FYI | Jun 25 2010
By Rudi Filapek-Vandyck
I readily admit it: I can be a naughty boy, sometimes. I should probably go to confession after my action this week.
Global provider of online trading services GFT this week rolled out one of its key analysts, director of currency research Kathy Lien, to provide investors in Australia with a timely update on what's happening in the world of global troubles and concerns.
Australian journalists were invited to gather together on Thursday, to enjoy a sandwich or two, and to listen to what Lien had to say about the sudden Rudd departure, the RSPT, European austerity packages and shifts in central banks' views and behaviour.
As soon became clear, Lien, educated at the Leonard Stern School of Business and in a previous career forex trader/analyst at JP Morgan Chase, is not sharing the current concerns about the global economic outlook that is gripping equity markets around the world.
Yes, economic growth in the US is probably going through a soft patch at the moment, but this is merely a temporary slowdown instead of a slide into double-dip territory. Says Lien. She predicts investors can bet their money there won't be even a hint of any forthcoming rate raises by the Federal Reserve this year. And European interest rate policy will be lagging the US.
Despite current market woes, the underlying trend for the global economy remains positive, in Lien's view, and the Chinese decision to return to a more flexible regime for the yuan is further proof of this. In fact, during the 15 minutes or so she was enthusiastically talking about the Chinese reintroduction of controlled currency flexibility, the term “game changer” was mentioned at least five times (I stopped counting after that).
Think “Chinese confidence”, otherwise Beijing would never had allowed this change. Think “increased spending power”, which should be good for commodities. Think “reduced need to buy US Treasuries”, even more reasons to not get too bullish on the US dollar.
As regular readers of my columns and market analyses know, I disagree fervently on the positive impact that allegedly should come from this limited and tightly controlled flexibility by the Chinese authorities. The reason? It's the same reason as to why I don't believe the sudden fall of Kevin Rudd and the subsequent rise of Julia Gillard implies a solid Buy recommendation for everything resources in the Australian share market.
The global economy is slowing down and financial markets are only now genuinely coming to grips with this prospect. The result is that corporate earnings estimates are falling across the globe, and forecasts for economic growth are so too.
I believe the prospect of this negative trend trumps everything else, and it will do so until we get more clarity as to how much “slower” we are talking about. Tant pies, like the French say, for everybody seeking a reason to buy on the basis of Chinese yuan appreciation or a watering down of Australia's RSPT proposal.
A negative trend in growth expectations means asset valuations won't be as cheap as they appear today – full stop.
And so it was, after a 15 minutes dissertation about how the Chinese re-introduction of yuan flexibility would “change the game”, that I used a brief pause to ask the following question:
If the Chinese decision is such a game changer, why hasn't it changed the game this week already?
Brief silence of about 2-3 seconds. Two Asian eyes, pupils widening, stare at me. All other eyes in the room stare at Lien, and wait.
Then comes the answer: Well, errm, other things were happening this week, other things that kept the market's focus elsewhere.
I agree. It wasn't really fair. That wasn't just naughty of me, that was plain evil.
To Lien's defence, she is a forex expert, and on her main territory she actually had some intelligent and plausible things to say. The Reserve Banks in Canada, New Zealand and Australia are likely to continue their path of tightening, and thus the currencies of these countries should remain supported against laggards such as the US and Europe.
This week's admission by the Federal Reserve that economic growth is likely to print lower figures in the months ahead compared with relatively robust looking numbers earlier in the year should bring the yen back in favour against the greenback.
And the fact that the Reserve Bank in New Zealand has only just started on its path of monetary tightening while the RBA is arguably already in an advanced stage of its own process in Australia probably means the Kiwi dollar will now gradually claw back some lost territory against the AUD.
Lien's personal target for AUD/USD is 0.90 and for EUR/USD it is “below 1.20”. When pressed about the relative modest nature of these targets, Lien responded by saying experts tend to put forward aggressive looking targets as that virtually ensures they will receive invitations to come over and explain on television.
There's no way in hell the euro will sink as low as 1.05 against the US dollar, she believes, and let's not mention future parity. European politicians will scream “murder” and “hang the speculators”. The European Central Bank will intervene.
Lien also has a clear message to all European politicians and journalists who cannot stop but repeating that euro-weakness is all about evil speculators doing their thing: large fund managers and central bankers are reviewing their euro-assets. Recent data show the world is reducing its exposure to an arguably higher risk and wobbly looking euro-zone. This -predictably- has put US assets (Treasuries) back in favour.
The euro still appears overvalued on various relative measurements; by between 2% and 10%, reports Lien.
Lien's target for the CNY/USD, by the way, is 6.65 in six months' time. The cross was at 6.79 earlier in the week.
As far as Australia is concerned, the RBA's next rate hike will happen in August (little to no doubt in Lien's conviction) and if inflation data unexpectedly come out much higher than expected, the RBA might even move more aggressively than simply another 25bp step.
All in all, the RBA should add between 50-75 basis points to the official cash rate over the next five months, in her view.
At which point she was reminded the RBA has a tradition of moving one interest rate hike too far, as it did in the last two previous tightening cycles.
