Is it time to go long all currencies?

The NASDAQ broke its three-day rout with a 0.9% rise as Google, Facebook and eBay added 2%. 

The S&P and the Dow also broke its four-day downtrend, which will see support for the broader market, particularly the information technology space. However, this does not mean that after this slight pull back the tech space would make the sector fundamentally cheap; it is likely that the market direction in these stocks over the coming week will be downward as they return to fair value.

What was interesting overnight was the USD weakness. The dollar index lost 0.6% but it was the movements against the EUR, JPY, GBP, AUD, BRL and CAD that are really interesting. Why this is interesting is that going long in each of these cases including the USD is compelling.

So, the question therefore becomes which side of the pair should we be going long and which short?

Base start is the long call for the USD; the fundamentals on a medium-term view are purely central bank differentials; the Fed is unwinding its asset purchase program and the Fed funds rate will rise in the next 18 months. US confidence is increasing as is business conditions, and the US recovery story will see demand for US investment vehicles. This will see the carry trade being unwound and a large repatriation of USDs. The demand for USDs over the coming investment cycle is clear; however what does that mean against peers with fundamentals in their favour?

The EUR, despite the deflationary risk in the periphery and the prospect of some form of QE, it is seeing support for the following reasons. Private lenders are paying off LTROs well ahead of time, making European QE a tough sell. Northern countries are seeing growth in manufacturing and services; indices such as the DAX are at, or, touching record highs, and the carry trade into high-yielding European bond markets is highly appealing. Italy and Spain have seen bond yields at levels not seen since 2005 in some cases. With highly attractive prices, a case can be made that investment returns in the eurozone make the EUR a long call, as the ECB looks unlikely to push the currency lower in the interim.

The same can be said for the BRL, a risk currency which is seeing support from a bounce in commodities such as aluminium, nickel and iron ore. Risk yield is highly attractive from Brazilian bonds and US investors will see the carry trade again as an attractive play into the BRIC country. Investment returns again look to be a clear case for the BRL.

The AUD has a central bank that is unlikely to move rates lower in the foreseeable future; if anything it will move them higher. It sees green shoots in the economy and fixed asset investment is rocketing higher, and real yields in the AAA-rated country are too hard to ignore from a foreign investment perspective. Despite the slack in the mining space and exporters feeling the pinch of a high currency, an equally attractive case can be made currently for AUD investment. 

Ahead of the Asian Open

The last currency to look at is the JPY. Yesterday’s trade balance was indifferent; the BoJ left nothing to the imagination, the spectrum of inputs to stimulus reasoning broadened (looking at possible inclusion of employment) and  has its timeline extended from two years to ‘medium term’. None of this is going to see the JPY weakening on the scale seen. What is does mean is that on the open of the Japanese market this morning watch for the Nikkei to take a solid hit as it has the highest correlation to its currency at 73% - and this relation is inverted.   

We are currently calling the ASX up 22 points on the 10am bell (AEST) to 5432, as the Shanghai Composite shows strength as does the iron ore price.

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