It was undoubtedly an interesting time to be in the USA over the last few weeks as the politicians bickered and messed around in Washington as the rest of the world looked on and shook its collective head.
The ultimate result has been a rush to US Treasuries, even after their downgrade to AA, as they are still seen as the safest place to park your money in a risk averse world – a bizarre paradox! Indeed, even as the US headed towards its “Tuesday default deadline” it was still receiving net inflows of capital! The yield on 10 year T-Bills has dipped below 2.5%. Short term bonds are yielding close to zero.
While I’m still sticking with my longer term view that other currencies will increasingly become viewed as “safe-haven” it’s too soon for anything to replace the USD. Remember that liquidity is a hugely important aspect for bond investors- bond markets of negligible size such as Australia’s even with their appealing yields can’t possibly be a destination for the world’s cash.
I expect this volatility to continue and the focus to once again shift back towards the Euro mess – so going long the USD seems like it might be the winning FX strategy for now.
Add to this the probable restarting of Quantitative Easing (Third time lucky as they say!) and you could expect another predictable bounce in the US stockmarket which will also mean strong demand for US Dollars.
As always the guys at PIMCO have said it best. Go to www.pimco.com for great commentary on the current state of US Bonds.
The swings have been wild the last few days on world stock markets. Up 5% one day and down 5% the next! Focus on the big picture for your FX Strategy. Guessing USD –Euro trades in this market is tough. But grasping that the risk trade is off and the AUD is getting smashed is easier. Look for trades based on USD for safety vs “risk on” currencies such as resource based currencies like the AUD. As you’ll see the AUD has lost 10% against the USD in the last couple of weeks and as more negative news comes out of China, such as housing data, or continued poor world economic data currencies that are “risk on” will continue to be punished.
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