Chasing Risk Is Still The Big Game In Town. By Nicholas Hastings
Chasing risk is once again the name of the game.
But, this time around, the rules may have changed.
As the global economy continues to recover even more slowly than anticipated, major currencies are likely to remain in narrow trading ranges while the focus of most investors shifts to the more attractive yields offered by emerging-market and commodity currencies instead.
At least four events this week appear to have cemented the outlook.
The most important was the U.S. Federal Reserve's tacit admission that the U.S. recovery simply isn't as strong as it had hoped.
Instead of providing fresh bullish signals that the central bank can exit from its ultra-easy monetary policy, the FOMC repeated its warning that rates will remain low for an "extended period."
On a similar note, the Bank of Japan confirmed it has little faith in Japan's economic recovery, with its decision to increase its quantitative easing once again.
The chances of any near-term hike in euro-zone interest rates is just as unlikely. Although a rescue package for Greece and S&P taking the country off negative watch may have improved sentiment, there is little sign that euro-zone growth will now pick up fast enough to allow an early move by the European Central Bank.
On the contrary, Germany's rejection of calls to stimulate its economy even more means that the risk of a double-dip recession is on the rise. Signs of slippage were already clear in the latest German business sentiment survey from ZEW this week.
For risk seekers, there was a fourth bit of good news--China's point blank refusal to unpeg its currency from the dollar.
Although this is likely to increase tensions between Beijing in Washington as the U.S. moves closer to naming China as a currency manipulator, the fixed peg for the yuan will mean more outflows into foreign markets.
"The longer China keeps its exchange rate undervalued, the more capital will be pumped into Western markets, keeping risky markets including equity markets supported," said Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London.
The benefits from these flows and the continued easy monetary outlook were already evident in stocks, with the Standard & Poor's 500 breaking to a new high for the year and the FTSE-100 looking set to head for another new high for 2010.
But, while this improved sentiment may well mean more investor interest in the higher yielding, more risky currencies of emerging markets and commodity-producing countries, the outlook for major currencies is much less clear.
Where once a greater appetite for risk may have pushed the euro higher, and the dollar and the yen lower, there is probably little momentum to do the same now.
While concerns about other indebted euro-zone countries weigh on the euro, the dollar probably still attracts support as the first major economy strong enough to eventually hike rates later this year.
And, as recent past performance proves, the yen often remains immune to other factors, especially if Japanese investors are repatriating funds before the end of their financial year.
How long this new risk game lasts of course is questionable.
Strategists at Barclays Capital suggest that its life will be pretty limited given that the end of the asset purchase program by the Fed at the end of this month and the likely start of rate-hiking cycles by Asian central banks could well bring the markets up sharp.
Thus, instead of trading under the influence of extended risk-driven trends, currencies will return to the choppy conditions that have frequently prevailed in recent months.
Early Thursday in Europe, news that Greece is still thinking of seeking help from the International Monetary Fund knocked the euro sharply lower. By 0745 GMT, it was down at $1.3661 from $1.3775 late Wednesday in New York, according to EBS.
See the euro's fall:
Click Image to Enlarge
The euro was also down at Y123.16 from Y124.21, while the dollar slipped back to Y90.13 from Y90.24.
But, this time around, the rules may have changed.
As the global economy continues to recover even more slowly than anticipated, major currencies are likely to remain in narrow trading ranges while the focus of most investors shifts to the more attractive yields offered by emerging-market and commodity currencies instead.
At least four events this week appear to have cemented the outlook.
The most important was the U.S. Federal Reserve's tacit admission that the U.S. recovery simply isn't as strong as it had hoped.
Instead of providing fresh bullish signals that the central bank can exit from its ultra-easy monetary policy, the FOMC repeated its warning that rates will remain low for an "extended period."
On a similar note, the Bank of Japan confirmed it has little faith in Japan's economic recovery, with its decision to increase its quantitative easing once again.
The chances of any near-term hike in euro-zone interest rates is just as unlikely. Although a rescue package for Greece and S&P taking the country off negative watch may have improved sentiment, there is little sign that euro-zone growth will now pick up fast enough to allow an early move by the European Central Bank.
On the contrary, Germany's rejection of calls to stimulate its economy even more means that the risk of a double-dip recession is on the rise. Signs of slippage were already clear in the latest German business sentiment survey from ZEW this week.
For risk seekers, there was a fourth bit of good news--China's point blank refusal to unpeg its currency from the dollar.
Although this is likely to increase tensions between Beijing in Washington as the U.S. moves closer to naming China as a currency manipulator, the fixed peg for the yuan will mean more outflows into foreign markets.
"The longer China keeps its exchange rate undervalued, the more capital will be pumped into Western markets, keeping risky markets including equity markets supported," said Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London.
The benefits from these flows and the continued easy monetary outlook were already evident in stocks, with the Standard & Poor's 500 breaking to a new high for the year and the FTSE-100 looking set to head for another new high for 2010.
But, while this improved sentiment may well mean more investor interest in the higher yielding, more risky currencies of emerging markets and commodity-producing countries, the outlook for major currencies is much less clear.
Where once a greater appetite for risk may have pushed the euro higher, and the dollar and the yen lower, there is probably little momentum to do the same now.
While concerns about other indebted euro-zone countries weigh on the euro, the dollar probably still attracts support as the first major economy strong enough to eventually hike rates later this year.
And, as recent past performance proves, the yen often remains immune to other factors, especially if Japanese investors are repatriating funds before the end of their financial year.
How long this new risk game lasts of course is questionable.
Strategists at Barclays Capital suggest that its life will be pretty limited given that the end of the asset purchase program by the Fed at the end of this month and the likely start of rate-hiking cycles by Asian central banks could well bring the markets up sharp.
Thus, instead of trading under the influence of extended risk-driven trends, currencies will return to the choppy conditions that have frequently prevailed in recent months.
Early Thursday in Europe, news that Greece is still thinking of seeking help from the International Monetary Fund knocked the euro sharply lower. By 0745 GMT, it was down at $1.3661 from $1.3775 late Wednesday in New York, according to EBS.
See the euro's fall:
Click Image to Enlarge
The euro was also down at Y123.16 from Y124.21, while the dollar slipped back to Y90.13 from Y90.24.
- 18 March |
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