Hooray! Happy days are here again if you are a currency investor.
So says George Saravelos, a currency strategist at Deutsche Bank.
Saravelos is a believer in the "Great Rotation," the theory that investors will be shifting en masse into equities from bonds as the dark days of the Great Recession recede into the past. And he says the Great Rotation is great for currencies.
"The start of the "Great Rotation" coincides with a cyclical trough in forex returns, suggesting we may be entering a cyclical 'bull' market for currency investors," he wrote in a note to clients.
So how, exactly, will this play out?
First up is the euro, Saravelos says. "EUR should outperform in the initial stages of the "rotation," he predicts. "Some crosses such as EUR/GBP have already recovered most of their pre-2010 losses. But the years of broad-based EUR weakness are over." Based on the euro's recent performance, Saravelos seems to be spot on with this point.
A second implication for currency markets relates to the risk on-risk off trade, which has been a long-term dominant theme in the currency markets. "Lower global tail risk means that both policy changes and investor flows become more responsive to individual country conditions," Saravelos says.
The bottom line: do your homework about different countries and currencies and it should really pay off.
