A default in Greece could already be significantly priced in, and a US recession, which also looks imminent, could help the US dollar. Not necessarily what you were thinking? It’s the “buy the rumor, sell fact phenomenon.
But there’s one currency and one event to which this phenomenon will not likely apply. In the interview below, David Rodriguez analyzes current fundamental topics in forex trading.
- There are more voices talking about an upcoming US recession. Do you think that a recession is indeed coming? If so, is this dollar positive on safe haven flows? Or dollar negative?
I think a recession is almost definitely coming. It may seem counterintuitive at first, but I think this may actually be a US Dollar-positive. The Greenback previously weakened on US economic contraction as the Federal Reserve enacted aggressive Quantitative Easing measures. Yet it seems increasingly likely that the Fed has run out of ammunition and further waves of QE are unlikely. What’s left? Fiscal stimulus likewise seems a low probability given the sudden conservative movement in the US legislature. In the end it means that the US may have little choice but face recession. And a record correlation between the Dow Jones FXCM US Dollar and the Dow Jones Industrial Average suggests that the US currency may gain further if stocks fall on economic contraction.
- How close is a Greek default? Is it already priced in?
It’s not a matter of ‘if’ but ‘when’. Frankly, I think that markets have long been pricing in some form of Greek default for some time now. The level of bearish market sentiment suggests that the Euro could actually rally on such an announcement””it would be like buying the rumor and selling the news. If the default proves less scary than imagined, the EURUSD could actually gain.
- Do you think that Trichet will cut the interest rates? How will this event impact the euro in your opinion?
I think he has little choice but to cut rates. Markets are pricing it in fairly aggressively, and while Trichet has repeatedly defended the central bank’s independence, I don’t think he wants to risk a full-on market panic and will likely look to ease policy. The inflation outlook looks far more benign than previously, and it’s now a question of whether the Governing Council will cut by 25 basis points (the consensus estimate) or by a more aggressive 50bp move.
- The “commodity currencies” have significantly dropped in value recently, but each a slightly different story behind it. Which of these currencies can emerge as a winner in your opinion?
I’m fairly bearish the commodity currencies right now. If I had to make a pairs trade””that is, buy one commodity currency, sell another””I’d sell the Australian Dollar and buy the Canadian Dollar. Why? The Aussie is the most susceptible to a global economic slowdown given its high interest rates and considerable sensitivity to global expansion and commodity demand. The Canadian Dollar seems less likely to fall sharply given its low interest rates and the fact that oil prices seem relatively stable. This would mean shorting the Australian Dollar/Canadian Dollar pair in expectation of further Dow Jones losses.
- More QE in Britain is widely anticipated. Will provide a “buy the rumor, sell the fact” phenomenon? Or will it genuinely weaken the pound?
Good question. It’s difficult to gauge exactly how much QE is baked into the GBPUSD. Trends have been unabashedly bearish for the domestic economy yet inflation is stubbornly high. Can the BoE cast aside above-target inflation and really enact aggressive measures? I don’t think the GBP would rally on any “buy the rumor, sell the news” dynamic. In other words, I would expect the GBP to fall if the BoE announces aggressive QE measures.
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