To complete the thought in our title: Death to fiat currencies. Long live precious metals! Is this market decoupling from its former fundamental underpinnings and transforming into a bubble market centered on competitive devaluation? Will AUDUSD trade at 1.00 next week?
Recent market activity suggests that the market is only investing in currencies not based on traditional metrics like relative growth dynamics and interest rate spreads or even on risk appetite anymore (the former be all/end all for USD direction), but rather on the degree to which various countries’ central banks are bent on devaluing their fiat currencies. Is this just a temporary distraction that will at some point dissipates or are we rapidly falling into a competitive devaluation endgame, one that risks becoming a reflexive market (read up on your Soros for that one) that develops into a full-blown bubble?
If the answer to the latter question is yes, then EURUSD could very well trade at 1.45 or 1.50 relatively soon and AUDUSD to 1.05 or higher. But won’t the ECB and German officials begin to scream bloody murder already at a level of 1.40? And even the RBA might begin to protest starting at around parity in AUDUSD. And In this case, if every country around the world increasingly begins to join the competitive devaluation chorus and threatens intervention/lower rates/controls/you-name-it to prevent currency appreciation, it could spark a super-bubble in the only hard currency – precious metals, a bubble that could even result in the death of all fiat currencies as we know them if the logic of such a bubble is taken to its extreme logical endpoint.
This all sounds terribly dramatic – and the consequences are unimaginable. We bring up the scenario because many of the elements are in place for a super-bubble (or at least a significant bubble) situation to unfold, not because we necessarily believe it is high odds. But a few more missteps from the “right” places, and a bubble we will have. Lets hope for the sake of our fiat currency savings that the wild imaginings of the goldbugs stay in the realm of fantasy. There is always the in-between scenario as well - one that sees a further chunky aggravated sell-off in the USD and perhaps 1500 or 2000 dollar gold followed by a huge unwind of the feverish speculation in the opposite as the powers that be move to avert financial Armageddon.
Chart: Gold vs. selected currencies
If we look at gold vs. some of the majors and a couple of key EM currencies, we can see that the recent focus on the decoupling theme (inferior growth in the US and strong EM performance) is fading relative to the competitive devalution theme as gold has made significant gains on key emerging market currencies (BRL and ZAR shown here) though it is not yet at an all time high vs. many of those currencies Still, these recent gains in gold vs. EM currencies are remarkable considering the enormous inflows into EM countries and the very significant rally in EM equities over the last month. The chart also shows just how much respect the Euro is getting due to the tight ECB (not to mention the overhang from a short speculative market ill-prepared for this new competitive devaluation theme). AUD strength is also remarkable. The point at which all currencies underperform gold is perhaps the Eureka moment that tells us a precious metals bubble is underway. Could that come if the ECB and RBA begin to complain about the strength of their currencies – or will recent developments short-circuit as the death of fiat currencies turns out to be greatly exaggerated?
One of the ways to counter bubble risks here migh be on recognition of poor economic prospects for China and elsewhere in the developing world, which could short-circuit the risk-taking mania in long emerging market and commodities trades that are the flipside of short US dollar trades. Also vital for short-circuiting a new anti-fiat currency bubble is a Fed that declares it is not interested in seeing a disorderly devaluation of the US currency (which this is fast becoming) and if it ends up vastly undershooting the market’s expectations on the magnitude of the next round of QE2. The stakes are huge here – and for the short term at least, it appears that bubble fears may ride roughshod over the market for at least the short term – the momentum in this market is brutal.
With that, have a wonderful weekend and be very careful out there.
No comments:
Post a Comment