FX STRATEGY
STRATEGY
FX
How to cope with violent market swings and preserve your capital
In our last issue’s column we looked at various positive developments in Latin American FX markets and potential future opportunities that may exist in the region. Although the macro views expressed are still largely intact, a pause for reflection has become necessary as participants reassess and reevaluate global growth prospects due to events closer to home in the Eurozone.
A severe meltdown in sentiment has manifested itself despite official efforts between the Fed and ECB to keep swap lines open and credit flowing; observers cite anecdotal evidence of tight lending standards and have witnessed a subsequent fall in intrinsic value of EUR- denominated assets.
These factors have outweighed any fundamental macro-view that may or may not be correct in the medium- term and have overwhelmed the collective attention and focus of the world’s capital markets, igniting contagion fears last seen at the end of 2008.
Adding to the uncertainty is a 40 FX TRADER MAGAZINE July - September 2010
general malaise reflected by a decline in global equity indices and with many commentators now spooked by the prospect of China’s economy peaking, the prevailing mood now seems grim to say the least. Sentiment again raises the possibility of a much- feared double-dip global recession, a dire situation that would starve established and emerging markets alike of much-needed access to capital.
To briefly recap and as most FX followers are aware, EUR/USD plunged by around 9 percent from late April’s 1.32 at the outset of Greek aid being officially acknowledged, to sub-1.20 in early June after the release of pretty ordinary Nonfarm payrolls whose only major boost came from Census workers. The US unemployment rate remains very close to a recession-like 10%.
Although these US data were weaker than most expectations, the USD asserted itself yet again as the currency of choice during uncertainty with the Euro making a new 4-year low against the Greenback. The EUR also lost
value against many other major currencies, the most obvious catalyst being an absence of the Swiss National Bank in defending the all-important (perceived) line- in-the-sand of 1.40 in EUR/CHF, after its estimated purchases of several billion Euros to prevent excessive Swiss Franc strength earlier in the month.
At time of writing the G-20 summit meeting of Finance Ministers is concluding and although markets are not yet functioning in a completely disorderly fashion, with record shorts in EUR/USD seemingly content to remain exposed thus, we sense potential for some official smoothing of currency rates, should the situation worsen progressively and especially if any further declines are rapid. The launch rate of circa 1.18 is now within sight as officials claim the current rate is not troublesome.
In sum and substance, through dialogue with global business partners our view is that the last few weeks have presented some of the most challenging and tough conditions in recent memory
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