The Financial Times has launched a new weekly podcast called "Hard Currency." The first interview aired on May 13th featuring Alice Ross as host and senior currency analyst Paul Robson from the World Bank of Scotland. It provided a concise, digestible, and balanced analysis of currency markets in ten minutes. I think this series has a lot of promise as a quick warm-up for a week of trading, and I will be checking in on it regularly.
Here are a few (teaser) highlights from this week's interview followed by my own commentary:
- The British pound may be serving as a safe haven currency, especially from the euro. Do not expect more quantitative easing from the Bank of England (BOE) unless conditions in the global economy deteriorate further.
- The euro (NYSEARCA:FXE) has not weakened as quickly as expected because of higher interest rates and the repatriating of euros by European banks.
- Mixed economic data in the U.S. make it hard to determine prospects for QE3 in the U.S.
- Currency traders are expecting an aggressive campaign of interest rate cuts from the Reserve Bank of Australia (RBA). However, short-term economic data seems to indicate that Australia's economic situation has stabilized. It seems more likely that the Australian dollar will hover around parity against the U.S. dollar (NYSEARCA:FXA).
I had not considered the impact of capital flows back into the eurozone by banks forced to bring money home - just as I had not thought about the capital flows of Swiss citizens causing the franc to surge in last summer's climactic move. I also recall now that the surge in the Japanese yen in the wake of the tsunami and Fukushima was reportedly caused by Japanese citizens rushing to bring yen back home. In other words, it seems the citizens of currency zones are having a large impact on short-term currency levels.
Robson seems to agree with my view that the RBA is not likely to drop rates much further than current levels. I think stabilization around parity versus the U.S. dollar makes a lot of sense, especially if the Federal Reserve is finally forced to ease again to support the U.S. economy. As long as the British pound versus the Australian dollar continues trending upward, I will continue to buy aggressively those dips and sell the rallies. I continue to cling to a small base long position in the Australian dollar versus other currencies; this position has served as a nice hedge. Moreover, the resulting carry has generate a very moderate buffer.
The attraction of using the British pound against the Australian dollar is that the pound is currently the "flavor of the year" with more and more traders assuming the U.K. offers a currency safe haven because of its current austerity program to rein in the budget. This status certainly explains why EUR/GBP has stubbornly sank, much to my dismay. However, I am also a stubborn skeptic that the pound's status as a safe haven is sustainable (for example, see "Austerity Under Fire: One Of Several Economic Drags On The U.K. Vs. The U.S."). So, I am only interested in holding the pound for very short durations.
The British pound vs. Australian dollar (GBP/AUD) has delivered one of the strongest trends of major currency pairs, bouncing about 10% in three months.
My currency trading continues to rely on a hedged, three steps forward, two steps back approach. It is slow-going and offers few home runs, but it also does not require that getting every trading call correct to be successful.
Be careful out there!
Disclosure: Long EUR/CHF, long EUR/GBP, long GBP/AUD, long AUD/USD. long AUD/JPY, long AUD/CHF, short EUR/JPY, long USD/JPY, short USD/CHF, short USD/CAD, short GBP/USD, long GBP/JPY (note well that this portfolio represents layered hedges and mostly short-term trades).