December 02, 2008
Posted by: Dave Bhagat
In a world of imploding equity valuations and panic-stricken
debt markets, currencies have been relatively stable. Stability
does not always mean properly valued; in my opinion, the dollar is
far from properly priced.
Not long ago, "fundamental" data moved currency markets; trade
surpluses and deficits, employment, inflation and GDP growth were
what mattered. Over time, as hedge funds grew more dominant and
capital more mobile, it was short-term capital movements that by
and large dictated what happened in currency markets. Capital moved
for high real rates of return (the carry trade being an example)
and the prospect of short-term speculative gain (from currencies
themselves or from a currency's equity and debt markets). As the
financial Armageddon unfolded, it has all been about capital
preservation, and the dollar has benefited greatly.
Money has flowed out of various "riskier" asset classes (emerging
markets, equities, high-yielding currencies) into the U.S. Treasury
market. Yield clearly has nothing to do with it. Bonds with
double-digit yields have been sold in favor of short-term paper
yielding a handful of basis points.
So far, many of these trading strategies have paid handsome
dividends. Capital has been preserved and many of the assets sold
have continued to plummet. However, investing at 0.10 percent is
not a viable long-term strategy unless we have global deflation and
plummeting asset values for some time to come. The strategy also
treats all currencies other than the dollar and yen as relatively
toxic. Once again, it may have worked short-term, but is unlikely
to in the long-term.
The dollar has had some positives working in its favor: a
proactive Fed; a large dose of fiscal stimulus in the works with
more to come; a Treasury market that is considered a safe haven by
most investors; and relatively attractive currency valuation vs.
some of the developed economy currencies which have similar
problems (slow to negative growth, a financial industry in turmoil,
etc.) but higher cost structures and more restrictive labor laws
that make them uncompetitive. In a general sense, Europe and
Britain fall into that category.
However, there are many more currencies representing faster
growing economies which are relatively unscathed from the financial
meltdown. Their sins have been an over-reliance on exports (as
opposed to domestic consumption) and falling prey to short-term
capital movements out of their markets.
At some point, focus will return to what should really matter in
the medium- to long-term: sustainable growth rates, low
unemployment, fiscal and budget surpluses and low inflation. When
that does happen, how will it impact the currency of the largest
debtor nation in the world, saddled with huge structural budget and
trade deficits and an over-leveraged, tapped out consumer?
The Road Ahead
The dollar appears to have lost upward momentum and I believe we
may see further weakness in December. Decembers tend to be
dollar-negative in general and even though the dollar may get a
slight bounce from year-end position-squaring, I believe we will
end the month with a somewhat weaker currency. Data will almost
certainly continue to paint a negative picture, especially the
employment number on Friday. In addition, capital flows should be
increasingly less USD supportive, as much of the repatriation trade
presumably occurred in October and November. Finally, calmer equity
and bond markets may signal a reduction in risk aversion, and that
should undermine dollar strength as less capital is likely to find
it way into the U.S. Treasury market.
While I expect the EUR to lag other currencies in strengthening
vs. the USD, a break above the 1.30 to 1.31 area could result in
1.38 to 1.40 later this month, but only if support in the 1.23 to
1.25 area holds. If that support level fails, the EUR could test
the 1.15 to 1.20 area. The GBP has performed better recently, but
gains above 1.60 may be hard to achieve and a break of 1.40 would
shift momentum to the downside. With Japan's economic picture
worsening and risk aversion lessening, the JPY should under-perform
over time; for now, it should remain in a 91-98 range.
The AUD has stabilized and with data relatively upbeat, forecasts
of future rate cuts possibly overdone and commodity prices
appearing to form a base, there is scope for more appreciation.
This might be the case for other commodity currencies such as the
NZD, CAD and possibly the BRL as well. Eastern Europe (Russia
included) continues to struggle and I see no immediate respite, as
soaring deficits, slowing economies and increased capital outflows
make for an unhappy combination. I am positive on most Asian
currencies towards the middle of 2009, but in the near-term more
currency volatility and weakness are possible, as currencies
continue to struggle under the weight of lowered growth forecasts
and capital outflows.
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Time to Pay the Piper?October 22, 2012 Posted by: Dave Bhagat
In a world of imploding equity valuations and panic-strickendebt markets, currencies have been relatively stable. Stabilitydoes not always mean properly valued; in my opinion, the dollar isfar from properly priced.
Not long ago, "fundamental" data moved currency markets; tradesurpluses and deficits, employment, inflation and GDP growth werewhat mattered. Over time, as hedge funds grew more dominant andcapital more mobile, it was short-term capital movements that byand large dictated what happened in currency markets. Capital movedfor high real rates of return (the carry trade being an example)and the prospect of short-term speculative gain (from currenciesthemselves or from a currency's equity and debt markets). As thefinancial Armageddon unfolded, it has all been about capitalpreservation, and the dollar has benefited greatly.
Money has flowed out of various "riskier" asset classes (emergingmarkets, equities, high-yielding currencies) into the U.S. Treasurymarket. Yield clearly has nothing to do with it. Bonds withdouble-digit yields have been sold in favor of short-term paperyielding a handful of basis points.
So far, many of these trading strategies...Read More