Forex Investment and Currency Trading

We are back to the medium-term trend in place since July where global recession risk, repatriation and negative surprises outside the US are the dominant themes in global FX markets. Thursday’s German Q3 GDP showed that the Eurozone’s biggest economy has now entered a technical recession. (Two quarters of negative growth). This may be followed up by UK and Japanese data in coming weeks which could show that these economies are also in recessions. How far can this process of de-leveraging continue? Data such as US bank credit as a percentage of GDP suggests that the de-leveraging potential is significant. US and Japanese investors have been the biggest diversifiers in the world and they are now taking money home as economic expectations outside the US and Japan are faltering. Therefore the USD and the Japanese yen (JPY) are likely to remain the strongest currencies in the world near-term whereas pressure will remain on emerging market currencies. This could remain the case until such time as global economic expectations bottom out and the global credit crisis and thereby global de-leveraging is through the worst. One key question is when foreign investors will start to come back to emerging markets in general and Asia ex-Japan (AXJ) markets in general. Some observers have the view that this could happen from the beginning of 2009. But this may be too soon. In the emerging market bull run from 2003-2007 the world was awash with cash as massive interest rate cuts by the Fed in 2001-2002 pumped liquidity into the global financial system and Asian central banks were willing to finance the expanding US twin deficits. However, this was an “unholy trinity” which eventually had to break up. Now the world is left with a global financial system which is clearly not functioning properly and where the US consumers have to spend less and save more. In terms of Asia ex-Japan (AXJ) currencies, bias remains long USD-AXJ. The view is that currencies such as the Korean won (KRW), the Indian rupee (INR), the Indonesian rupiah (IDR) and the Philippine peso (PHP) which have been hit the hardest by the global credit crisis and de-leveraging may also recover before ‘small open economy currencies’ such as the Taiwan dollar (TWD), Singapore dollar (SGD) and the Thai baht (THB) which have just started to weaken. This should again offer relative value opportunities in Asia. However, at this time when market panic is back it is all the same trade and hence the pressure on AXJ currencies will remain across the board. Hence, rather look for opportunities to buy the USD against AXJ currencies.