FX Monetary Policies
and raising). Te US is now in a position to benefit from clear positive themes like housing revival, energy independence and ‘reindustrialisation’.
All of which leaves the two major European currencies – EUR and GBP. Being a much smaller currency, of the two, sterling is the easier one to manipulate. If you add to that the fact that the UK gilt markets are heavily dominated by UK pension funds who are captive investors, the chances are that the adjustment process in the UK will take place primarily through the currency markets, which implies that EUR may very well outperform GBP over time, but it is a complicated call.
What about the rest?
CHF is very likely to follow the euro destiny, whatever that is. Te 1.20 floor will be kept at any cost at least until it becomes politically unacceptable due to unwanted inflation. But that is not going to happen for years. On the other end, it is difficult to imagine, in a world of subdued growth and badly indebted developed countries, the cross running away above 1.30 or even 1.25.
For the rest - Scandinavian currencies, commodity currencies, emerging market currencies - the temptation to think they will all trend higher than G5 in the long term is quite strong. I would advise caution. For some such a view will prove correct but choosing right will be of the essence. Situations in terms of current valuation, country specific weaknesses
and strengths, market positioning, are very different. 52 FX TRADER MAGAZINE April - June 2013
120 150 180
30 60 90
(180) (150) (120) (90) (60) (30) 0
1Q06 1Q07 Source: World Gold Council 1Q08 1Q09 1Q10 1Q11 1Q12 Chart 3 – World official sector gold demand
Moreover the market is now starting to discriminate well beyond the Manichean risk-on/risk-off template, which has been dominating the Great Financial Crisis for years aſter. Besides, a rising greenback is usually not good for emerging markets. And, as highlighted earlier, it is here (in the smaller peripheral economies) where the adverse effects of ultra-easing in the Western world could hit if something goes wrong in this gigantic experiment.
Last but not least, two lines on gold, which has fallen a bit out of favour recently. If the heads of the American, British, Swiss and Japanese central banks become ever more overtly ideologically committed to the cause of central bank balance sheet expansion and the ECB can be relied upon to resume balance sheet expansion as soon as Mario Draghi thinks he has the political cover to do so, this is a reminder of the case for investing in gold. Obviously having a strong dollar could be at odds with a rallying bullion. But the point is that despite the fact the American
economy is Sourse: World Gold Concil somehow normalising
(even if at a disappointing 2% trend rate of real growth) the view here remains that monetary policy will not normalise in America. Tis, if true, is bullish for bullion (maybe not so much in dollar terms). It is also the case that ownership of gold, as a percentage of financial assets, remains very low compared with previous cycles, according to the World Gold Council. As CLSA in their weekly Greed & Fear publication reminds us, the World Gold Council estimated that gold holdings accounted for only 1% of total global financial assets at the end of 2011, compared with 14% in 1980. It is also interesting to record that the World Gold Council recently reported that global central banks bought a net 145 tones of gold in 4Q12, the second highest quarterly buying since
the sector became a
source of demand in 2Q09 (Chart 3). As a result, central banks across the world bought 535 tones of gold in 2012, the biggest level of official demand since 1964.
Alessandro Balsotti (tonne) Official sector gold demand
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