First Quarter Outlook for Real, Argentine and Mexican Peso

NOV, 2009

Our last article reviewed the roller coaster that was 2009 and many of the core themes that influenced FX market pricing and movements throughout the year. Based on further observations our analysis to date indicates that thematic overtones such as liquidity, behavioral unpredictability of the ‘human element’ and over-reaction to basic fundamentals are likely to keep FX market participants firmly entrenched and involved in what could be another dynamic yet unpredictable year ahead.

January was reasonably quiet although did show the unwinding of one major recent trend as many currencies came under selling pressure, resulting in a generally unexpected bout of USD strength against most currencies, especially towards the end of the month. Interestingly, the Dollar strengthened on risk-aversion in some cases and on generally better-than-expected US data in others, as employment deterioration showed signs of slowing drastically.

The Euro in particular came to a sticky end (at least during this one-month time frame) leaving many participants wondering how the EUR could have fallen so relatively precipitously; from 1.50 in December to 1.38 in January, around 8 percent in just over a month and quite a significant move given unchanged interest rates at close to zero in both regions. 1.3500 should provide support, if indeed the Dollar manages to rise that far.

This kind of move illustrates perfectly how extreme levels of sentiment & positioning can dictate play over and above fundamentals in Forex.

In our last article we commented that although the USD with zero interest rates enables the $ to become the carry trade currency, we remained mindful that this vehicle is not always the best means with which to express a view should the trade become crowded. The markets love to hate the Dollar and quite simply it seems that in typical FX-style, the speculative positions did in fact become crowded into the end of 2009 from a short Dollar perspective, resulting in a currency sell-off. In this case, the worsening Greek debt situation during January greatly assisted the Euro’s weaker stance and quite simply served to highlight that the US is not the only economic region with a 300 million population to encounter fiscal difficulties. Talk of a break-up in the Euro now seems almost inevitable but the event itself probably unlikely.

Naturally this phenomenon of Dollar strength may yet prove to be an excessive correction in itself as time goes by as questions continue to arise over the fiscal position of the United States-as we go to press various newswires from the Davos summit report that President Obama renewed his pledge to make job creation his number one priority in 2010 but that it was also critical to rein in a record budget deficit that threatened economic recovery. Bottom-line, the USD is still potentially under threat and therefore ma.....




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