Last week, Bloomberg television aired a piece about how the lack of volatility in FX markets has reduced the number of functioning FX hedge funds from 145 in 2008 to 49 today (according to their source BarclayHedge). I ask myself, is it any wonder there is low volatility in FX markets when inflation is relatively benign in most of the G10 currencies, and when interest rates- which tend to follow the lead of the US- are now more or less set to stay on-hold across the G10 currencies too!? Add to this, jobs reports that bar one or two instances have had little impact on the market, and you can see why currencies are displaying ranging characteristics. But surely then, there must be some funds that are of the mean-reversion type? They can’t all be trend followers or arbitragers. And even the Global Macro funds must look at variables other than growth, inflation, interest rates and jobs. I feel that there is plenty of opportunity to make money in currencies.
The Australian dollar has gathered a little steam against the New Zealand dollar and the Canadian dollar over the last couple of weeks. I love watching this trio of currencies and admit to being an Aussie bull amongst the three. My reasoning is that whilst the three economies have more or less the same interest rates (AUD 1.5%, CAD 1.75%, NZD 1.75%), are all considered “commodity currencies” and all have significant appeal for Asian investors in their respective property markets, the Australian dollar has greater synergies with China. It has been bolstered in recent days by improving optimism that trade tensions between China and the US will be resolved, and maybe more so because of an uptick in 1st quarter China GDP to 6.4% Y/Y despite the trade dispute and tariffs imposed by the US. A strong China is associated with a strong Australia, which is a large exporter to China. Hence, why I favor the Aussie!
If Gold can be considered a proxy currency, then I am unsurprised that it has fallen in value as a consequence of the current bullish phase in US equity markets. US equity indices have risen about 16% so far this year. Should we follow the advice of that old adage “Sell in May and go away” or is there more juice to squeeze out of inflated stocks? It would appear the Consumer Confidence is a big reason for flourishing stocks. I am trying to find a reason that would provoke less sanguinity in US investors. US President Trump has played his part with his friendly taxation policies and by beating up the US Federal Reserve into to pausing with interest rate hikes, both which have been very good for the US consumer. Has Mr. Trump got any more tricks in his bag? I rather doubt it. I feel the last few months of his Presidency are going to be a rather unhappy period for him.
All which leads to my view that I feel we may be in for a period of mean reversion. That is, contrary to the prevailing trend in stocks, I favor some downside, and feel that gold may test the 1300oz handle again soon. Pick the ranges in the G10 currency pairs and their crosses and you may have some mean reversion tendencies there too. Bar some geo-political shock, I don’t see any economic events that will stir up volatility in Currency markets, but having said that, there’s nothing wrong buying volatility protection in preparation for a storm.
Keep an eye out this week for interest rate announcements in Japan (expected unchanged at -0.1%) and Canada (expected unchanged at 1.75%) and also US 1st quarter GDP expected at 2.2% Y/Y.
Good luck and good trading! Ben Robson
Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Forex And How You can Too.