Last week’s recommended longs for emerging and commodity currencies in intra-day, guerilla trading before risk faded proved right on the money, even if cable and euro defied expectations and continued with the uptrend. Aussie led the commodity group, its 5.9 per cent rise to $1.0340 marking its biggest 5-day advance since Feb ’09. Norway’s krone rallied 4.6 per cent to 5.55627 per greenback and loonie (Canadian dollar) strengthened 2.7 per cent on renewed growth hopes in the US, pushing oil above $87 again. Asian currencies, too, recorded their second weekly gain, led by South Korea’s won as positive industrial production in Europe and improved American retail sales re-ignited risk appetite and spurred demand for higher yielding assets.
With Europe still at the centre of the currency market risk narrative, improved August data no doubt buoyed the single currency, but the main source of strength lay in the Merkel-Sarkozy commitment to deliver a “comprehensive package” for the sovereign debt crisis. Market chatter betrays expectations of ring-fencing Greece, recapitalising banks and expanding the stability fund. Yet my crystal ball findings dismiss hopes that these measures will be enough. I find it difficult to dispute its de javu verdict every time European leaders promise a lasting fix, each time some indicator diverges from a down-trend and registers a figure that may well prove circumstantial. Double dip to soft patch? Yes. Lasting fix? No!
There’s still much transpiring not far from Europe’s nerve centres that can knock the wind out of euro’s sails pretty quickly. Its impressive rise from 1.3379 to 1.3878 last week masks political fissures that will simmer sooner rather than later. One, the Slovak ESFS approval, though immaterial, broke the parliamentary coalition, exposing problems of containing minorities with power but little interest in the union’s present situation. Two, Montebourg’s strong showing in French socialists’ primary shows a discomforting rise in protectionist tendencies. It is ironic that France’s socialists would compromise the euro a decade after their lobbying influenced the German monetary behemoth and midwifed the single currency, especially when the hard-right is hell bent on preserving its exposed banking sector and safeguarding the currency. Three, Berlusconi’s parliamentary defeat on a technical budget execution vote exposes a deepening cleavage in an already fragile coalition, a potential game changer for Rome’s ability to enforce increasing, and unfair, austerity.
The market’s herd behaviour makes it difficult to factor in potential fundamental pot-holes that technical chartists cannot properly position for. Despite sentimental euphoria, Europe’s underlying problems remain unsolved. As realisation sinks in that bank risk can no longer be divorced from sovereign risk, and even the most ambitious ESFS expansion can not halt a potential domino effect in a worst case bank-run, the risk pendulum will quickly oscillate back towards aversion, rubbishing the euro, dampening oil and commodity currencies, resurrecting the dollar’s safe-haven and retarding emerging markets. So, even as breaching 1.40 resistance analyses gather momentum, don’t be surprised if the euro takes another nose-dive in the near term.
Should the G20 aftermath present opportunity for safe-haven trading, do not head for the yen. Even as it fluctuated to the downside with the “classic return of risk appetite” last week, the BoJ is clearly mindful of the optimism’s hollowness, posturing yet again for intervention. For now, the script is pretty much the same. Watch risk like a hawk. Keep long emerging and commodity currencies till the window lasts. So long at the US seems growing, oil will remain strong, and emerging markets will expect healthy export bills, and subsequently strengthening currencies. But Europe’s troubles will keep centre stage for the foreseeable future. It will most likely shut the risk window as soon as its political differences resurface.
