Well, we are in the final day of trade for 2010 and things have certainly been quite exciting on the price action front, to set the stage for a very interesting 2011. At present, Eur/Usd and Gbp/Usd are of less interest, with the two majors consolidating recent moves ahead of the New Year. Usd/Chf and Usd/Jpy are however much more compelling markets to look at, with both the Franc and Yen outperforming. The Swiss Franc has been the major star here, with the single currency breaking to fresh record highs against a number of currencies and showing no signs of let up just yet. Meanwhile, we must not forget about the Australian Dollar, which trades by post-float record highs and also shows no signs of let up just yet. Other major currencies worth mention are the cousins on the commodity bloc which include Kiwi and Cad. These have also been relatively well bid over the past several months.
The resulting price action has actually set up what could be for us as contrarians, the potential for a very strong year in 2011 as we look to fade these moves which appear to be by cycle extremes. The currency pairs and crosses that we would focus on include the following; Usd/Chf (long), Eur/Chf (long), Gbp/Chf (long), Aud/Usd (short), Eur/Aud (long), Gbp/Aud (long), Aud/Cad (short), Gbp/Nzd (long), Usd/Jpy (long), Eur/Jpy (long), and Gbp/Jpy (long).
Certainly at this point, there are no clear technical or fundamental justifications for counter-trend moves in the markets, but at the same time, we need to remind ourselves that it is usually very true that when there are no signs of a reversal and everyone has given up, it is these times when we do indeed see such reversals play out. I believe that we are the verge of seeing some form of a major catalyst which could ultimately open the door for this anticipated reversal. Markets have a tendency to push in lightened end of year trade, and this is precisely what we are seeing here with many of these markets which continue to drive to fresh record and multi-year levels. It is actually quite common to see these moves retraced when liquidity returns into the second week of January and we will be looking for these retracements and more over the coming weeks.
While we are big fans of short Aussie and commodity currencies across the board into 2011, there is the inherent built in negative carry risk associated with these trades that makes holding such positions less attractive. We believe that any negative carry risk is well worth taking given what we project to be a major commodity bloc sell-off, however, should you be nervous about such risk, shorting the Swiss Franc and Yen may prove to be more appealing. The establishment of short Swiss Franc or Yen positions will afford the luxury of fading markets at record and multi-year highs without having to pay for holding these positions on a daily basis. In fact, traders can find comfort in being paid (albeit marginally) to hold short Yen and Swiss Franc positions.
Moving on, as we look to the year ahead, here are some major themes that need close watching. 1) Ongoing pressures in the EU peripherals and how these countries (and the Eurozone in general) respond to what has been a nightmare situation. 2) China economic data and monetary policy, which looks to be entering an aggressive tightening phase in an attempt to curb inflationary threats. This ultimately could slow global growth with many countries heavily dependent on China’s demand (commodity bloc most significantly exposed; Australia the most). 3) Fed monetary policy and direction over coming months. The addition of some notable hawks to the FOMC could change the dynamic of what is now a much more accommodative central bank. A focus more on inflation and less on the short-term problems could actually benefit the USD as pressures mount to start to reverse monetary policy. Any signs of continued recovery in the US economy will also help to accelerate this transition. 4) The UK economic recovery will also be in focus with the health of the economy still very much in question. 5) RBA monetary policy will also be a key issue, with monetary policy from the highest yielding economy starting to become less aggressive, which ultimately could narrow yield differentials considerably back in favor of other economies. 6) Ongoing developments in the emerging market economies and any signs of a more accelerated slowdown. 7) Overall performance in the global and US equity markets. 8) Overall performance and demand for commodities, with gold prices of particular importance.
As a side note, UK Nationwide house prices have come out much better than expected on Friday, and could be helping to prop the Pound a bit. Meanwhile, all will be focused on the first major release of the 2011 economic calendar in the form of China manufacturing PMI due out tomorrow. The calendar for the rest of the day is otherwise empty and we would once again like to take the opportunity to wish each and every one of you a very happy, healthy and prosperous New Year. I am so grateful for all of the support and look forward to working hard for you all in 2011.
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