Fundamental Analysis
trend for years. Not many readers will remember the Plaza Accord of 1985, but for those that do and for those that are now going to ‘Google it’, let’s remind ourselves that when the world intervened back then to strengthen the Yen, it was trading at around 261 to the Dollar.
Our view remains intact that in the long-term, with b a l l o o n i n g deficits, low interest rates, c omp e t i t i v e neighbour ing workforces on a geographic
basis
and poor Japanese demographics, it’s hard to see how in essence the Yen will not continue to decline furthermore on a relative valuation basis, and on present evidence there seems little reason why 110 and 125 and even 140 will not be probed over the next several cycles.
rate environments in the US, UK, Eurozone and Japan.
Based on previous rate cycles, we find it both interesting and a little disconcerting at the lack of furor in currency markets, which oſten take their cue from treasury markets, seeing that both Fed and BoE officials have hinted that withdrawal of stimulus will
FX
up some of its 2013 steepening, with the 10 year now closing Q1 2014 at around 2.7%.
Additionally, the continued propulsion higher in global equity markets indicates a high confidence on a broad scale and the slightly lower value of the greenback in tandem with weaker treasury yields may be the simplest explanation for the USD starting its year on the back-foot. Te FX market failed to meet its own loſty expectations of perceived sharply higher USD values based purely on rates, and may on this occasion have been a little overzealous in “buying the rumour”.
Based on previous rate cycles, we find the lack
of furor in currency markets both interesting and a little disconcerting So the majors are in tight ranges
and markets seem comfortable with digestion of data and perhaps more importantly with the transparency being demonstrated by major global central banks in continuation of what have become ‘normal’ zero interest
soon be upon us. When FX markets first got wind of this at the end of 2013 there were early signs of panic, with the benchmark US 10-year Treasury yield briefly breaching 3%.
Initial concerns have since ebbed, evidenced by the yield curve giving
In days of old when mobile phones were the same size and almost as heavy as a house brick, the mere mention of
stimulus withdrawal would have sent stock markets into a tailspin, likely coupled with plunges in the value of high-beta correlation currencies such as AUD, BRL and NZD. This time apparently, it’s different - or perhaps indifference; very hard to determine.
FX TRADER MAGAZINE April - June 2014 49
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