Forex Investment and Currency Trading

The Libor rate drop to 4.06% off 36 bps, the continued surprise rate cuts from central bankers (see India 1% easing); the continued injection of capital (see ING Dutch 10 bn EUR action, Korean action $100 bn, HKMA actions) – all this is evidence of action and response returning to markets. Call it the autumn thaw in the credit freeze. Against that we have China’s disappointing growth 9% - which couples with less inflation – allows for PBOC action to stimulate growth. We also have OPEC pushing for a more aggressive output cut to keep oil over $70 bbl. Finally, we have Hungary contemplating a rate hike and following IMF advice – tightening its fiscal budget. All this is not a surprise so markets have opened bid for equities, FX reflects the relative calm by selling G20 volatility, and we move to the next set of concerns. Those concerns are about the real economy – which many see has the worst since 1982. The speeches from FED officials today – led by Bernanke – will be important in the tone they set for another rate cut by month’s end. The equity market gets one day of light earnings and then the rest of the week over 1/3 of the S&P500 will announce – something that will lead the market forward in its view of how bad are things really. For economists we don’t get any big data releases – which may be a good thing for those beaten down by the bears. For FX players today is about relative values – and that grey zone between silly and panic which hit EUR/SEK at 10, AUD at .63 and CAD at 1.20. The EM world may have the majority of these plays – with BRL and MXN on the front line of risk aversion trades. So many are jumping on the push to add risk – but that belies the tragedy of the month so far and the best we should expect is a market that clings to some value framework.

Huge FX Moves over the Last Two Months
The last two months have seen some of the biggest moves in currencies over the last 20-years. For example, MXN, AUD, BRL and KRW have depreciated more than 20% versus the Dollar since early September. We have argued that currency moves observed over the last 2 months can be seen as a
combination of two main forces: First, they are a function of a weakening global growth outlook, to which currencies are more or less exposed. Second, the moves are a function of the global deleveraging process, which is hurting countries with large external liabilities, especially where those liabilities are predominantly dollar denominated.

Between the liquid EM and G10 currencies, the six cheapest are: ZAR, CLP, NOK, AUD, MYR and MXN. Most of these currencies have a strong commodity link which means that the fair value is likely to be highly dependent on commodity price dynamics going forward. At the other end of the spectrum (expensive) are: TRY, PLN, CZK, JPY, EUR, CHF.