Recent Articles

23rd November 2015
Three factors which should cap the USD surge…

The USD resumed its march higher in November, as expectations of a December rate hike (as we predicted back in September link) continue to grow (markets are pricing in a 70% chance of a December rate hike). The USD has now strengthened by over 40% since 2008 as measured by the US Dollar Index, and parity with the EUR once again seems a matter of when rather than if.


Just like the last time we saw the USD surge against the EUR (back in April, when we hit 1.05 in EURUSD), it is clear that market consensus is for this bull trend to continue. And just like back in April, we feel that such confidence is misplaced. There are three key reasons why we believe that the potential for the USD to head higher is limited:


1. The strength of the USD
The fact that USD is already very strong against most other...

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16th November 2015
Costs of dollar funding on the rise backed by new regulatory demands

The appearance of a relatively calm week in the currency markets should not be a reason for complacency. Despite no material directional changes in the level of most of the major currency pairs, dollar funding is becoming increasingly expensive and, last week, rose to a level only usually seen in financial crisis.


As the financial systems are facing increasing regulatory pressure, many parts of the money markets that were once only looked at by traders are now getting a lot of attention from investors. One of the examples is the cross currency basis swap between euros and dollars, which has become the talk of financial markets in recent weeks.


The cross-currency basis swap is an instrument that will convert a lump sum borrowed in one currency into a lump sum in another currency in a fixed rate. Taking the example of a EURUSD currency basis swap, at maturity, the principal in dollars...

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9th November 2015
Dollar surges on payroll data

The dollar continued its recent advance last week amid increased expectations that the Fed could begin raising rates as soon as next month. In last week’s report, we highlighted Yellen’s relatively hawkish tone following the Fed meeting two weeks ago and Friday’s employment figures support the notion that lift off could happen at in December after all.


For the record, the Bureau of Labour Statistics reported 271,000 new jobs were created in October – the strongest monthly gain this year. Meanwhile, headline unemployment fell to 5.0% while wages rose at their fastest pace since 2009 with average hourly earnings 2.5% higher than in October 2014. Unsurprisingly, the figures triggered a sharp rise in bond yields (the two year Treasury yield jumped to a five and a half year high) and the dollar rallied against all its major counterparts.


Two weeks ago, prior to Yellen’s statement, the futures market was pricing in around...

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