Monday, 1 March 2010

Focus back on currencies after stock turmoil

This year, currency investment is back in favour after last year’s stock market turmoil. Central banks are also widely expected to raise rates, further fuelling activity.

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Guanyu 道 said...

Focus back on currencies after stock turmoil

Amanda Lee
28 February 2010

This year, currency investment is back in favour after last year’s stock market turmoil. Central banks are also widely expected to raise rates, further fuelling activity.

Analysts reckon currencies such as the Australian dollar, the New Zealand dollar and the Canadian dollar are likely to outperform other currencies against the US dollar.

Exchange rates of the Australian and New Zealand currencies against the US dollar have come down since the beginning of the year, offering investors a good entry point, dealers said. Analysts also anticipate rate hikes from the reserve banks of Australia and New Zealand in the coming months, boosting the prospects of these currencies.

Catherine Cheung, head of investment strategy and research at Citibank, is bullish on the Australian dollar. She expects a 0.25 per cent increase on the 3.75 per cent base rate in the second quarter of this year.

Cheung said that the Australian dollar could rebound in the short term after falling against the US dollar, and investors could choose to take profits when the exchange rate reached 0.90 to 0.94.

French investment bank Calyon forecasts the deposit rates of Australia and New Zealand will peak at 5 per cent and 4 per cent, respectively. If the strategy is to go long, investors should look no further than the Australian and New Zealand dollars this year, it says.

However, those with a higher risk appetite and a desire for leverage might want to consider carry trades, which enable investors to short lower-yielding currencies and go long on higher-yielding currencies.

Ursina Kubli, an economist at Swiss private bank Sarasin, suggests investors go short on the yen and long on the Australian dollar.

But this trade could be dangerous, she warns, if the volatility of the yen rises. In such a scenario, returns on the carry trade will decrease and investors will suffer losses.

Dealers suggest there is little drama to be expected with yen as a funding currency this year, given that Japan is still undergoing deflation, and interest rates in other economies are likely to rise quickly.

Canada is expected to increase interest rates by 25 basis points in the second half of this year.

Although the Canadian dollar could also be a good play, its correlation with oil, which has declined, might see it weaken against the US dollar, according to Calyon.

One currency that is not going to be attractive this year is the euro, as Greece’s fiscal crisis remains a major concern, as do Portugal and Spain.

Market sentiments are going against the euro even though the fundamentals of the currency are not as bad as investors think, according to Cheung. This, she says, creates room for short-term trading opportunities in the euro.

Cheung sees similar opportunities in sterling, which she believes will outperform the euro this year.

The pound has weakened over the past few weeks and is currently trading at 1.52 against the US dollar.

Buying the pound now and selling it when exchange rates rise in the coming months is favoured by analysts who believe the Bank of England will raise rates by 50 points in the second half.

“Investors could consider a trading range on the pound,” Cheung said. “We believe it could go up to 1.6266, with the target being 1.675 against the US dollar.”

But not everyone thinks the Bank of England will increase rates this year. A Calyon report says that with Britain still in recession, it is unlikely to raise rates this year.