Monday May 3, 2010 - 18:30:22 GMT
Share This Story
Foreign Exchange Analytics - www.fxa.com
Forex Blog - Sovereign Risk Arb
It is pretty clear that the currency story since January has been more than simply selling EURUSD on anxiety over European sovereign credit risk afflicting the Club Med members. The trade has been good to those who put it on â€“ this pair is down around 6% since early February when Greece anxiety spilled over into a broadly short EUR trend.
Greece clearly refocused markets from looking at private sector credit risk to looking at public sector credit risk. With US, UK and JP fiscal balances looking pretty similar to Europeâ€™s Club Med (without the assets and economic dynamism), a very clear trend has emerged in the FX market â€“ call it sovereign risk arbitrageâ€¦shorting currencies from countries with weak fiscal balances and going long currencies with strong fiscal balances. Now I am not saying that shorting the USD in the first half of 2010 has been the way to be. Clearly the USD has been on balance a strong performer versus the EUR and JPY, while arguably having far worse fiscal position than the EUR as a whole, Greece notwithstanding. But impression is nine tenths of the trade and for much of the year to date the trade has been to punish the EUR for the sins of Greece, Portugal and Spain and not look at EZ balances in the whole.
JPY has also been a key short, from a sovereign risk viewpoint, in light of Japanâ€™s banana republic state of public finances (suspend for a moment the fact that Japan depends little on outside savings to fund its burdensome deficit). Even the GBP has proved a good short against fiscally strong currencies until more recently when the Conservative Party premium has supported the pound (seen leading coalition government after the May 06 election).
So what are some of the strong balances currencies? BRL, AUD, SEK, NOK, CAD, and RUB have all performed spectacularly against the EUR and JPY (since early February when Greece concerns dominated trading). For instance BRL is up about 18% against the EUR since early Feb. AUD is up about 12% since early Feb. CAD is up about 9% versus the EUR since early Feb. CAD is up around 14% against JPY since early Feb,
Feb-May is a long time for any trending asset or currency. Why should we think this is likely to continue? Well Greece as a credit risk is far from resolved and the same can be said to a lesser degree about Spain and Portugal. If growth remains weak (declining or anemic) for the next few years, Spain and Portugal will be joining Greece in a program of their own. Meanwhile markets can with some degree of certainty bet on Greece not meeting stiff EU and IMF conditions on reducing its deficit (by over 10 percentage points on deficit/GDP in the next 2 years). And the fiscal stories in the countries listed above are only getting better as growth comes back.
Donâ€™t get me wrong either about downside ahead in EURUSD â€“ it remains considerable, especially if reserve managers decide the can delay diversifying out of USD and buy EUR a lot cheaper if they turn more patient â€“ would open downside considerably. But if the above logic about playing strong fiscal balances (FX) against weak balances, the USD is not the core long one should have versus EUR ahead.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."