Last week was a surprising week to say the least, as the biggest news out of the entire currency market was the Reserve Bank of Australia (RBA) hiking its bank rate by 0.25% to 3.25% and surprised the entire world in the process…
Needless to say, immediately after the release, Equity market ended its downward correction, and a renewed sense of risk appetite took over, pushing all high-yield currencies, commodity currencies, Equity indices, to fresh new 2009 highs.
As a result, recent strength in the JPY subsided as traders re-evaluated their holdings. This surprise rate hike was not an isolated event since the entire world economy is currently intertwined, and any change of this magnitude is bound to have strong effects on other major currencies, including the USD and JPY.
Obvious questions have been raised to the validity of recovery. As most analysts were saying that the recovery is going to be slow and steady, this move from RBA is certainly telling a different story. As RBA leads the central bank in hiking interest rate, the next central bank likely to follow suit is probably RBNZ, and then possibly BOC. The real shockwave will be when ECB decides to hike interest rate, and that would signal an all-out economic recovery, regardless of what any analyst may say…
Since this surprise hike was ahead of schedule, in my opinion, by at least 6 months, I do feel that the market has formed a bottom, and the next movement is going to be upwards. Although some currencies may take longer than others, there is very little argument as if it will take place, but when…
The overall market condition will once favor carry trades. As both USD and JPY are posed to trade weaker (in the case of USD, it will remain weak until FOMC hikes rate), it may be a great time to invest in longer term JPY carry trades, such as Long EUR/JPY, AUD/JPY, and perhaps even GBP/JPY. The key is of course to enter a small position and add to it gradually, as the market recovers, this trade will grow. I think conservatively we could be looking at 3000 to 5000 pips of gain, from now to the mid of 2010, provided that USD/JPY trades above the 105 figure.
And of course, as the market corrects itself, I expect to see commodities once gain put pressure on inflation. As USD devaluates over the long-term (slow but steadily), GOLD and Crude Oil will probably remain in a tight uptrend. The only enigma will be the CAD, with its proximity to the U.S., we may see a divergence with crude prices, which is nothing new under the sun.
Hopefully this long-term analysis will help in your trading. As we trade in the Forex market day by day, having a clear view of the long-term can help us avoid holding on trades that clearly won’t come back, such as a SELL EUR/JPY or any JPY pairs… As I have stated previous, I think the bottom has been formed with USD/JPY and what we see is what we get.
Henry Liu
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