Risk aversion is likely to extend through February in the forex markets, with fundamental trends suggesting to buy the Japanese Yen and sell the Australian Dollar.
02-04-09-score
Although the Yen is highly overvalued, it is not burdened with substantial rate cut expectations and was the best performing currency against USD last month. Further, continued deleveraging across financial markets will bring yet more unwinding of Yen-funded carry trades. This means it will be some time before the dire state of the Japanese economy meaningfully weighs on the low-yielding currency. While the Canadian Dollar scores equally well, the Loonie is now marginally undervalued against its implied “fair” exchange rate and still faces meaningful downward pressure from adjustments in the yield spread.
Looking at the other end of the spectrum, the Australian Dollar is the weakest of the bunch. Although the currency is undervalued, a bullish correction in the near to medium term seems very remote. The Aussie was the second-worst performing currency against the US Dollar in January and remains threatened by comparatively large interest rate cut expectations. Finally, a trade-weighted index of the Aussie’s value now shows a whopping 98% correlation with the MSCI World Stock Index, suggesting that any move away from risky assets will weigh heavily on the antipodean currency. If you are looking for more information about online trading, please check out this Online Trading Guide. It has some great free resources.
*** The basis for the concept of currency valuation using yield, value, and momentum was originally proposed by Bilal Hafiz of Deutsche Bank AG.
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