The $70 rise in gold, $50 crude oil, the biggest weekly spike in the euro and the dollar's swoon against all forex crosses and the fall of the Chicago Volatility Index to 40 all suggest that the rules of the money game have changed once again. This was the week the White House and the Fed once again consciously, cynically decided to debase the world's reserve currency to reflate the global financial markets, meaning Sayonara for the Superdollar as a safe haven play. Whoever said all good things must come to an end was surely a forex gnome!
The UK economy is in deep recession, the High Street banks are nationalised carcasses of their former selves as wards of HM Treasury, Gordon Brown will face a backbencher revolt in the Commons in the prelude to a general elections that will return the Tories to power and an Old Etonian to Downing Street, the FSA's light touch regulation was proven a disgrace, London's Canary Wharf and Mayfair are Ground Zero in the credit tsunami and the Bank of England is printing money to buy gilts. A perfect argument to sell sterling? Pas de tout. I have actually been long cable with the vengeance at 1.39 and expect to see 1.60 before the golden autumn leaves flutter in the scepterd isle. Why? Sterling's epic fall in 2008-09 was bigger than Black Wednesday 1992 (when George Soros broke the Old Lady of Threadneedle Street with a billion dollar killing and ousted sterling form the ERM), bigger than Harold Wilson's East of Suez devaluation in 1968, bigger than sterling's exit from the gold standard in the 1930's. Sure, the City of London has lost the British Empire, North Sea oil, the cachet of global IPO's and public homage to credit alchemists from Sir Fred the Shred to Barcap to AIG Financial Bozos.
Still, I am a diehard sterling bull, even though I repeatedly warned last year in this column that 2.00 cable was sterling's final hurrah, so it made sense to short sterling against the buckaroo with all the single minded intensity of a heat seeking missile. The sterling call (and my conviction that crude oil would head to $25-30 when we traded at $140 last summer) did not exactly amuse the more neurologically linear traders on my team, who found it difficult to envisage a reconfigured world while standing upside down.
In essence, the bad news in sterling is priced in while the impact of Mervyn King and Alistair Darling's aggressive monetary and fiscal policy is not. There is some hint of life in the Halifax housing index, retail sales and PMI though capex, consumer spending and job losses will mean the deepest British recession since Jim Callaghan's era in the 1970's. The moment the markets sense Cool Britannia will do a Rip Van Winkle, the forex gnomes will jump on the rollercoaster de jour, take cable to 1.60-1.64 and euro/sterling below 0.78.
The Indian rupee was a profitable trade for me last week (bought NDF at 51.30 for a rupee pop on well, big time size) but I am reticent to hold longs because a vision of Mayawati as the Indian PM haunts my nightmares. Still, the Indian rupee has been whacked since February out of its 47-48 range and is El Cheapo Grande. Again, awful news swirls around the Indian Rupee. A sovereign credit downgrade by S&P, awful data, bombed out Sensex, a brewing fiscal and public finance horror story, a plunge in Gulf remittances (how to short Kerala proxies? Short pepper, the black gold of Cochin exported to the Roman Empire millennia ago?), the BJP going communal, a GDP growth squeeze, a pre-election RBI rate cut. However, as with sterling, the bad news on the Indian rupee is in the price. I doubt if INR will depreciate much below 51, absent a political shock. This is probably the time to design a non-linear call spread. The INR is sensitive to risk metrics and I can as easily argue the case for 48 as 52. Straddles anyone?
The Turkish Lira was a natural victim of the global credit crunch, Prime Minister Erdogan's game of chicken with the IMF on AKP government spending cuts ahead of the municipal elections, the exodus of hot money from Eastern Europe, the risk aversion mood swings in the Eurobond markets and the steepest GDP contraction since the time of Torgut Ozal and aggressive rate cuts by the Turkish central bank. The Turkish Lira has risen from 1.82 to 1.68 as the forex markets grasp that Ankara will sign an IMF agreement, that the GDP contraction and oil price plunge will make the current account deficit disappear, that Turkish CPI will fall to the 6-7 per cent range and that it is entirely possible that a multibillion dollar telecom takeover could well electrify sentiment and capital flows on the Istanbul Stock Exchange. The TRY, I believe, is headed significantly higher in the next six months and it is therefore prudent to prepare spring breaks in Antalya/Bodrun/Marmaris in the Turkish Aegean.
The Norwegian kroner has entirely vindicated my conviction that it was grossly undervalued at 6.9-7.2 to the dollar, a view I argued in successive columns and implemented on an epic scale in my personal prop FX book. The NOK is a classic petrocurrency as Norway is one of the world's top five exporters of oil and gas, thus a beneficiary of the post Opec Vienna meeting bounce in oil prices to $50.
In any case, Norway has better growth, and external balance sheet than the Eurozone and the Norges Bank runs the most transparent, prudent and successful global sovereign wealth pool outside Singapore's GIC/Temasek. The government of Jens Stoltenberg has demonstrated a degree of fiscal discipline that is shockingly lacking everywhere from Dublin to Rome. True, the softness in offshore oil/gas capex and North Sea and the world shipping/tanker bear market has hit consumer spending in Norway. However, there is no need for the Norges Bank to engage in quant or credit easing, unlike the Fed, the Old Lady and the ECB. While I recommend new money not chase the Norwegian kroner now that it has moved so dramatically higher at 6.35-6.40 unless they wish to replicate Edvard Munch's epic scream, I would probably add to existing longs were the NOK to slip to 6.60-6.70. Norway's current account surplus is almost the fifth of GDP, a testament to my belief that the NOK is among the most undervalued currencies in the world, a Scandinavian jewel in the forex crown.
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Community Comments (1)
You are probably right not to make much of the $500bn toxic asset plan, but we will see if the stock market rally can last:
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