aussie and swissie are good hedges

DIRECTOR OF CURRENCY RESEARCH, GFT

AS WE approach the end of the year in the currency markets, perhaps the only thing traders are certain of is that we are facing a period of great uncertainty. Although the global economy appears to have dodged the second Great Depression, markets continue to be concerned about the possibility of a double-dip recession, especially in the UK and the US where the recovery has been lacklustre at best and consumers remained hobbled by depressed asset values and listless labour markets.


In contrast to the troubled Anglo-Saxon economies of the West, the Asia-Pacific region continues to boom. So much so, that the Reserve Bank of Australia (RBA) governor Glenn Stevens surprised the market this week by making a decidedly hawkish speech in which he stated that Australia is experiencing “the largest minerals and energy boom since the late 19th century," noting that controlling this boom will “fall to monetary policy”.

Meanwhile in Europe, concerns about the solvency of the periphery economies in the region continue to plague euro-dollar. Last week rumours of a possible IMF rescue of Ireland roiled the credit markets and sent the single currency tumbling despite denials from all officials involved.

So what’s a trader to do amid this confusion where each G20 economy appears to follow its own path? One possibility is to not guess the near-term direction of the market and instead to put on a “risk straddle” trade by getting long both the Australian dollar and the Swiss franc. If the global economy does indeed pick up as the year comes to a close, the Aussie will be the prime beneficiary of this trend, especially if the RBA continues to raise short term rates.

On the other hand if risk aversion returns with a vengeance, the Swissie which is the closest thing in the currency market to sound money should appreciate more as investors turn sour on the balance sheet risk of both US and Europe. I will discuss this idea in more detail at my seminar with Allister Heath this Thursday at the Grange Hotel from 8am to 10am. Hope to see you there.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.