Making money in foreign exchange business in 2014

What will be the catalyst for winner currency ideas in 2014? As always, the nuances of central bank policy, relative economic growth rates, interest rate spreads, risk/volatility metrics, hedge fund positioning, OTC options strikes and chart points.

Published: Mon 6 Jan 2014, 10:56 AM

Last updated: Fri 3 Apr 2015, 5:08 PM

The best money making idea of 2013 was unquestionably long/dollar yen, an idea I had published in successive columns in autumn 2012, even before the Japanese election when the yen was in the 76-78 range. The Japanese yen has sunk to 105 now.

Accelerating US economic growth, the surge in US shale oil/gas production and renewed capital flows into Wall Street mean broad based US dollar strength, similar to the second term Clinton superdollar of the late 1990’s. As US Treasury bond yields rise to at least 3.5 per cent, the ideal long dollar trade is against gold or funding risk emerging markets currencies such as the Turkish lira, Indian rupee, Brazilian real, Indonesian rupiah and South African rand.

What could derail the strong US dollar momentum? A monetary U-turn by the Yellen Fed if economic data weakens or the Obama White House intervenes to soften the bloodbath in the bond market. The Chinese Politburo could also decide to reduce reserve accumulation in US debt markets as Third Plenum capital markets reforms are enacted.

Despite Mario Draghi’s tough talk, the ECB cannot tilt to a hawkish monetary policy even as dozens of major Old World banks face balance sheet risk on the eve of stress tests, the German Chancellor must sell banking union to a sceptical public and the Club Med countries still face Great Depression like unemployment rates. Europe is barely out of recession and I am shocked by the scale of long euro positions on the Chicago IMM currency futures markets revealed by the latest CFTC data. True, risk appetite and the shrinkage of the ECB balance sheet led to a stampede to go long euro to 1.38 since November. However, if Draghi signals another LTRO, the euro will plunge back to 1.30.

Sterling’s rally since cable’s July low at 1.48 was as swift as it has been impressive. However, near 1.66 cable, I think sterling is a crowded long, despite Osbonomics’ jolly boating weather metrics. Economic growth, PMI and High Street credit growth are all more than fully priced into the consensus trade in sterling. When the euro turns, cable will be collateral damage. I am a nervous bull on sterling now, as it is lunacy to defy market psychology/momentum in financial markets, I am alarmed by the scale of CFTC net longs on the Chicago IMM British pound futures contract. When cable turns, the complacent leveraged long gnomes of Leadenhall Street will hemorrhage cash. I expect cable to fall to the 1.56 – 1.58 range by the summer.

The Swissie is a proxy for euro/dollar since the SNB peg (or floor at 1.20) will not change even though Helvetica’s industrial/banking titans flirt with deflation. When the euro turns, the Swissie could depreciate to 0.096–0.98 against the dollar. This Swissie scenario will be welcomed by the SNB and the Bahnofstrasse banking elite.

I find the Norwegian kroner to be the most enigmatic currency in Europe, now that it has plummeted 10 per cent against both the US dollar and the euro. Yet the Norges Bank will hike interest rates well before either Dr Yellen or signore Draghi. I prefer to short the Nokkie against the euro once the monetary, technical and positioning duckies all line up for the kill. The new-centre right coalition in Oslo will use its vast offshore petrocurrency/fiscal surplus to cut wealth taxes to stimulate growth, a form of supply side Viking Reaganomics. This could be the catalyst for an epic money making rally in the Norwegian kroner. Not now. Stay neutral but stay tuned!

The Aussie was a hugely profitable short at the 1.04–1.06 levels I had recommended in successive columns in 2012-13. Below 0.89, the Aussie is a dangerous short. I would not be surprised it rallies on the short run to the 0.91-0.92 range on Chinese reform momentum, even though the RBA and mining capex suggest a lower Aussie.

I believe the Kiwi will be one of the world’s strongest performing non-dollar currencies, with the potential to rise to 0.86. Real GDP has risen three per cent, in New Zealand, consumer confidence is the highest since the Christchurch earthquake and RBNZ has said it will raise its 2.50 per cent benchmark policy rate to combat housing inflation. While the New Zealand central bank tightens policy, the RBA in Canberra could well cut rates, making Aussie/Kiwi a strategic short on any strength.