This text is from blog famous currency strategist Joel Kruger .
FOLLOW THE LEADER – The latest bout of currency weakness has finally been accompanied by an accelerated deterioration in global equity and commodities prices. The Euro has managed to extend declines against the buck on Wednesday, and sights are now set on next key support at 1.2800 further down. From here, the outlook is quite bleak, and I continue to recommend the US Dollar as the only viable option, with plenty of upside in the current market environment. Markets have a tendency of breaking ranges and pushing in one direction or another into year end. Given how things have been going, I project the move will be one which sees aggressive buying of the buck across the board, back to levels seen in the summer.
See daily technical analysis for major forex pairs by Joel:
NEW CORRELATIONS – One of the interesting things to look for this time around, will be the reaction of other traditional safe-haven currencies like the Franc and Yen. The Franc has already lost any safe haven lure on government manipulation, while the Yen is now likely to face a similar fate, with the currency at risk of depreciation even in a risk off market setting. The Japanese economy is no longer able to absorb any appreciation in the Yen on external factors, and you can bet that should risk off trade pick up again, there will be an intense opposition from local officials to any additional Yen demand. This leaves the US Dollar as the only safe-haven currency play, and with this in mind, we can expect to see any flows that might have gone into Switzerland and Japan now pump directly into the US Dollar.
NEGATIVE ON THE POSITIVE – Moving on, one trade that should have a very difficult time finding success over the coming months is the carry trade. I would caution traders to stay far away from any trades that might be attractive on yield differentials (positive carry). We are entering a new type of trend where the negative carry trade is likely to benefit most. Risk off trade means a move away from higher yielding currencies, and generally, when this type of activity turns on, it is very hard to turn off. Also seen enhancing this exodus from the positive carry is the fact that many of the higher yielding, risk correlated currencies had actually found bids in recent years on a safe haven appeal, due to their perceived immunity from the US and Eurozone crisis. But once the realization that they are far from immune kicks in, it will more than likely open a deluge of risk correlated currency liquidation.
GEOPOLITICAL RISK TOO – The only carry trades where you will likely find success are the baby carries like long EUR/CHF and long USD/JPY, where the interest rate differentials are negligible. In the short short-term, market pariticpants will look to digest the latest Fed policy decision, although I do not expect the event risk to inspire any significant volatility on its own. Instead, broader macro themes should continue to dominate trade, and I suspect that we could see a pick up in fear and uncertainty in the days ahead. One other medium-term risk that has not been getting enough attention is the geopolitical risk, with rising tensions in the Middle East and the threat of a nuclear Iran all very real and potentially contributing further to the US Dollar’s lure over the coming months.
