Assessing Currency??™s True Performance
In order to capture a currency??™s true performance, it is helpful to measure it against the value of gold, especially as the metal flirts with all time highs. Sterling for instance, whose spectacular gains versus the US dollar have contrasted with losses against EUR, CAD and AUD, has lost 22% year to date versus gold (charts below shows Gold +22% YTD versus GBP). The charts show gold to have soared by 33% in USD terms year to date, 18% EUR, versus 25% versus JPY and a miserly 3% versus CAD. The loonie??™s relative strength measured by gold reflects the currency??™s broad rally, which confirms the solid fundamental backdrop to its strength (positive budget/ current account balance, strong GDP growth, robust yield foundation and favorable oil receipts flow). Our calls favoring CAD versus GBP, and NZD in past Charts Strategies remain intact.
Why we Continue Favoring the Aussie?
Sidingwith the Aussie--the next best performer against gold??”does not comewithout its risks given the increasingly tenuous equity market picture.Yet the Aussie??™s ability to rebound rapidly from intermittent assaultson risk appetite justifies the currency??™s upward potential against GBP,NZD, and USD.
Wednesday??™srate hike from the Reserve Bank of Australia underlines the robustfundamentals of the Australian dollar, even during the current credituncertainty. The 25-bp rate hike to an 11-year high of 6.75% wasaccompanied with a hawkish statement indicating inflation was likely torise above the 2-3% target by Q1 2008. Markets are pricing a 60% chanceof a rate hike in December but a greater chance of a similar move inQ1. Today??™s release of the latest employment report showed the joblessrate edging up to 4.3% in October from the 33-year low of 4.2%.Payrolls rose by 12.9K from 13K.
Consideringthe Aussie??™s lofty interest rate structure and ongoing expectations forfurther rate hikes, the currency remains our favorite, even duringintermittent bouts of risk aversion. Looking at a daily AUDUSD chartfor instance, you will notice that each down day is immediatelyfollowed by a rebound in the following. Over the past trading days,there were only three phases of two consecutive daily declines. Thismay also be true in the case of the EURUSD, whereby it had not had 2consecutive daily declines since Oct 3. But the fact that AUDUSD faceshigher upside ground due to the onset of further rate hikes permits theresumption of the bull in a broad basis.
Aussiesoared to a fresh 23-year high at 93.98, facing 94.30 cents later todaybarring any protracted selling in equities. Recent trends, however,have shown the Aussie??™s ability to rebound speedily after bouts of riskaversion. With further RBA tightening ahead and USD pressure on themount, support stands at 93.20 and 92.80.
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AUDUSD: Quick to Rebound
GBPAUD: More Downside
GBPCAD: Downtrend Intact
The case for CAD against GBP is highlighted by an already slowing UK inflation (1.9% versus 2.0% target), a broader retreat in UK home prices and emerging signs of cooling retail sales and manufacturing production. There are also lingering losses at various UK banks, where liquidity strains continue to drive banks towards the central bank??™s emergency lending facility. With UK rates at 5.75% versus Canada??™s 4.50%, there is ample downside room for UK rates to head lower drop as well as for the British currency to follow suit. Although GBPCAD has already hit a 3-year high at 1.9400, we expect further retreat towards 1.90 by year end and 1.88 once the Bank of England begins its easing cycle.
No Currency Tips from Trichet, Bernanke
A $3.7 billion markdown by Morgan Stanley, losses warnings from Capital One and American Insurance Group, and subpoenas investigating NY lending institutions are some of the explanations to the Wednesday sell-off in US equities and turnaround in high yielding currencies in favor of the US dollar. Gold had dropped nearly $15 from its $840 high. Will these events serve as the eventual catalyst to the pullback in gold and trigger further losses in equities? It is possible. But in order for a gold correction to take place, the Eurozone or British equivalent of Citigroup/Merrill Lynch/BankofAmerica has to occur in order for risk appetite to be curtailed in a more global fashion.
Given that the central bank chiefs of the world??™s two strongest economies will speak on Thursday, at a time when their currencies are racing in diametrically opposing directions, will their comments make any difference in FX markets? Will Fed Chairman Bernanke make another U-turn at Wednesday??™s Congressional appearance (10 am EST), spilling more ink on the downside risks of the US economy 8 days after the FOMC issued a statement with a more balanced outlook? The Fed has already made a turnaround on August 17 when it Fed voted for a 50-bps cut in the discount rate, 10 days after indicating the economy to be ???supported by solid growth in employment and incomes???. Considering the underlying dollar damage and renewed deterioration in equities, Bernanke may play up the strengths of the US economy such as the recent resilience in the ISM services index and the relatively lackluster readings in weekly jobless claims. We expect the Chairman to be interrogated about the falling dollar, but also expect his replies to offer little value to a market gripped by a cyclically and structurally robust anti??”dollar trend.
ECB president JC Trichet due to hold a post meeting press conference at 7.45 am EST will be expected to continue echoing the inflationary risks especially after the preliminary October CPI figures showed a 2.6% rise, well above the 2.0% level preferred by the ECB. But we also expect Trichet to repeat last month??™s acknowledgment of the ongoing strains in Eurozone credit markets and the evident signs of a cooling Eurozone economy. Yet that would only be effective in causing a disruption to the euro rally in the event that Trichet steps up his worries on the downside risks to the Eurozone and global economy and eases his hawkish take on inflation. Since that is unlikely, Trichet??™s only FX is seen via any references to the euro??™s strength, dollar weakness.
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