The bullish case for Qatar National Bank

The next twist in global currency markets.

While I had outlined the rationale for a short yen position a month before Shinzo Abe’s election as the Japanese Prime Minister last November, I was amazed at the scale and speed with which the world embraced the short yen trade with a vengeance. At 93 against the dollar, I am afraid the risk-reward for yen bears is extremely dangerous. Chicago IMM data suggests speculative froth is at its highest. Abe’s LDP government must now walk the walk, not just talk the talk. The Bank of Japan must take concrete action in the money markets to convince the world that its 2 per cent inflation target is not LDP politician inspired verbal bombast.
In any case, the Bernanke Fed is also engaged in QE and the US Treasury-JGB yield spread nowhere near justifies 93 yen against the dollar. I cannot see a major, sustained spike in the yen as long as the LDP government delivers on its supplementary budget and the Bank of Japan on the scale/aggressiveness of its monetary easing even after Governor Shirakawa’s term ends in April. Any hint of disappointment from Abe or the BOJ means dollar yen goes back to the 86 – 88 range.

It is entirely possible that the Spanish political corruption scandal, the Cyprus bank recapitalisation (a Putin bailout in Limassol?) and Italian election risk result in the Euro-dollar rate at 1.30. However, any dollar strength against the Euro is temporary since the balance sheet of the Bernanke Fed expands while the balance sheet of the Draghi ECB contracts due to early repayment of LTRO loans by German and French banks. The US current account deficit and the US Treasury’s “benign neglect” (a euphemism for Lord Keynes’s concept of monetary seignorage) is also dollar negative.

The post – OMT announcement rally in the Euro was so spectacular because so many sovereign wealth funds in Asia/Gulf, global central banks, pension fund and life insurance companies has slashed exposure to the world’s second reserve currency after the onset of the Greece crisis in 2010. Even Bundesbank President Jens Weidmann, the most credible hard money banker in Frankfurt, has warned the ECB against a politically inspired depreciation of the Euro. This is a direct response to President Hollande and the Elysee Palace’s call for a lower the Euro and Mario Draghi’s hint that about a potential ECB rate cut.

The British pound sterling is hostage to austerity’s impact on economic growth and the perception that the incoming Bank of England governor Mark Carney’s penchant for inflation targeting. Apart from the yen, sterling is Cinderella of G-10 foreign exchange in 2013. While the MPC left the base rate at 0.5 per cent and the £375bn gilt purchase target unchanged, Mark Carney could well tilt dovish at the next MPC. The British referendum on the EU is also a sword of Damocles on sterling. This means sterling could fall as low as 1.52 in the next three months. Even the SNB publicly proclaims the Swiss franc the most overvalued currency in Western Europe. The SNB’s foreign exchange intervention in 2012 exceeded China’s PBOC in 2012. This is insane. Euro/Swiss will depreciate to 1.28.

The worst currencies to own against the dollar in 2013 are the Japanese yen (6 per cent), the British pound, South African rand and Egyptian pound (almost 5 per cent). The best performing “carry” currency in the world against the US dollar in 2013 is the Brazilian real (up 5 per cent), followed by the Thai baht, the New Zealand dollar and the Swedish kroner (all just below 3 per cent). I believe it is time to be careful about the risk of a global currency war now that its first battlefield is Japan. As the Chinese yuan surges against the yen, Chinese exports are bound to fall. This could well force the Polutburo and the PBOC to sanction a depreciation of the Chinese yuan. A sudden fall in the Chinese yuan will spread panic across the Asian export tigers, whose currencies will all fall in unison, notably the Taiwan dollar, Singapore dollar and the South Korean won.

The currency wars, in turn, could well result in a spasm of risk aversion on Wall Street and a global scramble into the US dollar as the world’s ultimate safe haven. This is a reason why emerging markets shares have underperformed US equities and commodities/gold and even corporate bonds have not shared in the euphoria of a risk asset rally since the New Year. Moreover, ten-year US Treasury note yields have risen above 2 per cent and contagion has now spread across the Atlantic to Europe. There is now extreme bullish positioning in the world stock markets. If global shares take a hit, expect a major rise in the US dollar and a fall in the price of gold to as low as $1450 an ounce.

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