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19 Apr 2013
Forex Flash: It is very easy to simply be bearish commodity currencies - Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale notes that It is very tempting to simply be very bearish of commodity currencies.
He comments that, “Surely this will play out in due course. That it hasn't yet is because the low yield environment supports demand. Central bank reserve diversification has supported the Australian dollar, for example, even as the resources industries suffer. He writes, “Its status as highest-yielding triple-A is unchallenged. Indeed for all risk assets, inflation expectations being revised sharply lower allows central banks to keep super-easy policies in place for even longer and that is what has given us such high valuations for commodity currencies and many other ‘risk assets'.”
He adds that he could go round and round in circles on this basis. He asks whether it is the case that falling commodity prices keep inflation expectations down and help high-yielding assets including commodity currencies? He writes, “To square the circle, I'd return to the move in TIPS and in Treasury yields. Treasury yields are going sideways, unable to fall any further despite the fall in inflation expectations. Real yields are going up as a result. And lower commodity prices will feed through to improved growth expectations if we see lower prices for oil in particular. We may well see a period of benign inflation and softer growth, accompanied by range-bound government bond markets.”
Juckes notes that this is a ‘risk-on' environment but probably one in which assets (equities, commodity currencies, etc) do ‘OK' but don't make significant new highs, and this will set the stage for an upturn in economic activity to send Treasury yields higher once the fall in inflation expectations is over. He writes, “We may be in the process of establishing a new higher range for real yields that only shows up in nominal yields later in the year.”
He comments that, “Surely this will play out in due course. That it hasn't yet is because the low yield environment supports demand. Central bank reserve diversification has supported the Australian dollar, for example, even as the resources industries suffer. He writes, “Its status as highest-yielding triple-A is unchallenged. Indeed for all risk assets, inflation expectations being revised sharply lower allows central banks to keep super-easy policies in place for even longer and that is what has given us such high valuations for commodity currencies and many other ‘risk assets'.”
He adds that he could go round and round in circles on this basis. He asks whether it is the case that falling commodity prices keep inflation expectations down and help high-yielding assets including commodity currencies? He writes, “To square the circle, I'd return to the move in TIPS and in Treasury yields. Treasury yields are going sideways, unable to fall any further despite the fall in inflation expectations. Real yields are going up as a result. And lower commodity prices will feed through to improved growth expectations if we see lower prices for oil in particular. We may well see a period of benign inflation and softer growth, accompanied by range-bound government bond markets.”
Juckes notes that this is a ‘risk-on' environment but probably one in which assets (equities, commodity currencies, etc) do ‘OK' but don't make significant new highs, and this will set the stage for an upturn in economic activity to send Treasury yields higher once the fall in inflation expectations is over. He writes, “We may be in the process of establishing a new higher range for real yields that only shows up in nominal yields later in the year.”