FYI | Apr 09 2010
By Greg Peel
While stuttering, momentum is clearly to the upside in the US at present. The first monthly jobs increase over 100,000 since November 2007 provided the positive impetus in March. This caps a period in which inventory restocking has been distorting apparent GDP growth, pent up demand from frustrated consumers has shown up in positive sales numbers, and the final cries of government emergency stimulus have been heard.
ANZ's strategists believe it's been a bit of a honeymoon and that reality is about to bite. There is good reason for the Fed continuing to stick with its near zero interest rate policy – underneath the numbers the US economic recovery is little better than sluggish. Household debt burdens are still weighing and the labour market remains weak which ever way you look at it.
ANZ has thus “taken profits” on its recommended strategic trading positions. The intention now is to “wait out the anticipated market tempest in a safe port and to re-enter at better levels”.
A more imminent problem as far as ANZ is concerned is that the “tidal wave” of foreign equity investment into Emerging Asia is likely now cresting and the impact will be felt on Asian (ex Japan) currencies. Then throw in the seasonal mantra of “sell in May and go away”. It might have been a trap last year, but will weigh on the market this year.
The Chinese renminbi is clearly the swing factor, and the risk to ANZ's Asian weakness thesis is a revaluation to a greater degree than the market expects. However, just as the Fed is committed to not raising its cash rate for a while (thus capping the US dollar) so too are the Chinese authorities intent on not revaluing the renminbi anytime soon. Aside from the issue of China not wishing to look like it's revaluing on US insistence, it does not want to scupper the quiet recovery of its export markets and risk a “W” recovery rather than a “V”.
But US and European export demand will recover, ANZ suggests, and that's when Asian currencies will pick up again. And the renminbi will be revalued by year end.
ANZ suggests the return to risk appetite from a year ago has only meant a recovery to neutral levels, thus any pullback provides a good strategic re-entry point for a recovery in momentum. So it's a case of sell, lie on a beach, and come back when valuations look attractive once more.
