Fundamental Analysis of currencies. Once entrenched,
currencies can trend for years and generally always overshoot - just look at the Swiss Franc moving from 1.80 to 0.70 over the past 10 years, or the Australian Dollar moving from 0.6 to 1.10 over the past three years. Another great example of how FX markets can turn quickly when the ‘herd’ is one way is illustrated by the movement in Swiss since the SNB intervened in September 2011, the Swiss Franc subsequently losing over 30% of its best-level value against the USD from that low point of 0.70 to its current rate of 0.93. You couldn’t make this up.
With China, taking into account other conditions such as the debtor (US) /creditor (China) relationship, a target of 20% appreciation to around 5.01 may actually turn out to be too conservative but we’ll start there. This certainly provides some food for thought and who knows what the authorities may decide to do in the run-up to and maybe even during the Chinese New Year in January.
Proud Pound?
Back to one of the other major currencies, we want to mention the fact that despite all the odds against, the Pound did
not succumb to the perceived downside risk of being potentially pigeon-holed with the rest of Europe, and while its gain on the
FX One factor that appears to
have soothed investor nerves as evidenced by good demand for UK government paper at recent gilt auctions is the action taken by Cameron’s government as opposed to mere words exhibited by others.
While we are not wildly bullish on the UK due to
the the
nature of the coalition and
sometimes banter
between
the UK and the EU, we draw attention to the 10 year average exchange rate against the USD that comes in at around 1.70. We see no reason on present evidence why the market may not gravitate to that resistance level in the short term if momentum and foreign investor interest continue in their current direction and after the recent flush of long Swiss positions amid the uncertainties of Europe, the UK may become a safer
greenback was only one percent currently trading at 1.5660, it was a gain nevertheless. As seasonal adjustments of VAT calculations feed into providing a lower headline inflation rate in early 2012 we anticipate further interest in the Gilt market which has done so well recently, 10 year yields are still hovering close to 2%, which is no mean feat considering the somewhat dire but improving fiscal climate.
haven than many.
The Land of the Rising Sun - and Falling Yen?
A look ahead into 2012 would not, we feel, be complete without another glance to Asia, to the mighty Japanese Yen. By any measure, Yen gains have been extraordinary over the past few years. We talked earlier about
FX TRADER MAGAZINE January - March 2012 15 fragile
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