Credit, equity and FX markets extend gains on recovery hopes
Global markets continue to extend gains, supported by rising corporate earnings and better economic data, notably out of Asia. Investors have finally reached a consensus that the worst is over and are looking to better times ahead. Granted, there remain voices calling for a ‘correction’ or a ‘pullback’ – and so long as such voices remain markets will likely continue to rally. Indeed, it is when such voices have been stilled that we should worry. For now at least, the fundamental grounds for this rebound in risk appetite remain solid. From a market perspective, this rebound in economic expectations has been reflected most visibly by the rallies in credit, equity and commodity markets. However, the FX market has also seen a clear reaction through broad USD weakness and sharp gains in so-called ‘higher-beta’ currencies. Since the start of the year, the top five currencies against the US dollar (USD) have been: BRL +27.44%, AUD +22.01%, ZAR +19.56%, CLP +18.52% and the NZD +16.77%. Commodity currencies have been particularly in vogue, supported by very strong gains in their underlying fundamentals.
However, there have been and remain opportunities in regional crosses. In particular, Asia has seen an increased focus in cross trades. Granted, trade costs and the question of deliverability have limited flows in these crosses to some extent – many Asia ex-Japan (AXJ) currencies are not fully deliverable and therefore have to be executed offshore on a non-deliverable forward (NDF) basis, increasing trading costs relative to fully-deliverable spot rates. Nevertheless, there have been opportunities.
One of the key themes this year has been to favour the AXJ ‘domestic-demand’ currencies such as the Indonesian rupiah (IDR), Indian rupee (INR) and the South Korean won (KRW) relative to the ‘external demand’ currencies such as the Singapore dollar (SGD), Malaysian ringgit (MYR), Thai baht (THB) and Taiwanese dollar (TWD). This theme has worked well since the end of Q1 and should continue to do so as we head into year-end. For instance, since the end of Q1, the IDR and KRW have appreciated by +10.38% and +6.90% against the SGD. With exports/GDP at around 190%, Singapore remains an externally-driven economy and has taken a fearsome hit from the global recession. As such, it will not be until 2010 that the SGD starts to catch up with appreciation elsewhere in the region.
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