What are the 'choicest' currencies to home-in on in the volatile world of financial markets?
Internet broker FxPrimus’s market analyst Marshall Gittler proposes two ideas for those looking for guidance.
The first is the anticipate weakness for the Australian Dollar.
“AUD could weaken further: AUD has been the best-performing major currency so far this year. That suggests a lot of investors have profits to take,” says Gittler.
Weaker-than-expected Retail Sales data on Monday morning, which showed a -0.1% decline have also impacted on the outlook for growth, which could sway the Reserve Bank of Australia (RBA) to publishing a more pessimistic statement.
“Today’s worse-than-expected retail sales sets the stage for a dovish RBA meeting. While I don’t expect any major change in the statement, they could emphasize a) that inflation remains below target and b) the threat that a rising exchange rate poses to the recovery. That could cause further profit-taking on AUD,” continued Gittler.
In a preview of the RBA meeting, which is scheduled for Tuesday February 4 at 3.30 GMT, Gittler says that the odds of a policy cut are very low – not just for that month’s meeting, but for the whole year (18%).
The focus for analysts will be the wording of the RBA’s statement, therefore, and this, he thinks, could be more negative leading to a further devaluation in the Aussie.
“I would expect to see little change in the statement, resulting in little impetus to trading. If anything, the emphasis might be on the low level of inflation after the drop in December, and that could knock AUD somewhat,” remarks Gittler.
The economy is struggling apart from Trade which is quite strong.
“Mining investment is slowing, wage growth is at record lows and inflation is at the bottom of the RBA’s target band. Iron ore and coal prices rose late last year but have since stabilized. On the other hand, the trade surplus hit a record high.
"Nonetheless, looking at last month’s statement, not that much seems to have changed. (“Economic conditions in China have steadied… Further increases in exports of resources are expected…the outlook for business investment remains subdued… inflation remains quite low…” said the analyst.
It is interesting to note that this bearish view of the Aussie falls in line recent analysis from RBC Capital Markets who say there is a statistically significant probability that the Aussie will weaken in February and March, due to cyclical factors which affect all G10 commodity currencies.
“The most recent strength may also reflect a common phenomenon in the G10 commodity currencies – a tendency to overshoot in January," says a note from RBC Capital Markets.
“A simple strategy of positioning for a reversal of January’s direction in the remainder of Q1 is consistently profitable in these three currencies,” added RBC’s FX Strategist Adam Cole.
USD to Recover
FxPrimus’s Gittler’s second piece of advice is that the Dollar is likely to gain on Monday in a ‘mean reversion’ from the overdone loses of the previous Friday following the Non-Farm Jobs report (NFP).
“It often happens that whatever USD does on NFP day, it does the reverse on the following Monday. That’s because people tend to over-react to the figures. After they’ve had the weekend to dissect them – and particularly the hawkish comments from two FOMC members – I think there could be some mean reversion today, particularly on USD/JPY,” said the analyst.