in other countries start producing.

    NZD is less vulnerable to a Chinese slowdown than AUD is. China only takes 18% of the country’s exports (Australia takes 17%, the US takes 12%) and most of those exports are agricultural products, not building materials. If the economy slows, people might not buy a new house but they will still have to eat. Moreover, milk prices have been rising recently, in contrast to iron ore & coal.

    CAD is vulnerable to a downturn in oil prices, but the correlation seems to be waning recently. On the other hand, unlike AUD, Canada is leveraged to an accelerating economy: 73% of Canadian exports go to the US, which I expect will continue to enjoy fairly robust growth in 2017. And the Trump administration has said that they don’t have a problem with Canada’s trade patterns, so NAFTA renegotiation is not a significant threat. If the USD continues to rally because of a strong US economy, Canada should be a major beneficiary. That ought to help the CAD outperform the other commodity currencies.

  • The Bank of Japan (BoJ) today surprised the markets with yet another tweak of their monetary policy. As expected, it focused on the shape of the Japanese Government Bond (JGB) yield curve, but it contained enough new and unexpected aspects to provide several surprises.

    First, a short history of BoJ policy. They introduced “Quantitative and Qualitative Monetary Easing”, or QQE, in April 2013. When that didn’t work, they introduced “QQE with Negative Interest Rates” in January of this year. Now that they see negative interest rates actually harm the economy, they’ve switched to “QQE with Yield Curve Control.”

    There are two major components of this new program:

    • Yield curve control: At the short end of the yield curve, BoJ has kept the benchmark rate for part of bank reserves unchanged at -0.1%.

      At the long end, will target 10-year Japanese Govt Bond (JGB) yields at around current levels of 0%. They’ll buy bonds if yields start to move up, or they will lend money for up to 10 years at a fixed rate if yields start to move much lower. I’ve never heard of anything like that before. Their longest operations up to now were 1 year. The ECB’s long-term refinancing operations are 3 years.

      Anchoring the 10-year yield at 0% has two effects. First off, they’re guaranteeing that if the banks (or anyone else) buy 10-year bonds at this level, they won’t lose money. Secondly, by preventing 10-year yields from going below zero, the yields of longer-term bonds should stay positive. That will help the profitability of insurance companies and pension funds, which need longer-term assets to match their long-term liabilities.

      In any case, cutting the interest rate on bank reserves further into negative territory would have hurt bank profits, so this is better than the alternative, as far as the banks are concerned.

    • Inflation-overshooting commitment: This is even more radical, in my view. Before, they were pledging to get inflation back up to 2% by a certain time. They never met that target, so they just kept pushing it out further and further. Now they’ve scrapped the target date and instead pledged to keep expand the monetary base until inflation is stable above the 2% target. In other words, they’ve committed to overshoot their inflation target. This is the only central bank in the world (that I know of) that has taken such a radical step.

    They also said they will cut interest rates further if necessary

    The moves seem aimed at reducing the harmful side effects from the negative rate policy, which was hurting bank profitability and could make them less willing to lend

    Japanese stocks rose as banks & insurers are seen as benefiting from the moves. That’s the white line in this graph. USD/JPY, the yellow line, moved up almost in lockstep with the stock market. That seems to have been the path by which the BoJ’s moves affected the currency market.

    But the graph shows, once the Tokyo stock market closed, the yen began strengthening again. That’s because these moves won’t directly impact the currency. It’s an indirect impact: by making banks and insurance companies more profitable, they won’t need to hedge their overseas investments so much and they may be more willing to take risks. But on the other hand, by making Japanese bonds more attractive, the BoJ could be discouraging them from investing abroad. So the impact on the currency isn’t that clear.

    Meanwhile, the JGB yield curve steepened somewhat as 10-year yields, which had been below zero, moved up to around zero %. Rates at the longer end moved up as well, which may have been as much the BoJ’s intention as anything else.

    All told, I believe that the BoJ’s pledge to keep policy loose not only until they achieve their inflation target but until they overshoot their target on a sustainable level is the most radical thing I’ve heard from a central bank. I think in the long term, that should work to weaken the yen, because it promises that they will just keep trying and trying. But in the short term, I’d say a lot depends on what the Fed decides tonight.

  • Today I’d like to discuss what impact the dramatic and largely unexpected Brexit vote will have on the world. But before I do, I’d like to discuss an event that happened almost 20 years ago: the Russian bond market default. The connection may not be immediately relevant, but I think it explains a good deal of why we are now entering into one of the most dangerous periods I’ve seen for the markets.

    You may remember that Russia defaulted on its bonds back in 1998. At that time, one of the favorite investments for hedge fund was to borrow money in the low-interest-rate yen and invest it in high-yielding Russian bonds. When the Russian bond market collapsed and their assets suddenly plunged in value, all these hedge funds rushed to close out their positions and repay their liabilities. The result was an enormous rally in the yen – up something like 4 yen a day every day for a week.

    The reason the Brexit vote reminded me of that event was this: it was completely understandable in retrospect, but completely unforeseen in advance. I don’t remember anyone warning that a collapse in Russian bonds would affect Japan. Yet it did, very much so. Now that we know why it did, we can see the cause and effect and we feel that we should have been able to forecast it. But certainly nobody did at the time.

    Now we are hearing a lot of predictions and forecasts for what will happen after Brexit. That’s only natural; we all have to make plans for the future, and so we all want to have an idea of what the future is going to be like. Unfortunately, it’s inherently unknowable. The one thing we can be certain about the future is that it’s unlikely to be the way anyone imagined. As Daniel Kahneman said in Thinking, Fast and Slow (a book that every investor should read – twice),

    …our tendency to construct and believe coherent narratives of the past makes it difficult for us to accept the limits of our forecasting ability. Everything makes sense in hindsight…And we cannot suppress the powerful intuition that what makes sense in hindsight today was predictable yesterday. The illusion that we understand the past fosters overconfidence in our ability to predict the future.i

    I’d like to list some of the effects we’ve already seen from the Brexit vote. The disintegration of the Conservative Party leadership might have been foreseeable, even though PM Cameron had pledged ahead of time not to resign, but the Labour Party too? Boris Johnson out of the running for PM? Perhaps the gating of the UK commercial property funds was foreseeable, but who predicted that Brexit would accelerate the collapse of Italian banks? (I’m not even sure what the connection there is myself – it seems to be based on the expectation that the ECB will have to keep rates lower for longer, and that’s a particularly difficult environment for the troubled Italian banks.)

    In fact, one of the consequences of the vote so far seems to be the absolute reverse of what everyone predicted. Most pundits – myself included, again – expected Brexit to be the first domino in a chain that would see voters in at least France and the Netherlands pushing for their own referendum. But so far the impact seems to be the exact opposite: voters in Spain strengthened the pro-European center-right party, while polls in Denmark, Finland and Sweden have shown increased support for staying in the EU. Perhaps people are seeing the problems that the UK is suddenly confronting by voting to leave and re-evaluating whether it’s worth it. Could it be that the ultimate impact of the Brexit vote could be greater Eurozone integration? Perhaps the Italian banking crisis will be the impetus. Seems hard to imagine, but not impossible.

    The impact isn’t just in Europe. For example, during the recent FOMC meeting, participants said they thought it would be “prudent” to wait for the result of the referendum “in order to assess the consequences of the vote for global financial market conditions and the U.S. economic outlook.” Now that they know the result, how much longer will they wait? Brexit has sent the yen up sharply and thereby destabilized Japanese markets. Investment decisions on hold globally, economic activity lower, oil prices fall…what will be the impact on the Middle East?

    In short, the implications of this event for investments are both global and unknowable. Money is flowing out of Britain (or it would, if the property funds would allow redemptions); where will it go to? If people sell their Belgravia flat, will they buy one in Vancouver instead? If they bail out of gilts, will we see the US long bond trade with a 1-handle, and US mortgage rates fall further? Will my house in Phoenix increase in value because of discontent in Sunderland?

    Nonetheless, we have to make decisions based on our incomplete knowledge. Even doing nothing, even keeping our money in cash, is a decision. Cash in which currency?

    We know that uncertainty has increased and that it’s likely to last some time. In that context, the typical trades in the FX market are to buy dollars; buy the safe-haven JPY and CHF; and sell the main currency affected, GBP. High-beta currencies such as AUD and SEK are also likely to be hit. Of course, these currencies have already moved a considerable amount. But just because they are cheap or expensive doesn’t mean they can’t get cheaper or more expensive.

    The best plan at such times is to remember the wise words of Howard Marks, of Oaktree Capital: “You can’t predict. You can prepare.”

    i Kahneman attributes this idea to Nassim Taleb in The Black Swan, another essential investing book.

  • Fed and SNB lower their real interest rate forecasts: are we all turning Japanese?

    Four major central bank meetings in 24 hours and no change in policy at any of them. The Chinese philosopher Lao Tzu summed it up when he said, “By doing nothing, everything is done.”

    Yet as spectators at a soccer match well know, no score doesn’t mean no action. What emerged from two of these meetings was the conclusion that real interest rates – interest rates minus the rate of inflation -- would stay lower for longer than expected.

    In the US, the FOMC lowered its forecast for end-2018 interest rates by around 50 bps to 2.46% on average from 2.95% (2.38% from 3.00%, using the median). Yet the forecast for inflation was left unchanged for both 2017 and 2018. That means lower real interest rates. The Swiss National Bank reached the same place but from the other direction. It kept its rates the same while predicting a slightly higher inflation rate – make that, less deflation – for 2016 and a slightly higher inflation rate for 2017. That too means lower real rates.

    What was particularly significant for the Fed was the change in their forecast for the longer-run level of the Fed funds rate. Their median forecast for that fell 25 bps in March and another 25 bps this time as well. That’s a huge move, considering that this is their forecast for the long-run equilibrium level of rates – the rate over several economic cycles. It’s particularly significant given that there was no change in their forecast for the long-run rate of growth or inflation. They are now saying that for a given growth and inflation combination, interest rates will probably be lower than they were before. Note that their forecast of a future long-run Fed funds rate of 3% is only slightly more than half the actual long-run average, which is 5.73% (from 1954 to end-2007).

    The Fed’s downgrade of this longer-term rate coincides with an important break in the market’s expectations for inflation. Until recently, the market’s inflation expectations were closely correlated with the current price of oil. But in late April, the two started to diverge significantly, with inflation expectations headed lower even while oil prices headed higher. Perhaps the market thinks that higher oil prices are only temporary (as do I); perhaps they see energy prices having less impact on inflation over time. Whichever, this change in inflation expectations is worrisome for the Fed, as Chair Yellen admitted: “we can’t take the stability of longer-run inflation expectations for granted,” she said at the press conference.

    Note that this is also the week that 10-year German Bund yields went negative, suggesting that in Europe too, investors see little prospect of inflation any time soon. (Rates of course are also affected by the presence of a major non-profit-seeking buyer, namely the ECB.) We haven’t quite reached that point in either the US or the UK, however.

    Is Japan’s experience a harbinger of things to come? There, overnight rates have been 50 bps or less since 1995, yet inflation has only exceeded 1% when the government raised the consumption tax. It could be that we are going to see global conversion to the Japanese norm, at least among the advanced economies.

    What does this mean for currencies? In the near term, probably a weaker dollar as the “monetary policy divergence theme” fades even further from view. It is bullish for emerging market currencies as the reduced likelihood of any Fed tightening improves the outlook for those economies. It improves the outlook for carry trades; within the G10, that means NZD and AUD, the currencies with the highest interest rates, may benefit, while in EM, RUB, TRY and ZAR have the highest rates.

    I would recommend caution with carry trades right now and also with EM currencies in general. That’s because these trades don’t perform well when during a risk-off environment, and next Thursday is the Brexit vote – which could turn out to be a serious, serious risk-off event.

    Speaking of which, the statement following the Bank of England meeting today laid out the Monetary Policy Committee’s expectations for what would happen to sterling if the country votes to leave the EU. “On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply,” the MPC predicted. “This would be consistent with changes to the fundamentals underpinning the exchange rate, including worsening terms of trade, lower productivity, and higher risk premia.” Note that by saying the fall would be “consistent with changes to the fundamentals,” they are in effect ruling out intervening in the FX market to counter any such decline. We could see some major volatility if the country votes Leave.

  • Oil prices likely to remain volatile

    Oil prices were collapsing earlier this year, but they’ve since rebounded nearly 60% from their February lows. Is the price going to keep rising?

    Personally, I don’t think so. I think the price is likely to fall back down towards the recent lows, although probably not that low again.

    But in any case, I expect the oil price to remain quite volatile as economics, technology, geopolitics and finance combine to provide an unstable supply and demand picture for crude.

    Behind the recent rally has been a remarkable turnaround in speculative positions. So far this year, hedge funds and other investors have more than doubled their net long position in oil futures and options. It’s now approaching the record set in June 2014, when it looked like ISIS fighters might take over Iraq.

    As you can see, not only were investors accumulating long positions, but they also closed out over half of the record short positions that they held. It was this short-covering really that pushed oil prices up.

    The question is, what will cause investors to continue to close out these short positions or to buy more contracts? This is where it gets difficult.

    True, there has been some decline in global production. That’s because of several disruptions to supply, such as malfunctions at a Venezuelan export terminal and a pipeline bombing in Nigeria. And there’s been some hope that OPEC and the major non-OPEC countries would agree at their meeting in Doha on April 17th to at least freeze production, if not cut it back.

    At the same time, demand out of China and India has been strong, with both countries importing near record amounts of crude and products in February.

    But there’s one big problem overhanging the market: the global inventory overhang. The whole world could stop pumping oil for a week and that would only bring inventories back to their normal level. And we all know that’s just not going to happen. On the contrary, the US Government’s Energy Information Administration expects that global inventories will continue to rise this year and even next year.

    Aside from supply and demand, there’s another factor coming into play: the refinancing of America’s shale oil producers. As I mentioned, the oil market is the intersection of economics, technology, geopolitics and finance. Economics determines the demand for oil. Technology increases oil companies’ ability to find and develop oil reserves. Geopolitics can interrupt oil supplies, as it is now in Nigeria, or increase supplies, like with Iran.

    The impact of finance is a bit less obvious. It’s most important with the US shale oil companies, which depend on bank loans for finance. Banks reset oil companies’ credit facilities twice a year. They determine how much the companies can borrow based on the value of the companies’ oil reserves. If the price of oil is high, the banks lend them more money; if the price is low, the banks cut back their loans. Many of these agreements are coming up for renewal in April. If oil prices fall further, then much of the US shale oil production may be shut down, causing a big spike up in prices. And if the loans get rolled over, then production can continue unabated, which might push prices down.

    So there’s a lot that might move the price of oil in the near future: speculative positioning, the Doha meeting, Asian demand, US shale oil refinancing…The direction of prices isn’t clear by any means.

    But what is clear is that the volatility of oil is likely to remain high as these many cross-currents intersect to push the price around. That’s why I think oil is an attractive market for investors looking for volatility.

  • What to expect from the upcoming central bank meetings: ECB, BoJ, Fed

    Webinar held on 3 March on The recording can be accessed at:

    Hello everyone! This is Marshall Gittler, head of investment research here at FXPRIMUS.

    Today I’m going to be discussing the upcoming central bank meetings We’ve got three biggies in the next two weeks: the ECB on the 10th (Thursday), the Bank of Japan on the 15th (next Tuesday), and Fed on the 16th. In addition, the Bank of Canada and RBNZ both meet on Wednesday, March 9th (Thursday in NZ). There’s also going to be a Bank of England meeting on March 17th, but that is likely to have relatively little market impact now that all the Monetary Policy Committee members are voting the same way.

    So there’s going to be a lot of central bank activity in the near future. And as we all know, the markets are being totally dominated by the central banks nowadays.

    So what can we expect from these meetings? Well, let’s first see what the general world conditions are.

    The main things to notice are:

    • Growth in most countries is stagnant at best, slowing at worst
    • EM countries in particular are slowing sharply
    • Global trade is falling
    • Inflation is still well below target almost everywhere
    • Financial markets are volatile (although not as volatile as they were back in January)

    I’d like to take the fourth point, sluggish inflation. It’s true that inflation has picked up in many countries, but it’s still well below the central bank’s official target in most of them. We can see here that in the US, it’s moving back towards target, but the EU and Japan are nearly in deflation! So it’s hard to see how those two are going to hit their targets without further action. That’s why I think we might see further action from some central banks.

    But…how do lower interest rates help an economy? In theory, they should boost lending. But you can see here that bank lending hasn’t picked up very much outside the US even though interest rates are at record low levels. That’s because companies don’t borrow just because money is cheap, they borrow it because they think they can invest that money profitably. Why should they bother building a new factory if they don’t think they can make money with it? This is the other problem that central banks face: lowering interest rates hasn’t worked in one of the main ways it’s supposed to.

    So if lowering interest rates doesn’t encourage borrowing, what does it to? It weakens the exchange rate. That’s one way that central banks can help their economies out. But of course a country’s exchange rate will fall only if other countries don’t lower their rates too. If everyone lowers their interest rates, then relative interest rates remain the same and nobody wins – they just wind up in the same situation but with everyone worse off.

    Furthermore, negative interest rates have started to have the opposite effect. You can see here in this graph of bank stocks relative to their home markets how bank stocks have underperformed the overall stock market recently. That’s because investors worry about negative interest rates eating into banks’ profits. That might force them to charge more for loans! So it may be that the interest rates tool is no longer as effective as it was.

    Now let’s discuss the central bank meetings in the order in which they’ll occur:

    The ECB is the one where expectations are the highest. At their last meeting, ECB President Draghi gave a big hint that they would increase their market assistance. He said that Eurozone inflation dynamics were weaker than expected that it may be “necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available which will also cover the year 2018.”

    The point about the ECB staff’s economic forecasts is quite significant. The forecasts that they have now only go out to 2017. At their next meeting, the staff will make forecasts out to 2018. These are really important for the ECB. As you can see, the ECB is forecasting that growth will recover and that inflation will move back towards the target over the next two years. But if they revise down their inflation forecast for this year and next and forecast that it’ll take three years to get back to their target, they’ll have to take some further action.

    As you can see in the graplh below, inflation expectations – the blue line – haven’t been affected at all by the ECB’s actions, and instead have basically followed the oil price, the yellow line. And in fact recently inflation expectations have continued to fall even as oil prices have stabilized. So with oil remaining at extremely low levels, the ECB has to do something lest a deflationary mindset get established.

    Now, we all know that they can’t really do anything. For example, the Bank of Japan has kept its short-term rates at 50 bps or less for the last 20 years, yet they’re still struggling with deflation So I’m not sure that central banks have the tools to create inflation right now. But they can’t admit that. No central banker can stand up and say, “well, really we’re powerless to do anything about it.” The former BoJ Gov. Shirakawa effectively said that, and he was forced out of his job early to make way for Gov. Kuroda, who promised to do more.

    So the ECB will have to take some steps even if they don’t really think that the steps will make any difference. That’s because of the role that confidence plays in the markets.They have to appear confident even if they’re not.

    The question then isn’t whether they’ll do anything. The question is what they’re likely to do, and more importantly, whether it will be enough to impress the markets.

    For example, they did increase their stimulus in December. They lowered the deposit rate by 10 bps further into negative territory, and extended the length of time the bond purchases were scheduled to run by six months, as well as some other small measures. But Draghi had built up expectations so high ahead of that event that the small increase was a disappointment to the market, and this is what happened: EUR/USD jumped 4 cents in one day!

    So the key point is that this time, they know they’ll have to do something really big, or else the market will once again be disappointed. And a second disappointment after such strong suggestions in January would be really really disappointing for the market. It would send the euro up sharply and stock markets down sharply. And they can’t risk that. Financial conditions in the Eurozone have already been tightening over the last few months, whereas in the US they’re actually looser despite the fact that the Fed hiked rates in December.

    So what can they do? They need to make a big impression on the market. Just changing one thing probably wouldn’t be enough. That’s why I expect them to reveal several new measures. Among these, I’d expect to see the following:

    • A further cut in the deposit rate. They’ve lowered it by 10 bps increments each time, maybe they’ll try 15 bps this time.
    • The introduction of a tiered deposit rate, like in Japan. That will be necessary to prevent the negative interest rates from pinching bank profits.
    • Raising the monthly bond purchases
    • Extending the minimum duration of the bond purchases
    • More miscellaneous measures

    I don’t want to get into the question of whether these issues would be effective in boosting economic activity and raising inflation. That’s not what matters for us. The issue for the FX market is whether it’s enough to boost market confidence. I think these measures would demonstrate to the market that the ECB is seriously worried about the downside risks to inflation and to the economy and is going to take, as Mr. Draghi said on another subject, “whatever steps are necessary” to fight them. That should probably boost Eurozone stocks and weaken the euro, as happened when they first cut rates into negative territory.


    Now, the next meeting is the Bank of Japan the following week. It’s a lot harder to predict what they will do at that meeting. On the one hand, Japan’s inflation isn’t going anywhere. The BoJ even invented a new measure of inflation, one that excludes fresh foods, energy and the effect of tax hikes, in order to make it easier to meet its inflation goal, but that measure too turned down in January.

    To make matters worse, inflation expectations are falling. The % of people who expect inflation to be higher next year is falling – that’s the graph on the left – and market-based inflation expectation measures show that the market expects no inflation for the next five years. So there is reason for the BoJ to act again.

    On the other hand, we saw earlier how Japanese bank stocks basically collapsed following the move to negative interest rates. That’s the yellow line in this graph. Furthermore, the BoJ board only voted 5-4 in favor of going to negative rates. That’s a very close vote, which doesn’t inspire much confidence in such a radical move.

    One of the four people who voted against negative rates – Ms. Shirai – will be leaving the BoJ board on March 31st, and another, Mr. Ishida, will be leaving on June 29th. BoJ board members serve 5-year terms so both of them were appointed before Mr. Abe came into office. If I were Mr. Kuroda, I’d wait until Mr. Abe had replaced these folks with more sympathetic board members before taking action again, rather than risk having the vote go against me. So I think they’ll wait at least until April, after Ms. Shirai leaves, and probably until July before changing rates, unless something big happens. That would suggest the yen is likely to strengthen further after the upcoming BoJ meeting.

    After that, it’s a lot to do with the general global risk environment. I still believe that Japanese investors have more money to put offshore and that those capital flows are likely to weaken the yen further, but risk aversion may interfere.


    Finally, there’s the Fed meeting the next day. I don’t think anyone expects them to raise rates at this meeting. Nonetheless, I think the market is underestimating the likelihood of another rate rise.

    This graph shows the FOMC’s forecasts for the Fed funds rate over time, taken from the materials that they publish every quarter, vs the market expectations as derived from the Fed funds futures. As you can see, there’s a huge gap. The FOMC is assuming at least 3 more rate hikes this year, while the market is only pricing in about a 50-50 chance of even one more. (Note: the probability has increased somewhat since the webinar.) But does the Committee really need to hold off so much?

    They have a dual mandate: they have to aim for price stability, which they define as a 2% rise in the core personal consumption expenditure, and full employment, which they estimate to be a 4.9% unemployment rate. As you can see, they’re pretty close to reaching both those targets.

    So why didn’t they move in January? They explained that they are “closely monitoring global economic and financial developments and assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Note that they said “global economic and financial developments,” not just “domestic economic and financial developments.” So apparently a lot depends on whether global growth recovers and markets around the world stabilize. You can see here from this graph of the implied volatility of various instruments that volatility is still pretty high, but it’s coming down. If that continues, I think they’ll still plan on hiking later this year.

    The important thing will be to see the dot plot. This is the dot plot from the December FOMC meeting. Each dot represents the forecasts of a member of the Committee for the Fed funds rate at the end of each year. You can see from this the distribution of forecasts on the Committee. This is where I got the average weighted forecast that I used in the earlier graph. I think if the Committee is still forecasting at least two rate hikes this year, the market will have to adjust its rate expectations upwards. That is likely to strengthen the dollar. If on the other hand the Committee capitulates to the market’s view and forecasts only one hike this year, then I think the dollar will weaken.

    In any event, many of the US economic indicators are starting to come in better than expected. The mood in the US is improving. Against this background, I wouldn’t be surprised to see some further downward revision to the Committee’s forecasts, but I don’t think they’re likely to change that much. I expect that the market will be surprised on this account and the dollar will strengthen after the FOMC meeting.

    This is Marshall Gittler, head of investment research at FXPRIMUS. Get more market insights on our education pages and turn your trading ideas into action with FXPRIMUS, The Safest Place To Trade.

  • Brexit – the question of whether the UK will leave the European Union – is on everyone’s mind nowadays, after UK PM David Cameron called a referendum for June 23rd. Will they or won’t they? That’s not necessarily the right question, at least not for now. The proper question for the FX market is, might they? And the answer to that one is a definite “maybe.” So long as it’s “maybe” and not “no,” I think the pound is likely to be under pressure.

    Fears of a Brexit have made the pound the worst performing major currency over the last week, even worse than the Argentinian Peso, the habitual resident in the FX basement. Of course, at some point it may mean revert – markets tend to overshoot in one direction then overshoot in the other – but I’m not sure it’s overshot to the downside quite yet.

    At the end of the day I don’t think the British public will vote to leave the EU, but the market has to price in the chance that they might, and if that chance increases, then the risk premium associated with British assets and with the pound should increase too. That means a weaker pound.

    The problem is that I don’t see things getting better rapidly on the Continent, and therefore I think the risk of higher poll numbers for the “out” vote may increase. In particular, the refugee issue is heating up again and is likely to get even warmer along with the weather as more people decide to leave their shattered homes. Immigration is one of the main concerns of those British who are dissatisfied with the EU. PM Cameron’s modest renegotiation of the UK’s status within the EU will probably fail to mollify these folks.

    We can take some lead from the Scottish referendum on independence that was held in September 2014. While in the end the vote went against independence, it was noticeable that support for leaving rose as time went on, while declared support for staying in fell. In the event the vote to stay in was higher than the polls had suggested, but so too was the vote for leaving, as the “I don’t knows” made up their minds. The latest polls show some 46% want to remain in and 38% want to leave, but that’s almost exactly where we were with the Scottish referendum four months before it took place (48% “no” vs 35% “yes”) and it tightened up considerably after that.

    Investors who want to take a position on the possibility that the UK leaves should do so by selling GBP/USD or, even better, GBP/JPY. That’s because if something with such wide-ranging and unpredictable implications does actually happen, the safe-haven JPY is likely to appreciate overall. It might also be worth considering buying gold in GBP terms, because gold too could benefit.

    On the other hand, I think EUR would also be negatively affected in case of a vote to exit, although obviously not as much as GBP. That’s because not only would a vote to leave the EU be a leap into the unknown for the UK, it would also be a leap into the unknown for the EU itself, too. All sorts of questions arise, such as what will the people in Catalonia or the Basque region do? How would this affect the chances of anti-EUR parties, such as the National Front in France? Etc. Looking at the difference between the 6M risk reversals (which now include the referendum period) and the 3M risk reversals (which don’t encompass that event), it’s clear that the GBP options market is already concerned about the referendum while the EUR options market isn’t. That suggests the issue could put downward pressure on the EUR over the coming months as investors begin to think through the impact of a Brexit vote on other currencies besides GBP.

  • The year started out pretty badly, with the S&P 500 index down nearly 11% at one point. But since then it’s recovered about 40% of its losses in just five business days. Are we seeing a return of risk-seeking?

    Certainly, many of the factors that were weighing on the market earlier in the year have stopped or even reversed. Foremost of these is China, where the authorities offered more measures to support the economy and boosted the currency. The fact that lending soared in January was also significant as it holds out the promise of a stable economy – although one wonders if prolonging a debt-fuelled expansion is really in the country’s best interest over the longer term. A slight rise in inflation there in January is also positive.

    Meanwhile, in Europe, ECB President Draghi has reassured the markets that the ECB will do more in March, and even Bank of England uber-hawk Ian McCafferty has turned into a dove. Recent comments by (most) Fed officials give the impression too that they’re in no rush to hike any time soon, either.

    The impact has already been felt in the bellwether commodity sector, where prices of many growth-sensitive commodities have risen slightly or at least stabilized after a prolonged period of declines. Brent for example is 25% off its recent lows, while copper is up 5.7% from the bottom.

    Against this background, FX traders may want to put on some carry trades, taking advantage of the low interest rates among the buyers of commodities and the higher interest rates among the sellers. Going long ZAR, MXN, NZD or AUD and financing it with the safe-haven JPY or CHF, or the low-interest-rate EUR would seem to be one way to take advantage of this trend, if you think it’s likely to persist.TRY has the highest deposit rates among the readily available currencies, but given the geopolitical problems surrounding Turkey, its currency is likely to be subject to other forces. RUB is a strong oil playthat also has high rates; market participants who expect that oil will even stabilize should consider that currency too.

  • The Bank of Japan:  Propping open Pandora’s box


    The Bank of Japan’s introduction of negative interest rates is one of the most significant events to hit the FX market recently. By taking this action, the BoJ has basically said that its bond-buying operations have reached their limit and they need to find other ways to support the economy. The likely channel is through the exchange rate:  by depressing interest rates across the yield curve and (one hopes) raising inflation, the BoJ is aiming to lower real interest rates. This won’t benefit companies that much, because they can already borrow at extraordinarily low rates, so the aim must be to push down the yen by making overseas investment more attractive and at the same time implicitly guaranteeing Japanese investors that the authorities will prevent the yen from strengthening.

    Looking away from the yen, how might this move affect other countries? There are two ways:  through trade and through policy. On the trade front, countries that compete with Japan are not likely to give up without a fight. I would expect to see other trading countries, such as South Korea, allow their currencies to weaken, too.

    The big question will be whether or how China responds. If China responds by letting its currency weaken too, then that could set off a repeat of the round of risk aversion that we saw last August. Note that China has changed its way of managing the CNY and is now managing it against a basket of currencies, rather than just against the dollar, so it may move to offset a weaker yen. On the other hand, the country’s exports to Japan are relatively low compared to its imports from Japan, so it may decide to let the move slide as a wash.

    The policy implications may be even more important. Simply put, now that two major central banks have instituted negative rates, the policy is no longer experimental but rather is a “standard policy tool.” Thus the BoJ has in effect validated it for other central banks. This had an immediate impact on the UK, where the market is now pricing in more of a chance of a cut this year. Sweden, Denmark and Switzerland, which all have negative rates now, may be emboldened to lower them further. It may also help ECB President Draghi to overcome opposition on the ECB Governing Council to lowering rates further into negative territory. (Note that the BoJ specifically said it would buy bonds at yields below its deposit rate, contrary to ECB policy.)

    The BoJ said it “will cut the interest rate further into negative territory if judged as necessary.” And if other central banks cut in response to Japan, and then it cuts again, and then they follow again…it looks like the currency war is in full swing. The loser of this war – and hence the strongest currency -- is likely to be the dollar, as the Fed will probably at least keep rates steady if not hike further.

  • Special report:  Today’s US nonfarm payrolls report for January


    1330 GMT:  US nonfarm payrolls (Jan)  Today will be spent waiting for the US nonfarm payrolls report, the big indicator of the month. Strong employment data should encourage the Fed to keep hiking while any weakness might convince them to stand pat for longer. The market is looking for a relatively robust rise in payrolls of 190k, but after the stronger-than-expected ADP report of 205k, some people may have upped their forecasts. That would be a bit below the recent trend (229k a month over the last six months) but that would be quite reasonable after the enormous December (292k) and October (307k) increases. The market will also pay attention to any revisions to those earlier strong figures.



    To be really supportive of the dollar, the figure would also have to show a rise in earnings and a rise in the participation rate, which are announced at the same time.

    The reason is, the Fed wants to see a healthy job market. One part of that is that demand for labor should be rising and therefore the cost of labor should be rising. This has been happening; the rate of growth in earnings has accelerated from an average of 2.0% yoy in 2014 to 2.2% in 2015, and it was 2.5% yoy in December. However, the market is forecasting that the rate of growth in average earnings fell back to 2.2% yoy in January. That could be a negative for the dollar.



    Another aspect of a healthy labor market should be more people coming off the unemployment rolls and into the work force. That would mean a continued rise in the participation rate. The participation rate hit a bottom of 62.4 in September and has since crept up to 62.6. That’s still low but at least the trend is upwards. No forecast is available for this indicator.



    The unemployment rate is expected to stay at 5.0%. Only an extreme NFP number would be likely to change that.

    It will be interesting to see how the market reacts to the data. On one hand there could be some relief if the data is weak, as it would discourage the Fed from hiking again any time soon. That could help risk-sensitive assets, such as the AUD and stock markets. On the other hand, more weak US data just adds to the evidence that the Fed shouldn't have hiked in December in the first place! One expects that the dollar would weaken in case of a miss or strengthen in case of a beat.

    However, it’s not always like that. This graph shows how EUR/USD moved in the hour following the NFP the last six times that it missed its forecast. Curiously, the dollar strengthened three times and weakened three times.



    On the other hand, the dollar gained for at least the first 30 minutes when it beat expectations. So it seems to me that its movement has more to do with the market’s view on the dollar than with what the number is. In today’s case, the market seems to be negative about the dollar for the moment, so unless it’s a pretty strong beat, the dollar could move lower.



    13:30 - Canada – Unemployment rate and employment Change (Jan) At the same time, Canada releases its employment data for January as well. The market expects the unemployment rate to stay at 7.1% and for the economy to add 6k jobs, down from 22.8k in December. As the Canadian economy is increasingly affected by the weak oil price, there is a danger that unemployment may tick higher and job gains lower.

  • The Delphic Fed


    The Fed’s January statement has replaced “Forward Guidance” with Delphic commentary that investors can interpret in line with their own biases. Some market participants believed that the Committee was still hawkish, because they did not rule out another rate hike in March (hence the fall in stocks). At the same time, those so disposed could interpret several key changes in the statement as dovish (hence the fall in bond yields). It’s as if they are now taking lessons in market communication from former Fed Chairman Alan Greenspan, who once told a senator that “if you understand me, I must have misspoke.”


    They no longer say that they are “reasonably confident” that inflation will rise back to its target, but they did not say they think it won’t rise back to the target. They also removed the sentence about the risks to economic activity and the labor market being balanced, but they didn’t explain which way they do see the risks tipping. And they said they are “closely monitoring” global economic and financial developments, effectively a euphemism for China, oil and stock prices. “Closely monitoring” is a catchphrase for the Fed, much like the ECB saying it is “vigilant” the month before it takes some policy action. “Closely monitoring” means they’re worried about some issue that may affect policy, but it allows them to remain vague about what they intend to do about it. So at the end of the day investors are probably more confused than ever about the FOMC’s intentions.


    There may be a reason for this ambiguity:  it could be because the Committee isn’t sure what’s going on, either. The Fed is notoriously poor at forecasting the economy and the current mixed bag of indicators doesn’t make it any easier, especially if you start off by ruling out forecasting a downturn. A study by researchers at the San Francisco Fed showed that since 2007, the FOMC has been “persistently too optimistic about future U.S. economic growth.”[i] The previous year’s most recent annualized quarterly growth rate accounts for 62% of the variance in the FOMC’s forecasts even though there is little correlation between the quarterly growth rate at the end of one year and the actual growth rate over the next year, according to this study. In other words, despite the dozens and dozens of PhD economists at the Fed slogging away at forecasting the economy, the group responsible for steering the world’s largest economy basically makes policy using the rule of thumb that the future will be pretty much like the recent past.


    In fact, it seems that the market is better at forecasting what the FOMC will do than the FOMC itself is! Note how much higher the Committee’s forecasts for rates at the end of 2015 were than the market’s.



    The bottom line is that whether they hike again in March depends on the data, as usual. We now look to Fed Chair Yellen’s testimony to Congress on Feb. 10th for some clarity, but I doubt if we will get clarity then either, because I doubt if she has any clarity to give. This is only realistic, because in fact the economic signs are indeed mixed at the moment.


    Is this ambiguity good or bad for the dollar? I believe that as long as they don’t rule out further rate hikes or change their forecasts, it should be dollar-positive in that the Fed remains more hawkish than the market. Moreover, the monetary policy divergence theme remains intact on the ECB’s side, if not the Fed’s. Nonetheless, that is all in the price already and so should not be much of a factor for the dollar’s future direction. We’ll have to see how the dots fall in March.


    [i] Lansing, Kevin and Benjamin Pyle. 2015. “Persistent Overoptimism about Economic Growth.” FRBSF Economic Letter 2015-03. Available on the web at

  • Facing the same problems, central banks decide to wait and see


    Both the ECB and the Bank of Canada remained on hold this week, but they both showed a bias for easing. The common point from their analysis was how both economies are being buffeted by the crisis in emerging markets and the collapse of oil prices. ECB President Draghi listed “uncertainty about emerging market economies’ growth prospects” and “volatility in financial and commodity markets” as two of the biggest factors causing heightened uncertainty, while BoC Gov. Poloz was more specific in mentioning “recent developments in China.” Of course falling oil prices hit the two areas in opposite ways:  Draghi noted that lower oil prices should help consumers and companies, while Poloz said the BoC Governing Council focused its discussions on the implications of oil for the Canadian economy – one assumes not on how beneficial these implications would be. 


    One other notable difference is that the fall in oil prices has recently had a different impact on Canadian inflation than on Eurozone inflation. In past years, higher oil prices have meant higher inflation in Canada as they boosted the Canadian economy, while lower prices naturally meant lower energy costs and lower inflation – just like in Europe. But recently, the collapse in oil prices has been enough to send the currency plunging, and that has pushed up the price of imports, including food. The result is that Canadian inflation has actually been rising recently (watch Friday’s CI for December).



    This creates somewhat of a policy dilemma for Canada. On the one hand, the economy is slowing and lower rates may be necessary to support business. On the other hand, that would probably weaken the currency further and push inflation up more (although at 1.4% it still has some way to go before it breaks out of the 1%-3% target range). My guess is that they will probably stand pat for some time further while they wait to see what kind of fiscal plan the new government comes up with. Meanwhile though I expect the market to do their work for them by continuing to weaken their currency as oil prices fall.


    In the Eurozone I don’t see any such dilemma. So far the ECB’s QE program seems to be boosting bank lending without causing any harm to the average individual, as retail bank deposits have yet to go negative. Oil prices are now far below what the ECB staff assumed when they made their forecasts in December, and the International Energy Agency Tuesday warned that the market “could drown in oversupply” as Iran resumes supplying world markets.  It’s quite likely that they will have to lower their 2016 inflation forecast of 1.0% at the March meeting, and probably the 1.6% forecast for 2017 too. Can they assume that oil prices recover by 2018? Nobody can assume anything nowadays. Draghi himself said that “the credibility of the ECB would be harmed if we weren’t ready to revise the monetary policy stance.” Of course, he also hinted that there would be more of a move in December than there actually was, but it will be hard to ignore yet another round of cuts in the inflation forecast within the time horizon of the ECB’s monetary policy. Further easing from the ECB should reaffirm and reinforce the “monetary policy divergence” theme that has been pushing EUR/USD down for some time.


    Next week there are two more central bank meetings:  the Fed on Wednesday and the Bank of Japan on Friday. The Fed is likely to stand pat, as not enough time nor data has gone by since the last meeting to conclude that further tightening is warranted. The Bank of Japan though faces a dilemma, though the opposite one from Canada’s:  its currency is strengthening even while inflation is slowing. They too may choose to stand and wait at this meeting, but I think eventually they will have to take further action to prevent the safe-haven yen from becoming a danger to themselves.

  • How Did Pundits Do in 2015? Not Very Well, As Usual

    This first comment of the year is always the most fun one for me. I’m going to compare what the market was forecasting for 2015 with what actually happened. The result, as usual, was that the pundits did poorly. Flipping a coin would have resulted in a pretty similar result and only cost you whatever the coin was worth.

    For “market forecast,” I’m using the median consensus forecast from Bloomberg on 31 December 2014.  

    To start with, here’s a graph comparing what the market forecast the spot return would be for each of 31 major currencies against the dollar (the Y axis) vs what the spot return actually was (the X axis). (Spot return is just the change in the price of the currency.) If the market forecast was exactly correct, then the dot would fall on the yellow line.



    The results were not particularly inspiring. The market only got the direction against the dollar of 17 of the 31 currencies correct or 55%. This about what one would expect by flipping a coin.

    The biggest errors were BRL (expected:  -1.7%%; actual: -33%), ZAR (+0.6% vs -25%), COP (+2.6% vs -25%), RUB (+16.5% vs -20%), MXN (+9.3% vs -14%) and TRY (-0.6% vs -20%). Clearly the market underestimated the decline in commodity prices, particularly oil, and the sell-off in EM currencies, not to mention the political turmoil in Turkey. What this suggests is that the slowdown in China and the sharp fall in oil prices were major surprises to the FX market.

    Also note that almost all the currencies are either on or above the yellow line, meaning that they either met or were weaker than the market consensus. Only CHF (which abandoned its peg vs EUR) and JPY performed better than expected. That shows how the market underestimated the dollar’s rally in general.  

    If we look at total return (spot return plus interest income), the picture is even worse. In this case, the market got only 13 of 30 currencies correct, or 43%. Apparently the errors in forecasting interest were added onto the errors in forecasting currency rates, rather than cancelling each other out.

    RUB was the major outlier; the market expected a total return of 45% but in fact it lost 8.5%. Many of the other commodity currencies also did much worse than expected on a total return basis.

    One interesting point:  ARS had the worst spot return (-35%) but the best total return (13%) of any of the currencies. It happened in 2013 as well that ARS was both the worst-performing and best-performing major currency in the world at the same time.

    This analysis could be depressing for retail investors. You might think, if the highly paid experts working at the big investment banks who spend all their time thinking about FX can’t do any better than flipping a coin, how on earth can you? But I look at it the other way. This analysis suggests that even an amateur has a fighting chance against the experts, because the experts (and I include myself in this group) don’t really know for sure what will happen, either!

  • When will be the Fed’s next move?

    Now that the Fed has started its process of “normalizing” interest rates, the question the market is focusing on is:  when will be the Fed’s next move? I expect that there will be a period of waiting and watching while the FOMC members assess whether inflation is going to reach their target. If they decide it is, then they will tighten further and USD will appreciate; if not, then we may have reached almost the maximum for “policy divergence” and USD could weaken. But while they are waiting and watching, the dollar is likely to trade in a range.

    Fed Chair Yellen spelled out in broad terms the conditions necessary for further tightening in her opening remarks at the press conference following the recent FOMC meeting. She said that “the process of normalizing interest rates is likely to proceed gradually, although future policy actions will obviously depend on how the economy evolves.” In other words, we are not to expect a rate hike at each meeting, as happened in the 2004 tightening cycle; each meeting is “live,” i.e. they will have to make a fresh decision at each meeting.

    Under the Fed’s dual mandate, it is required to pursue “maximum employment” and “stable prices.” The former they define as 4.8% to 5.0%, which means that with the unemployment rate currently at 5.0%, they’ve met their goal. The latter they define as “inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures.” They’re not there yet by any means. That means progress on inflation will determine whether they hike or not. Inflation data may therefore supplant the monthly nonfarm payrolls as the key indicator for the markets.

    With inflation taking the spotlight, the monthly personal consumption expenditure (PCE) deflator, the Fed’s main target, becomes an even more important indicator than before. The figure for November, which was released Wednesday, showed the overall deflator rising 0.4% yoy – a welcome acceleration from +0.2% yoy in October but still close to zero -- while the core index, which excludes volatile food and energy costs, remained at 1.3%, well below the 2% target.

    While their target is defined as the PCE, the market assumes they look more at core PCE. The recent movements of this indicator are not encouraging. The three-month change annualized hit the target earlier this year, but has since declined and is now bouncing around 1.2% -- exactly where the yoy rate of change is.


    Given the relatively stable inflation rate, I would expect a period of stability on the FOMC too. I don’t see much chance of another rate hike at the January meeting; I think the earliest would be the next meeting after that, in March. That means we may be in for a period of range trading on the dollar, at least against the major currencies.

    I still believe that the Committee wants to raise rates further in order to normalize their monetary policy, but they need to move within the context of their mandate. That means they will be watching the inflation numbers carefully – and so should we.

  • South African Rand:  stay away!

    There’s been a lot of attention focused on the commodity currencies recently as commodity prices dive. I took a look at the South African Rand (ZAR) to see how it behaves relative to various commodities, stock market indices and interest-rate spreads and found out the following:

    1. 1) The strongest correlation is clearly with stock markets, notably the MSCI Emerging Market stock market index but also the S&P 500. As such, it appears that ZAR is a typical growth-sensitive EM currency.
    2. 2) It is more sensitive to movements in industrial metals than precious metals, even though the latter are a much bigger share of the country’s export basket. That probably ties in with metals as an indicator of global growth
    3. 3) The spread between official interest rates in the US and South Africa is little use in determining the exchange rate. On the contrary, the two-year spread actually works in reverse:  that is, ZAR tends to weaken against the USD when the spread widens. That suggests that the causality runs the other way, i.e. the spread is driven by the FX rate rather than the FX rate being influenced by the spread. Note though that I only looked at nominal interest rate differentials. Other research found that real interest rate differentials (that is, after adjusting for inflation and default risk) are a significant determinant of the exchange rate.


    The one thing that these sorts of studies don’t pick up is politics. Emerging markets have been described as "those countries where politics matter at least as much as economics for market outcomes,” and that certainly holds true for ZAR. (RUB and MXN are also EM currencies, but they are more closely correlated with oil than ZAR is.) For example, we saw barely a ripple in CAD recently when the Liberal Party ousted the Conservatives after nine years in office. On the other hand, on Wednesday USD/ZAR jumped after the well-respected Finance Minister was replaced, reportedly in part because of his opposition to a transaction involving a friend of the PM. ZAR is now at a record low.

    My conclusion from this analysis is that when the commodity currencies are weak, ZAR is likely to be particularly weak. That’s because of second-round effects of commodity prices on local politics:  low tax revenues and falling employment in the mining sector are likely to increase political instability. That’s why even though ZAR offers relatively high interest rates, I would not recommend carry trades using it at the moment.

  • Thinking about the direction of currencies in 2016, we have to start with the question: what will be the main themes likely to persist throughout the year? The past year was dominated by fears about global growth, particularly China; the decline in commodity prices, particularly oil; and the dénouement of policy divergence between the US and the rest of the world, particularly the EU.

    The global economy doesn’t hit a reset button on 1 January and so I expect these trends to continue at least into the first half of the year and probably longer. Specifically, I expect Chinese growth to slow further as the government continues its multi-year effort to restructure the economy. That means the price of commodities used for capital investment, such as iron ore and copper, are likely to remain under pressure for longer than those for day-to-day use, such as oil. The oil-sensitive currencies (CAD, NOK, MXN, RUB) may therefore recover vis-à-vis the AUD, CLP and ZAR.

    One side-effect is that EM countries, particularly China and the oil producers, may continue to run down their FX reserves. Their sale of US bonds should keep US interest rates well above those of other countries and support the dollar.

    Slower Chinese growth and weak commodity prices also imply no quick return to inflation. The ECB and BoJ are therefore likely to ease further. I expect the BoJ to follow the lead of the ECB and SNB and to lower rates into negative territory for the first time in that country. That would probably propel USD/JPY higher still.

    At the same time, the FOMC thinks rates will rise much more quickly than the market does. Assuming the Committee is even only half correct, that means further monetary policy divergence and a lower EUR/USD.

    As for new trends, watch the refugee crisis in Europe. This issue will add to the pressure on the EUR as the institutional foundations of the EU starts to crumble: first the Shengen Agreement, then the debt limits, and then what? Furthermore, political disarray and high levels of immigration on the continent increase the possibility that the UK votes for a Brexit – another big uncertainty for the market, and one that is liable to weigh on the pound.

    The US would seem to be an island of stability in this uncertain world. However, the impact of higher US rates and the Presidential election in November is likely to add to the global uncertainty. Still, the economics and the politics favor the dollar in 2016, in my view.

Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


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