This text is from blog famous currency strategist Joel Kruger .
REPEATED CYCLE – It has been a very familiar pattern since inception of the global economic crisis in 2008. 1) Governments and central banks step in to add further stimulus and monetary policy accommodation. 2) Market participants initially react favorably to the moves on the comfort of knowing the economy will be artificially propped. 3) Reality sets in on the realization that these government and central bank measures are simply not enough and the local economies are still in need of more artificial support.
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EUROZONE CONCERNS RESURFACE – This has been the repeated cycle over the past few years and we are currently seeing part 3 of the latest wave playing out. Currencies are back under pressure following some impressive risk on rallies as the euphoric high from the most recent round of government and central bank proponomics fades into the sunset. Presently, it is the Eurozone crisis that has crept back into headlines, with the EU’s inability to agree on the timing for a common banking union, Spain and Italy dragging their feet on the subject of financial aid, and Greece’s never-ending debate on how to meet its bailout targets all factoring into the risk off price action.
BUT NOT ONLY THE EUROZONE THIS TIME – However, this time around, it isn’t only the Eurozone crisis that is getting attention. This time around, a lot of the concern and worry is focused to the east as well, where fear of an accelerated deterioration in China is materializing into a legitimate concern over the onset of a third phase of the global slowdown, which takes aim at China and its correlated economies; including the commodity bloc countries and emerging markets.
“DOWNUNDATURN” – One of these countries which I contend will suffer from a serious bout of underperformance going forward is Australia. I have long said that the Australian economy has not been positioned to deal with the reality of a major “downundaturn” and this will only result in a bigger hit to the economy when things finally catch up. Well…things are finally catching up, and a combination of ongoing China negative news, softer local economic data and the latest worrying comments from Australian officials should not be taken lightly. From a currency standpoint, in my opinion, any weakness seen in the Euro over the coming months will pale in comparison to weakness in the Australian Dollar.
LOCAL OFFICIALS WAKING UP – Over the weekend, the Australian trade minister was on the wires saying that Australia could not rely on its resources to ensure better living standards over the next decade, and that the government would need to create room for additional RBA rate cuts. One of my major critiques of the Australian economy over the past few years has been the government’s attitude projecting a view of immunity from the global crisis. These latest comments have however been more common of late and reflect a new sentiment reaffirming my view that local officials have been behind the curve and slow to react to the threat of contagion on Australian soil.
TREASURER SWAN SONG – Adding to the bearish Aussie sentiment on Monday have been 1) comments from the usually upbeat Treasurer Swan that the resource sector slowdown would significantly hit government revenues, making efforts to return the budget to surplus more difficult, and 2) estimates from Macquarie that big local banks could lose up to AUD$500M as a result of the resource sector slowdown, leading to higher unemployment and a rise in bad debts.
LOONIEVILLE – On the strategy front, I continue to look for more broad based appreciation in the US Dollar going forward. I am positioned long USD/CAD and will be expecting a surge back over parity and towards the 2012 highs just shy of 1.0500 over the coming weeks. Technically, the Canadian Dollar continues to look well overbought on a medium and longer-term basis, while fundamentally, the view highlighted above of a third wave of the global recession, should weigh on the commodity correlated Canadian economy.
STILL HOLDING EUR/AUD – While we may not see the Canadian Dollar sell as aggressively as the Australian Dollar against the US Dollar over this period, I like the long USD/CAD play because of the less painful negative carry. I am however still positioned short Aussie via the Euro, and will be targeting a move to EUR/AUD 1.4000 over the coming weeks. I am long EUR/AUD from around 1.2000. Finally, I have begun to build into a long USD/JPY position, although this trade might take a little more time to play out.
PARTY WILL START ONCE RETAIL LEAVES – The key holdup in USD/JPY could very well be the overwhelming ratio of retail long positions, which is a major preventative of gains in the major pair. But once this ratio does normalize, look out, as the pair is likely to sky-rocket. The Japanese economy just doesn’t benefit from a local currency at record levels, and the idea of the Yen as a safe-haven is nothing short of laughable.
