However, irrespective of whether you think the whole euro experiment is doomed to failure or believe that the single currency will survive the latest crisis intact, for the time being the euro-dollar is damaged goods. The result of imposing austerity budgets on southern Europe and the cost of a possible bailout for those economies are likely to slow Eurozone growth going forward, leaving interest rates stationary for the foreseeable future. Such a scenario makes the euro much less attractive to risk capital in 2010. In short, the risk trade of 2009 – when euro-dollar rallied along with global equities – will no longer work in 2010.
So where is the risk trade of 2010? It’s in Australia – the one place in the G20 that continues to register upside economic surprises. Last week Australia reported blow-out employment numbers with more than 50,000 new jobs created against expectations of only 15,000. Over the past four months, the country has generated more than 200,000 new jobs. To put that in perspective, the US labour force would have had to expand by 3m jobs over the same period of time in order to match that accomplishment.
Although the latest tightening moves by Chinese monetary authorities have raised concerns over the sustainability of the Australian economic expansion, we continue to believe that the chances are very good that the Reserve Bank of Australia (RBA) will raise rates to 4 per cent at their upcoming meeting next month.
With a yield advantage of 300 basis points over the euro, and 375 basis points over the greenback, the Aussie will be the predominant carry trade in the currency market this year. If equities rally, risk capital will likely flow down under.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary on currencies at www.GFTUK.com/commentary or e-mail them at firstname.lastname@example.org.