There is still a chance that beleaguered EM currencies, equities and ‘risk’ will end the year better
f you wanted evidence that FX moves don’t reflect economic virility, you could do worse than reflect on the fact that the yen will certainly be the strongest G10 currency in 2011, and the Swedish krona the weakest. Both, mind you, have done a lot better than a host of emerging market currencies, as we’ve seen double digit falls against the US dollar this year for HUF, BRL, MXN, PLN, TRY, INR and ZAR. Out of those under-performers, the ones which stand out on valuation grounds as ‘cheap’ are TRY, PLN, MXN and HUF. The three CEE currencies face challenges (and we fancy the Poles and Turks to manage better than Hungary) but MXN comes out as the most attractive. This is worth a mention after yesterday’s set of encouraging US economic data, which once again highlights the fact that one legacy of the European debt crisis will be a measure of Transatlantic economic divergence in 2012.
Overnight activity mostly saw a lively contest between Fitch (downgraded 10 Spanish banks) and S&P (downgraded 7 global banks) to see who takes the prize of ‘Scrooge of the year’. They will opine of sovereign ratings soon, no doubt. Meanwhile, one effect of BdeF Governor Noyer’s observation that the UK should lose its triple-A rating before France, has been to highlight the creditworthiness of the UK and the relative safe-haven appeal of sterling-denominated assets gilts, corporate bonds and the currency.
There is little in the way of market-moving data today: Europe has a lot of speakers including Monti, Draghi, and Bini-Smaghi. The US sees CPI data. Position-squaring will surely be the dominant theme. EUR/USD has found a measure of calm as a result but unless we break 1.3145, bears will be firmly in the ascendancy. I still fancy that a late-year S&P rally is more likely than further weakness and long CAD/JPY appeals as a result. Short EUR/GBP should continue to perform reasonably and a little bit of ‘Scandi-cacth-up’ is possible too.
Societe Generale
Research & Analytics