EURUSD: Eye on the Wrong Ball
In Economics on Tue 26 Jul 2011 at 21:10
- I’ve been caught watching EURUSD in isolation, which misrepresents the weakness of both currencies, particularly USD.
- Unwind of the FX carry trade is relentlessly bidding up JPY, as investors unload EUR denominated assets.
- Time to revisit Gold & Silver.
- British austerity has been declared a losing battle by the mainstream, but austerity isn’t a short-term remedy, and GBP is showing relative strength–an early harbinger.
- Evaluating GBP fixed income opportunities and even a BP stake in coming weeks.
I have to admit, I caught myself watching EURUSD FX spot rates in isolation. I had a client call and ask why the Euro was still so high against the Dollar, and the conversation reminded me to check in on my FX crosses. Of course I’m aware of the weakness in developed nations’ fiat, but I really started to misinterpret EURUSD as indicative of a stronger Euro than there really is. I’ve since stepped back from the spot rates to look at the Euro & USD against some other peers. I’ve found some good opportunities in doing such.
First, I turn to some other FX crosses to really appraise the strength of the Euro:
The flows in risk-on v. risk-off days have shown a discernible carry trade: in risk-on environments, borrow JPY (near zero interest) then buy EUR denominated bonds. You can see this manifest in the leaps and bounds of EURJPY chart above or in an overlay of Italian 5-year yields v. EURJPY:
…but unlike EMU members (PIIGS), Britain controls her own currency, her own monetary policy, and her own political will. With inflation near 5% and annualized growth near 0.2%, the Brits are hurting–no doubt. Yet, look at their currency, the Pound Sterling (GBP), which is starting to show relative strength in unison with the deleveraging:
Inflation is curable, since the Bank of England still has rates pinned at 0.50%, dating back to 1q2009. I do not want to misrepresent the UK economy as anything but delicate, especially since the politicos threaten a relapse back to Quantitative Easing. I’m evaluating fixed income opportunities in GBP denominations though. I’m also watching BP, which closed -2.56% on bad EPS today. I expect to take a BP (LSE) equity stake within the coming weeks.