JULY TRADING STRATEGY

As the second quarter of the year 2014 opens, we are now getting better insight into how the year will unwind for the major economies and invariably their currencies. The month of July promises a reversion to higher levels of volatility as rate speculation on the US dollar becomes more pronounced. This will be a welcome change of pace from June lows, and is likely to breathe life into currency pairs which benefit from increased volatility i.e. USD JPY and EUR USD.

In the following notes, I will define my position on the various majors and the trades that I will be pursuing in accordance with the views held.

UNITED STATES DOLLAR (USD)

The US economy looks to be growing from strength to strength, logging better numbers on employment, fuelling speculation that a rate hike is much closer in the horizon. Wage growth remains muted however, and slack in the employment sector remains a concern for the US economy. July is earnings season, and will give us insight into corporate profitability, plus will help us understand whether fed policy of easy money is buoying earnings. We have already seen that M&A activity has been amplified in 2014. Asset purchases by the Fed reserve will come to a halt in October, but that is still a long way off and there is a genuine concern that tapering will bring the pain, and markets might struggle to deal.

My view, however , is that Yellen and company will not be in a hurry to raise the benchmark interest rate in 2014 because no asset bubble seen fomenting and the US recovery is only just finding its legs. A rate hike would be farfetched idea in 2014, even though I expect the US to continue on a steady growth trajectory, and will outperform the EZ economies including Germany possibly.

GREAT BRITISH POUND (GBP)

The UK economy, like their US counterparts, is experiencing a growth story, and the United Kingdom seems on a fast track to break out growth potentially in the next two years. Governor Mark Carney has waxed hawkish on several speaking occasions and that is possibly an indication of his leanings. Even though he carries a single vote on the monetary policy committee, he has the wherewithal to steer consensus in his favor. Overall, the perceived overheating of the US housing market, a worrying development, considering it is what led to the financial crisis in 2008, has fuelled the speculation of an imminent rate hike in the UK, along with the sustained UK economic performance. One third of economists now believe that a UK rate hike will happen within the next 170 days. I expect that there will continue to be an outperformance by the UK economy even though the weight of expectation might colour expectations and lead to naysayers on the prospects of the UK’s growth, which remains a limited downside risk.

THE EUROZONE (EUR)

The hope for the comeback of the Euro comeback remain subdued even after Draghi’s bazooka into the fledgling region have refused to take, the market calling his bluff. Draghi’s promise of being in advanced stages of preparatory work for the commencement of asset backed purchases by the ECB has failed to convince the market that the bank is genuinely going to roll them out. However, Draghi might indeed pull the trigger, as economic numbers disappoint consistently, credit growth remains muted, disinflation abounds and the threat of the more endemic deflation hangs over. This is an indication that the ECB, shall continue to ease monetary policy further, and more aggressively than other central banks, and in opposite directions with a number as regards monetary policy. This remains the best possible tool in the toolbox of the ECB to get the EZ out of the slump it finds itself in. Overall, I expect to see tepid growth in the region for the short to medium term.

JAPANESE YEN (JPY)

The scorecard for the efficacy of Abenomics will be peered into more critically, throughout the year. It is difficult to predict where the chips may fall, but on the margin, Abe might have saved Japan from the debilitating deflationary range it has suffered for decades. Inflationary targets of 2% not yet met but a strong move in that direction would indicate that Japan is back on the field.

AUD/NZD

The commodity currencies taking their cues from the China growth trajectory will continue as always given that China stays a leading trading partner of the Pacific countries. The big story however is the RBA’s declaration of the AUD as being overvalued and making the specter of a rate reduction in December all but imminent, as was offered by the RBA governor. NZ having the highest interest rate among the major economies continues to strengthen on the back of stable economic conditions, not forgetting the likelihood of a .25basis points benchmark rate hike at their MPC meeting this July. That, however, will be a roll of the dice in my view.

GBP ——– BULLISH
USD ——– CAUTIOUSLY BEARISH/NEUTRAL
JPY ——– NEUTRAL
AUD ——– BEARISH
NZD ——– CAUTIOUSLY BULLISH/NEUTRAL
EUR ——– BEARISH