Market Highlights:
- G20 Gives Tacit Approval to Carry and USD Shorts
- IMF States that USD is Overvalued and has Further to Fall
- Today’s Price Action and Developments
G20 Gives Tacit Approval to Carry and USD Shorts
The weekend’s G20 Ministers meeting came and went without any significant guidance from the official communiqué with respect to the global rebalancing of trade and investment flows, or currency market valuations, as many had hoped and expected. Further, the G20 ministers agreed, in principle, not to remove the significant levels of fiscal stimulus currently on display in the global economy. In doing so they effectively reiterated the point made most forcefully by Mark Carney at the BoC that a great deal of the “strength” of the current economic recovery is based on policy intervention. That is, the nascent recovery is completely dependent upon record-low interest rates and fiscal stimulus, the removal of which would almost certainly derail the entire economy. Rather than delivering specific objections to the current state of economic affairs and overwhelmingly weak USD, the group’s communiqué spoke only in general terms, providing a clear directional path for markets ahead. The USD is very likely to see further near-term weakness given the fact that its valuation was not specifically addressed, leaving traders to simply follow the trend currently in place. The maintenance of the status quo should also see the EUR continue to push the envelope with respect to its current upward trajectory, with gains above 1.50 likely in the offing near term. As for emerging markets, again very little was said or done that would change the current environment, where the current inflexibility of the Chinese exchange rate system, which has seen the yuan hold steady since the summer of 2008, is forcing the upward trajectory of currencies that are allowed to float freely, such as the Brazilian real, which has appreciated more than 30% already this year. While downward pressure remains on the USD, it will not be felt evenly around the world. Commodity-linked and emerging-market currencies most leveraged for growth, as well as the EUR, will likely outperform the broader market.
IMF States that USD is Overvalued and has Further to Fall
The IMF gave its tacit approval to immense risk-taking and the continuation and acceleration of the mother of all carry trades over the weekend with a report stating of the USD that “in real terms, it has moved closer to medium-run equilibrium (though it still remains on the strong side).” While arguing that the EUR is also trading on the “strong side,” the IMF did very little to dissuade traders from continuing to add to short-USD positions, which effectively amount to a massive carry trade on USD borrowings to fund the purchase of a whole range of risky assets, from currencies to equities and commodities.
This weekend’s meetings at the IMF and G20 essentially boiled down to the following: the market’s current assessment of risks and valuations is largely correct and unlikely to require any intervention from either group in the short term. In other words, traders, the trend is your friend and risk acceptance is the new and accepted order of things in financial markets – so get ready for further USD declines as well as continued gains for currencies, commodities, and equities ahead.
Today’s Price Action and Developments
As might be expected given the discussion above, the USD is weaker across the board with the Dollar Index plunging more than a big figure (nearly 1.25%) to trade well into the 74 area, a fresh 15-month low for the trade-weighted basket. Equities have been well-bid, with the Nikkei advancing a modest 0.2% while the Hang Seng added 1.76% in value. The European bourses powered ahead given the risk-accepting tone to the weekend’s financial diplomacy to the tune of 1.5 to 1.75% while North American equity markets are trading well into positive territory to start the day. Oil prices have also rebounded just under 2% to trade back up to $79.
The EUR has broken through the 1.50 resistance on the path to higher rates this morning, though it still remains 6% below its previous high water mark that came amid the USD’s ultimate depths. The EUR found support not only from the weekend’s meetings but also from the fact that German industrial production and September’s trade surplus showed improvement in the overall economic picture for Europe’s largest economy. The Australian dollar also benefitted from better-than-expected home loans data, though the fact that the Reserve Bank has deployed two successive rate hikes somewhat diluted the impact of an otherwise currency-positive story. The Loonie has benefitted from the run up in demand for risky assets as well this morning, trading through 1.06 to the downside for USDCAD and showing few signs of letting up in the short term. Though the 1.0550 mark should provide initial resistance, USDCAD could very well probe to lower levels on the lack of any market intervention, verbal or otherwise, from both the IMF and G20.
Have a great day.
By Mark Frey, Regional Director for Corporate Canada
Trackback: | Share this article:
