Forex Investment and Currency Trading

EUR wins ‘ugly contest’- easily

EUR/USD peaks after, not before, Fed Funds target rate has bottomed, so not yet. Cue a break through 1.60 as the Fed cuts to 1.50%, or less. Relative to the end January Quarterly, we are much less sure that ECB cuts soon and a bit surer that Bank of England cuts more. So EUR/GBP breaks and holds above 0.80 into the summer, much higher than previously forecast. If EUR/USD rises hard, Cable is static. If the dollar rallies, Cable falls, hard. Either way, Cable has peaked for this cycle, for sure.

Markets have given up pricing more Australian interest rate rises and are instead suddenly pricing H2 cuts. These feel like dangerous, even watershed, days for the AUD in a higher volatility world. Sell it. Yen longs still appeal on the other side. Unilateral Japan MOF intervention is a risk worth taking on: In real terms, the yen is way cheaper than the last time it dipped below 100 per dollar nominal.

For emerging markets with heavy external financing needs the world looks a steadily more perilous place. Romania and Hungary are outright sells. Turkey and South Africa are also vulnerable. In Latin America, Argentina and Mexico face problems. Regional commodity exporters fare better for now but be careful; China growth is slowing. Consensus 10% per annum CNY appreciation expectations are right for 2008 but could be very wrong for 2009. Next year could be much less.