Despite the recent bout of risk aversion, 2013 has been a good year for investors long the S&P 500 or other risk sensitive assets or indices. Indeed, the stock market continues to beat back negative news about the looming sequester, with the Dow Jones industrial average poised to finish the week up despite Tuesday's steep sell off. So the lovely Gingers Rogers is correct in declaring "We're in the Money." However, perhaps more astute of the late great star is the observation that "the long lost dollar has come back to the fold." USD has been the week's winner, gaining against virtually everything except the Yen.
EUR/USD is pressuring the 1.30 handle, dipping below this morning. This latest move has got the techs targeting 1.28. This analyst predicted a dip to 1.27 based on the fundamentals, but certainly did not expect it to come this soon. The expectation of such a quick retreat for the common currency, especially as expressed by activity in the options market, has me reexamining my year end target. Let me reiterate that the tail risk which had been priced out of the market is now bumping up against the reality that Europe still has a long way to go before returning to growth. Europe is making the choice to endure short term pain via various national austerity programs in order to hopefully regain credibility in the sovereign debt markets for some of its weaker members. The Eurozone deficit is currently 3.3 percent of GDP, with growth for 2012 coming in at -0.9 percent. Europe also has a slight current account surplus, a rare achievement in advanced economies. By contrast the US GDP grew by 1.5 percent, but the government budget is still 7.0 percent of GDP in the red. Similarly, the current account deficit continues to remain high at 3.0 percent of GDP. In sum, the US is growing, but the growth is coming at a heavy price. Slow improvement in sentiment across the Atlantic, combined with necessary structural reforms to some national economies and a continued progress in normalizing sovereign debt markets will make EUR an attractive long later in the year, but not yet.
AUD/USD is continuing to test new lows, though has been met with fresh buying at the 1.0180 level. The pair continues to be under pressure from China growth concerns and uncertainty surrounding monetary policy. Many analysts believe that the RBA could ease further, especially if growth faces headwinds from a broader slowdown in Asia. The Aussie has been an investor favorite for the past year, as it offers yield as well as an AAA sovereign credit rating.
The loonie also continued its slide, with USD/CAD consolidating its gains above the 1.0275 level, touching as high as 1.0330. The near 30 percent discount at which Canada must sell its oil continues to weigh on the Arctic nation's currency, as do broader growth concerns.
Emerging market currencies largely followed the broader market, with nearly everything selling off against the dollar with exception of the Thai Baht. The MXN has also shown some resilience. USD/MXN is well off its highs earlier in the week, and failed stay above 12.8 this morning, despite a brief spike up to 12.85, means there are still plenty of bargain hunters out there looking to go long the Peso. Aggressive traders may want to short the USD against high beta currencies such as the ZAR or INR if they think risk sentiment will improve next week, which are near there weekly lows this afternoon.
Longterm, MXN remains a buy. Expect more short-term pain for the EUR, but this will be followed by a robust recovery later in the year.
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