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Currency Check

05/07/2013

Last evening, the Reserve Bank of Australia (RBA) reduced its interest rate 0.25% to a now record 2.75%. Governor Glenn Stevens joins his central bank counterparts from the United States, Europe, and Japan in adopting easier monetary policy to carefully lower the value of his domestic currency. Keep in mind, historically the RBA favors higher rates relative to other developed economies in order to attract capital inflows to offset a 30-plus year streak of account deficits.

However, the RBA’s decision highlights the headwinds that are facing resource and commodity-oriented economies currently. The lack of a strong rebound in Chinese resource demand is challenging domestic growth in Australia. In fact, the RBA statement sums up the outlook rather starkly for expected resource demand:

 “With the peak in the level of resource sector investment likely to occur this year, there is scope for other areas of demand to grow more strongly over the next couple of years.”   

Investors must continue to closely monitor the price action of global currencies.

Some things to consider…

  •  The 12% decline in the Japanese yen (Figure 1.1) continues to fuel the global carry trade and act as 2013’s strongest tailwind for global capital markets.

 

  • The 3% rise in the United States dollar (Figure 1.2) will continue to impact sector allocation flows for the S&P 500® Index (SPX).

 

  • A momentum reversal lower for the U.S. dollar is needed to support lifting allocations to multinationals, within the materials sector in particular.  

 

  • The strength of the Mexican peso (Figure 1.3) highlights continued favorable investment opportunities in both the Mexican debt and equity markets.

 

  • The Indian sensex (Figure 1.4) has experienced a 9% rebound from its mid-April low for the year, fueled by strong capital inflows. Investors should be alert and continue monitoring the price action, as continued strength will warrant an upgrade in allocations to India.

 

  • There remains further downside vulnerability for the spot price of gold (Figure 1.5). Previous long-term support at $1,525 has now transitioned to major resistance.

 

 

Source: Bloomberg

 

Figure 1.1 Japanese Yen, 2007 to Present

 

Source: Bloomberg

Figure 1.2 U.S. Dollar, May 2012 to May 2013

 

Source: Bloomberg

 

Figure 1.3 Mexican Peso, May 2010 to May 2013

 

Source: Bloomberg

Figure 1.4 Indian Sensex, May 2012 to May 2013

 

Source: Bloomberg

Figure 1.5 Spot Gold Weekly, 2007 to 2013

 

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.