If you're not bracing for a fall off the "fiscal cliff" right now, you're in a distinct minority. The recent tussles and name calling in Washington makes middle school playgrounds look tame, even with the looming prospect of massive tax hikes and spending cuts. Mere word that House Speaker John Boehner is headed to a meeting with President Obama helped stocks reverse course today.
Still, one way or another, the fiscal cliff will someday be history, and the currency strategists at Barclays Capital are getting ready.
They believe risk appetite will rebound once the fiscal cliff is behind us, and they expect several risk-sensitive currencies to reap outsize benefits.
Which ones in particular? They like the Mexican peso, the Indian rupee, and the South African rand. "We expect the MXN, INR and ZAR to be the best expressions of the better environment that we see beyond the cliff," they wrote in a note to clients. These currencies are currently cheap by several measures, they say, and they tend to have a high-beta response to shifts in risk sentiment.
At the same time, the BarCap strategists are very bearish on the yen. With stimulus-minded politicians likely to win the upcoming election, they expect to see more action from the Bank of Japan. And if policymakers start targeting a higher inflation rate, well, watch out: "we think these changes will have a profound, depreciatory one-off impact on the JPY of over 10% from 78 to 88 over six months," they say.
The short version: if you don't mind some illiquidity and risk, consider buying the peso, rupee, or rand against the yen. Good luck out there.
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