Its been a busy week back on the FX markets.
First a quick walk through on the past and a summary of the current issues ahead relating FX to all asset markets.
The last few years has seen gradually reducing volatility in the global FX markets. The risk on inverse correlation ratio to the US$ has been reducing in 2013. I personally have been keeping a careful eye on this particular relationship for obvious reasons. The US$ is traditionally the global funding currency. Over 80% of the world’s credit instruments are denominated in US$. The US$ has also dominated the world of international trade with most trades settled in US$ and over night credit for $US remains the dominate inter trade funding currency.
What happens to the US$ basket has dominated participant discussions over the last few years as the FED’s unprecedented monetary liquidity injections and perpetually expanding balance sheet has provoked bearish US$ and positive alternative US$ allocations. The “alternative” camp has included, at various times post the 2008 credit (US$) crisis, commodities, inc oil and bullion as the major themes, Equities, AUD, SGD, CHF,EUR,etc.
As this equity bull market powers on to new record highs and into its 6th year participants that joined the rally as a counter move to debasement of the US$ are rightly reexamining where we are given the debasement trade appears to be going global given the apparent economic success of the FED’s debasement moves.
The FED unprecedented recent actions appear to have:
1) Recapitalized the US banking system
2) Delevered their consumers
3) Rebalanced their trade nos (partially).
4) Created GDP economic growth
&
5)Nationalized their public deficit and reduced interest charges to a pepper corn in the process in the circular interest charges passed from government to the Fed and back to government.
Given their apparent success, especially vs harder currency strategies e.g. the euro is it any wonder others are following the US and UK leads to debase any and every way possible. 2014 sees the laggards of the BOJ continue their 2013 strategy of massive fx debasement and expansion of the BOJ’s balance sheet. And ahead for 2014 we have an inevitable follow through of the ECB as deflation and private sector credit contraction envelops the euro zone.
We have therefore an apparent divergence on the macro level.
On one side we have the early adopters of unconventional monetary policies (UK & US) starting to pull back on their monetary measures as the private sector starts to take up the slack of money supply expansion. (Remember in a Fiat currency system growth = money supply expansion. Until now the central banks have been creating the expansion. The hope for 2014 is that private sector can take over the expansion as they take on more credit again).
On the other side we have the late movers to the monetary policy measures. E.g. Japan and Europe. Japan has announced yet more measures recently and it appears Europe is on the cusp of announcing her own unconventional actions.
The third block of currencies are the prior strong currencies ie the commodity currencies and safe heaven currencies. (The CHF has long ago given up her safe heaven currency bias). The SGD appears to have unofficially given up this policy although retains a safe heaven bias due to her fundamental strengths which the government and central bank are unwilling to dilute at present. The Commodity currencies are in the dog house due to domestic property bubbles from Norway to Canada to Australia. As well as lower demand for commodities as China struggles and the US energy production boom continues. Lastly, given US and UK private sector credit demand starting to shift up, it appears monetary demand for commodities may also continue to weaken. This monetary demand weakness will further removing another price support for this allocation.
This all feeds into credit market rates. It appears rates are rising and diverging so again this is a US$ and Uk GBP strengthening scenario from the marco/monetary perspective.
Timing is everything of course. To be effective in monetizing these macro issues is the challenge for all asset allocators. So we must move on to the technical analysis matters and market market correlations and inverse correlations as well as instrument selection to best design our monetizing strategies for the above macro issues.
Having said all the above lets move on to some of the institutional readings of where we are inc technical analysis of the major trading fx pairs.
First up a 2014 trade report from Danske that nicely kicks us off:
Danske-fxtech-FXTopTradesOutlook-2014
Next up a useful tech report from Citi. Note the GBP as the alpha currency (& economic world wide alpha) for 2014. A slight bias to US$ weakening vs the euro therefore by inference a stronger gbp vs Eur and much stronger vs JPY as they forecast 1.75 to the US$ and the USDJPY moving to 108.95 soon. You do the maths for the GBPJPY therefore!! (Also consider what this will eventually do to the UK economy, manufacturers, etc. This directly feeds into trade and investment sector and tactical allocations, if you buy into the analysis).
And next up a Nordea view on the USDJPY inc a nice photo to get your our minds focused on a return to volatility and trend changes.
I wouldn’t let the emotion of this photo influence us in any way but we should all recall that the nice easy low volatility rise in asset markets we have experienced in recent years can evaporate very quickly. Expect the unexpected especially when participants have such a consensus view on so many asset markets! In spite of the easy profits at present and apparently calm waters such ‘herding’ as we have, at record leverage levels is incredibly dangerous. I can’t stress this technical point strongly enough folks.
Here Nordea on the USDJPY:
And here Nordea on a multi fx pair perspective.
And here Danske again on a regular weekly technical tactics perspective:
And here Barcap on their technical view and sticking to their stronger US$ bias with a 107.6 target to jpy and the eur threatening her trend supports. (Bounced Friday but lets see whether the ECB are finally going to come to currency debasement, inflation-ist camp). Of course, I should add, its a strong US$ bias with one notable exception. Yes, you guessed it the UK’s GBP again as the Alpha world wide currency, and economy, with a move to 1.68 targeted by them. By inference stronger gbp vs euro also.
And here a rat of JP technical reports on the major pairs over the last few days.
And here an interesting fx technical analysis report from MIG.
Eurgbp which I know many participants are either following or have a position in I’ll update on here later today, inc a chart. The ECB’s words were super bearish euro but with no policy action to give teeth to the words. Until the teeth bite a range is most likely therefore.
Rates are crucial to all markets but rate divergence is particularly powerful at moving the fx pairs. So here JP on their latest Fixed Income technical analysis perspective.
(US$ junk bond prices remain very elevated and the spread is very narrow now on a historical basis vs corporate and the UST).
I have several more fx reports here so please come back to this Monday to check if there is an update to the list of reports and content.
Have a wonderful Sunday.
Rich