Bourdeau: Camping Out in FX
Investors I speak with fall into three camps: those who dislike the USD, those who dislike the EUR, and those who dislike both.
Perhaps one currency is not worse than the other -- but one is worse than the other at certain times, according to the price action.
Like watching a tennis match, investors switch their EUR sights between the hawkish European Central Bank and the Eurozone sovereign debt crisis. They switch their USD sights between weak US data/debt ceiling concerns and USD safe haven status. This back and forth largely explains price movements such as: EURUSD dropping 10 big figures from 1.4940 on May 4th to 1.3970 on May 23rd (drivers: less hawkish ECB/Greece worries) and the 7 big figure move back up in EURUSD to 1.4700 on June 7 (drivers: weak US data/dovish Bernanke).
A hawk and a dove: Speaking at the ECB press conference June 9, ECB President Trichet was a marked contrast to the recently dovish Ben Bernanke. Trichet used the words “strong vigilance” signaling a rate hike at the July policy meeting. Shortly after he said those words, however, EUR sold off. This was likely a case of buy the rumor, sell the fact – meaning the market had already priced in Trichet’s hawkish code. Additionally, markets have been hit with about of risk aversion. EURUSD is positively correlated with risk seeking, so it made sense to see EURUSD correct lower in part playing catch-up withS&P500 move lower in early June.
Avoiding the “Big Two”: To some extent whether you are in the anti- EUR or anti-USD camp determines if you are a seller of EURUSD on rallies or a buyer of EURUSD on the dips. Of course there is another camp that dislikes both currencies and does not want to be long either the USD or the EUR. Investors in this camp, during risk averse times, tend be long safe haven currencies– JPY and CHF -- against the USD and/or EUR. In risk seeking times, those looking to avoid going long either the USD or EUR (the “big two”)tend to be long commodity currencies (AUD, NZD, CAD) and short the USD, since EUR has tended to rise recently during times of risk seeking.
Game changers: It is important to track which theme the market is trading on and what upcoming events could bring about a switch. Next week’s China data could drive market sentiment. Ahead, also watch the headlines and debate from European officials into the June 20 EcoFin/Eurogroup meetings and the EU Leaders Summit on June 24 to gain insight into the second Greece bailout package. EUR could be in for a bumpy ride up until the Greece package is actually announced. June 22 is the next FOMC meeting and Fed Chairman Bernanke press conference. Bernanke is unlikely to change his dovish stance between now and then. Attention will then turn to US June payroll report – a key USD driver -- and the July 7 ECB meeting. Never a dull moment in global FX.
left/CNBC/Sections/News_And_Analysis/__Story_Inserts/graphics/__ICONS/icon_story_360_TV.gif1505000lefttruehttp://msnbcmedia.msn.comCNBC 360 TVfalse1PfalsefalsefalsefalseCNBC TVAmelia Bourdeau is director of foreign exchange at Westpac Institutional Bank and a regular contributor to Money In Motion. Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm."Money in Motion Currency Trading" repeats on Saturdays at 7pm.