This text is from blog famous currency strategist Joel Kruger .
FRANCLY SPEAKING – Quite an impressive run for EUR/CHF over the past few sessions, with the cross skyrocketing through barriers at 1.2100, 1.2200, and 1.2300 to post fresh multi-month highs. This has been one of my favorite trades over the past several months (second only to the now expired USD/JPY long from below 79.00), and it has been super impressive to see a central bank mount such a successful intervention campaign. In my view, the chances for effective currency intervention these days has been much higher, given the new world economy which supports coordinated action. We have already seen both the Yen and Franc depreciate dramatically in recent weeks, and it is certainly no coincidence that these two currencies have been hit so hard, given their traditional safe haven correlations and displeasure from locals on the appreciation from external factors.
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LAST MAN STANDING – Several months ago I warned of these dramatic declines in the Franc and Yen, and I don’t say this to toot my own horn, but to make the point that a good part of my USD bullishness was grounded in the expectation for weakness in the Franc and Yen. Up until only a few months ago, there were three currencies associated with safe haven buying; the Franc, the Yen and the buck. But now, with the other two currencies breaking away from safe haven correlations, this leaves only the US Dollar as the pure flight to safety currency play. As such, any signs of instability within the global markets is likely to open a more pronounced inflow into US Dollars going forward. On the other side of the coin, I maintain a US Dollar bullishness even in risk positive market conditions, as I contend that the US economy is still better positioned to emerge from the depths of the global recession, which will force a reversal in monetary policy and ultimate narrowing in yield differentials back in favor of the buck.
THE NEXT BIG TRADE – As far as strategy is concerned, as much as I am bullish US Dollars, I am bearish the commodity bloc currencies and emerging markets. I would be on the lookout for the next big trades to come from the short commodity bloc/long USD side. I am currently short AUD/USD (also long some EUR/AUD), and will be looking for a break back below parity over the coming weeks. Part of my commodity bloc and EM bearishness also has been driven on a view that China is not as well positioned as many think, and could still be at risk going forward. Last week I talked about my skeptisim with the China trade data and it seems I am not alone with this view and other share my sentiments (SEE Bloomberg article).
