This text is from blog famous currency strategist Joel Kruger .
BULLISH EURO OUTLOOK BACK ON TRACK – On the fundamental front, it has been a very quiet start to the week, with the only major developments coming in the form of a much softer Japanese growth showing, and a better than expected 2Q Greece GDP. However, technically, the story has been far more compelling, with the Euro rather well bid on Monday and trading back into the 1.2300′s. The move further supports my short-term outlook which continues to favor additional upside towards 1.2600 at a minimum, before any legitimate consideration is to be given for underlying bear trend resumption….And the price action gets even more interesting upon closer glance.
CURRENCIES RALLYING BUT LOOK WHAT’S LEADING THE CHARGE – In recent weeks, and even months, any broad based currency rallies against the US Dollar have been predominantly led by the higher yielding commodity currencies, with Aussie usually at the front of the pack. Today however, the gains in currencies have been led by the Euro, which has been absolutely obliterated against its commodity cousins throughout the global macro slowdown. While it is true that it is only one day’s worth of price action that we are looking at (and not even one day at time of publication), the fact that we are seeing this outperformance now is critical in my opinion, as it represents what could be the start to a key fundamental shift in the global macro dynamic.
WHAT IS PRICED IN AND WHAT ISN’T PRICED IN – Up to this point, the Euro has been underperforming against these currencies given the knock the single currency has taken in the face of an intense Eurozone slowdown. However, with the Eurozone crisis showing signs of stabilization, and some of the other currencies tracking extremely overbought against the Euro, investors could be starting to consider the possibility of booking profits and reversing these flows back in favor of the Euro. Simply put, there might now be a lot more upside needing to be priced into the Euro and downside that has not yet been priced into the commodity bloc (EM) FX. Currencies are all about correlations, and with Europe finally stabilizing a bit, look no further than the correlation between China and the commodity bloc/EMs, to see just how things could change rather quickly.
FAR TOO DISMISSIVE – China has been showing ongoing signs of deterioration, which I believe will only get worse as the fallout from the global recession finally hits this exposed economy that has held up relatively well to this point. And when it does hit, you can be sure that currencies like the Australian Dollar will suffer mightily as a result. The Australian central bank has made it very clear how reliant its monetary policy is on external factors, with China at the center of all of this. However, to this point, the RBA has been far too dismissive of the possibility that the picture might not be as pretty as the one being painted.
BULLS, BEARS AND PIGS – I have therefore adopted an extremely bearish outlook for the China correlated commodity bloc and emerging market currencies going forward, and would look for significant underperformance against the Euro, US Dollar and Pound into the end of 2012 and throughout 2013 and 2014. Technically, the view is also well supported in my opinion, with the Euro/Commodity & EM crosses tracking by what looks to be cyclical bottoms (or very close to), with plenty of room for even a substantial corrective rally at a minimum. We all know there are bulls, there are bears, and then there are pigs. At this stage, it looks to me like EUR/AUD bears (for example) are looking a little piggish. And the fundamental catalyst for this type of anticipated reversal would most probably come from the mentioned pricing out of Euro risk and pricing in of China (and by extension…commodity bloc and emerging market currency) risk as highlighted above.