F/X Stategy: Too Early To Get Aggressive

Despite the ‘celebration’ following last Friday’s U.S. payroll report, our Foreign Exchange Strategy service does not recommend shifting to a more pro-cyclical currency stance.

FX Stategy- Too Early To Get Aggressive

A n improvement in the global economic outlook is the key fundamental reason to take on more risk in an investment portfolio. The U.S. payroll report was positive relative to expectations, but rather weak in absolute terms. Moreover, last week’s Fed and ECB meetings did little to lift our optimism. Several indicators continue to suggest it is too early to add to pro-cyclical currency trades.

  • For example, the global leading economic indicator is still pointing down. More importantly, with no new stimulus measures announced this week, it is difficult to see the global LEIs inflect upwards.
  • In addition, gold is a real-time monetary indicator and the peak in March 2008 correctly warned that deflation risks were escalating. Gold’s recovery in early 2009 (ahead of the bottom in equities) then accurately indicated that reflationary policies were finally gaining traction. Gold prices slipped back below $1,600/oz following this week’s Fed and ECB meetings. This suggests that major central banks are still behind the curve.  As in early 2009, a sustained rally in gold will signal that the forces of reflation are starting to win out.
  • Finally, an uptrend in Chinese stocks and an acceleration in Chinese money supply growth will be bullish signs for Chinese growth and the commodity complex.

Bottom line: It will take further proof that the global economy is stabilizing before augmenting a pro-cyclical currency investment stance.

Print Friendly
About BCA Research

BCA Research is a world leading provider of independent investment research. Since 1949, the firm has provided its clients with leading-edge analysis and forecasts of the major financial markets, with clear and focused investment strategy recommendations and backed by countless proprietary models and leading indicators. Asset class coverage includes equities, fixed income, currencies, real estate, commodities and geopolitics. The firm provides its services to financial professionals across six continents, through a wide range of products, services, and meetings. BCA maintains a head office in Montreal, with local offices in New York, Los Angeles, London, Hong Kong, Sydney, and Buenos Aires. Not yet a client of BCA? Take a short trial to our research.