Green Shoots: a sentiment shift toward currency strength again
A number of weeks ago I wrote a post entitled, “An Imbalance Developing in GBP/USD.” We were waiting for the sentiment shift to come and it has arrived. I’m not saying that the Pound will definitely be higher some time from now as in some “the trend is your friend” context, but rather our bias for trades should be long due to this sentiment shift. Last month the Fed for the first time acknowledged that they are confident about an economic recovery occuring. This is what they said in March:
Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract.
This is what they said at the latest FOMC meeting:
Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower.
For those of you new to central bank parlance, this means the Fed expects a turn around. The market had been pricing this in beforehand as a result of signs of slowing deterioration in economic data, however, there is no evidence that this view has been fully priced in yet. This supports a positive bias for currencies against the dollar along with the Gestalt Shift of a perception for an economic turn around. The logic behind this is that money flowed in to US treasuries and other assets after the violent asset deleveraging last year with the idea that US assets are safe and the US Fed was most proactive in flooding the markets with money, thus giving the US the best chance to recover first. However, as risk appetite improves due to this gestalt shift of a perceived economic turnaround, investors are becoming more choosy and putting their money in countries with better yielding assets and taking it out of a country where inflation could put the deficit in an even worse condition. That said, the UK is not that much better, but they were also proactive and were over punished due to the carry trade unwinding of last year. Some other clues supporting this view are falling Tbond prices and Eurodollar interest rate futures showing some weakening.
The Euro would also be a good candidate for a long bias because it’s viewed as second in line as a world reserve currency but I would not recommend putting a lot on a long EUR/USD position just because the economy is still trying to recover and would be really sensitive to Euro strength as it is an export economy.
As always, don’t take this as investment advice, but rather as strategies to think better about approaching markets.
One Response “Green Shoots: a sentiment shift toward currency strength again”
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