What about the currencies out East?
By: Will Armitage
Tags: Economics, Forex Traders, Forex Trading, Investment Management, Stock Market

What about the currencies out East?

My last article focussed around the three major currencies in the western hemisphere. To sum up that piece, I concluded that the Dollar would lead the way in the coming months, with the Euro pushing the Pound to the bottom of the class. Amongst the various feedbacks to that piece, I was interested to read the comments of one particular reader. I would certainly agree with you that trying to predict the FX dynamics in the coming years is remarkably tough!

In the shorter term, it is certainly worthwhile having a look into the currencies on the other side of the world, namely the Yen, Aussie and Kiwi. These are the national monetary systems of Japan, Australia and New Zealand respectively.

The Nikkei (main bourse in Japan) just enjoyed a record-winning streak of 16 days of consecutive gains, beating a record of 14 that had stood for over half a century. Prime Minister Abe’s shock general election call played out slightly better on 22nd October than Theresa May’s debacle from earlier this year. He returned to power with a roughly 2/3s majority. Japan’s much-lauded Abenomics programme with the triple prong of hyper-easy monetary policy, fiscal stimulus and structural reform have paved the way for the stock market to hit highs for this millennium to date. Looking at the Nikkei chart for the past seven decades, it’s truly amazing to think that the Nikkei is still some 42% lower than its all-time high on the last trading day of the 1980s!!

And what about the currency? Well a look at the USDJPY (US Dollar versus Japanese Yen) for the past ten years reveals three general trends:

Firstly, yen strength (i.e. the dollar depreciated against the yen post crisis) through to the end of 2011. Secondly, three and a half years of fairly consistent yen weakness from the start of 2012, which then dramatically accelerated in 2013 and 2014 once the impact of Abenomics fed through. The third phase has seen Yen strength return particularly up to June last year, when USDJPY broke back below 100 for the first time in three years.

From a technical perspective, it would seem that a period of renewed Yen strength is in the offing (i.e. a return to the downward trend of USDJPY). Looking at the chart below from this year, we can see that it has twice in recent months failed to break above the 114 level. For those of you who are fans of Fibonacci levels, this mark represents a 61.8% retracement level from its early September lows to its January highs. We find USDJPY back here again. Should it fail to break through at the third attempt, a return towards 100 would not be wholly unexpected in the coming months.

So, having expressed positivity (despite calling for USDJPY to fall) towards the Japanese currency, what lies in store for the Australian Dollar in the coming months?

Local Australian currency traders may well be slightly distracted for the early part of next week with them turning out in droves at the racetrack in Flemington, Melbourne, for the race that stops a nation, rather than being glued to their trading terminals. The 2017 running of the Melbourne Cup will happen on Tuesday. My two fancies for which are the British trainer Hugo Palmer’s Wall of Fire and the French trained Tiberian, both at double digit odds. Those who have known me for a while will be well aware that my racing tips are mostly prodigiously poor. When Pelican launches its Sports Betting operation, Flamingo, you would do well to oppose all my sporting bets!

The past ten years has seen a similar three phases of direction to that of USDJPY. An initial decline, followed by a rise, before a general downtrend returns. This is the AUDUSD chart:-

Yet, you’d be totally wrong to say that one had witnessed a phase of strength — weakness — strength. That is because the price of the Australian Dollar and New Zealand Dollar are the first named currencies in their relationship with the greenback (US Dollar). So when the price moves up, the Aussie Dollar is appreciating against the US Dollar and vice versa. When the USDJPY moves up, it means that the Japanese Yen is depreciating against the US Dollar.

The overall movement of the Aussie Dollar has always been very closely correlated to the prices of commodities. In layman’s terms, when the world is hungry for natural resources, the Australians’ currency appreciates in value. It is no coincidence that the Aussie high coincided in August 2011 with Gold soaring to its multi-decade highs. A look at the below reveals the extent of this relationship. The correlation only really broke in the last couple of years that was during a period with overall US Dollar strength which limited any great Aussie Dollar acceleration against the US Dollar.

Given the facts that the Reserve Bank of Australia are unlikely to be raising interest rates any time soon (and certainly not at this week’s meeting on Melbourne Cup Day!), my view that commodities (particularly gold) are not about to tear higher and the fact that the general consensus is for the AUDUSD to move back above 0.80, I am slightly bearish the Aussie.

The Kiwi Dollar has a similar known as a commodity currency. Its 96% correlation with the Aussie Dollar is all too plain to see.

The Kiwi has often been the favourite trade of the Japanese housewives. With interest rates having been so low for so long, investors have looked further afield for yield. And in the case of New Zealand, the differential has been considerable for many years! This is commonly known as a “carry trade” where you sell a low interest currency and buy a higher interest rate currency.

The NZDJPY trade generally rises during periods of global economic growth and stability, while the inverse is true during times of stress. The chart for this current millennium plays this out.

Following on the trend of voting in young, very gifted leaders like in France and Austria, you may have missed the news that the new Prime Minister of New Zealand is a 37 year old central-leftist. Her new Finance Minister has been quoted as saying that a decline in the Kiwi is natural at theses levels and is not something that would overly concern him. Her plan to ban non-Antipodeans from buying in New Zealand, specifically to calm a Auckland house price boom) will also limit inflows. (Can you imagine what would happen to the UK’s house prices if Jeremy Corbyn would replicate that particular move?!)

So, my view is that over the next two quarters, the Yen (JPY) will outperform the Aussie (AUD), whilst the Kiwi (NZD), despite its comparative interest rate advantage, will be bottom of this particular triumvirate.

Whatever your view on the Eastern currencies mentioned here or the more popular pairs, Pelican is the choice of the experienced trader wanting to build his or her private or public discussion groups. Within your groups, you can see others’ positions, copy or, uniquely, oppose trades, all within a unique FCA-regulated environment.