My business partner, Paul Gambles, was chatting again
recently with John Noonan, Senior FX Analyst at Thomson Reuters. Like us, John
sees the Swiss Franc as overvalued, although I do not share his faith in
Europe’s ability to move towards fiscal consolidation as an immediate factor in
generating an Euro-Swiss Franc cross rally. John even broached the recent
rumours of the SNB setting a peg against the Euro for the Swiss Franc at 110
even though this brought to mind the disastrous Sterling peg against the Euro’s
predecessor, the ECU, which fell apart dramatically and saw George Soros
famously make billions on the trade as desperate attempts to raise UK interest
rates to the best part of 20% during a single dramatic day failed ignominiously.
Goldman Sachs apparently claimed that the CHF is even more overvalued than the
Brazilian Real, by one reckoning more than 70% over. But if a peg is nonsense
then what is the alternative for an economy reliant on both currency stability
and exports?
Equally trapped is the Yen - although the Japanese central
bank’s strategy of stepping in and out of the markets in ‘stealth mode’ seems to
be doing little to weaken the Yen in any meaningful way, although John sees this
as more pragmatic - “Rather than drawing a line in the sand which gives the
market a target, I think what they’re doing now, which makes a lot more sense,
is keeping the markets off balance. Working out when the markets are over-doing
it and panicking and buying the Yen as a safe haven form of security and coming
in at the right time when the markets are positioned would be far more
effective, but we also know that any kind of interventional loan without the
co-operation of other central banks is always going to be difficult; you’re
fighting a losing battle, but certainly this would be more effective than just
saying at 76.25 we’re not going to let the Yen strengthen any more. It makes
sense that they’re doing it this way.”
John has yet to come round to our certainty of major weakness
in the Australian Dollar, seeing a more benign economic outlook than my view.
Also, it now appears to us that there is really only one currency trade right
now - US Dollar versus everything else. Everything seems to have been inversely
correlated to the Greenback and we have not yet seen significant breakdown in
those correlations despite Japanese intervention and Swiss talk.
The level of equity correction has generally not seen the
expected extent of US Dollar strength in all cross rates, with Sterling
certainly holding up very well. The Australian Dollar seems to have been the
most risk-on currency. Just as whenever US Dollar has weakened over the past
couple of years it has been the Australian Dollar that has strengthened the
most, the AUD was the biggest victim of recent USD strength. I still see AUD
rivalling Real and Swiss Franc as the most inflated currency, supported by carry
trade monies.
To my mind the Australian Dollar is a good candidate as
perhaps being the single most vulnerable currency in the world to correction
right now. Any economic weakness and consequent strengthening in the USD is
terrible news for the Australian Dollar. We see carry trade contributing around
15 cents to the current value to Australian Dollar. In short, we see the AUD
being susceptible to re-testing previous intermediate lows of USD 0.60 whereas
John sees that as less likely than his base case of moderate weakness - “All
those instruments for carry, playing the emerging market story and the good
times, with the investor fright that we saw last week that would take it off. As
far as the Australian Dollar is concerned, I would agree that if we had a major
systemic event, a systemic failure somewhere around the world and investors were
pricing that in, as we saw in 2008, the Australian Dollar would be targeted.
Back then it went from 98.50 40% down to 60 cents. I don’t think it will go down
that far. I’m more in the 10% camp, but I think we would need an event like that
because not only is the Australian Dollar a beneficiary of the pure carry trade
on yield, it’s also a way to play the China story, and the China story still
looks strong. The numbers that we’re seeing coming out of Asia on the trade data
is all suggesting that they’re coping quite well with this pronounced slowdown
in the US and Europe. So I think there’s momentum in those economies, so while
that’s the case and we don’t see a systemic event, the Australian Dollar will
probably hold around these levels, but I agree that if we see the markets roil
up again and they start fearing a Lehman-like event then the Australian Dollar
will be extremely vulnerable.”
Basically, many of the world’s leading currencies are,
potentially, vulnerable. If you want a safe haven then you will not do a lot
worse than the Singapore Dollar.
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