Today we have a look again at how the USD is doing versus our proprietary risk models. Also, we take a look at how this market is trying to price GBP versus other currencies and what may be driving the currency’s recent strength.
Closing comment
The USD move has apparently gotten a bit ahead of itself judging from today’s action, but the consolidation has been fairly orderly and Friday’s bullish pattern is still intact, though we need to see follow through by midweek if we are to avoid the impression that we are getting bogged down in a range3. Importantly 1.2970 in EURUSD held (the old low now serving as first resistance), though we have to allow for a 1.3075 test.
The USD move has apparently gotten a bit ahead of itself judging from today’s action, but the consolidation has been fairly orderly and Friday’s bullish pattern is still intact, though we need to see follow through by midweek if we are to avoid the impression that we are getting bogged down in a range3. Importantly 1.2970 in EURUSD held (the old low now serving as first resistance), though we have to allow for a 1.3075 test.
USD vs. Risk
Our carry trade model shows that after a remarkable period of divergence in the USD/risk negative correlation (our explanation for this has been the surge in US interest rates relative to many other major currencies, which proved independent of moves in risk appetite) we are seeing a bit more correlation again, with risk measures easing a bit while the USD has rallied since the beginning of the year. The most interesting test for the USD is in the instance of a real sell-off in equities, which we haven’t seen for some time. Below chart based on data from Bloomberg.
Our carry trade model shows that after a remarkable period of divergence in the USD/risk negative correlation (our explanation for this has been the surge in US interest rates relative to many other major currencies, which proved independent of moves in risk appetite) we are seeing a bit more correlation again, with risk measures easing a bit while the USD has rallied since the beginning of the year. The most interesting test for the USD is in the instance of a real sell-off in equities, which we haven’t seen for some time. Below chart based on data from Bloomberg.
GBP vs. USD
The pound has maintained its strength versus the USD so far this year as the currency is seen as a popular alternative to the Euro as long as the single currency is suffering. Ahead of the beginning of the year, a few are also out (as we have been) suggesting that the currency is undervalued. Below we offer a couple of charts that show some of the fundamentals of the relative valuation
The pound has maintained its strength versus the USD so far this year as the currency is seen as a popular alternative to the Euro as long as the single currency is suffering. Ahead of the beginning of the year, a few are also out (as we have been) suggesting that the currency is undervalued. Below we offer a couple of charts that show some of the fundamentals of the relative valuation
Chart: GBPUSD vs. 2-year interest rate spreads
This chart suggests that GBPUSD should be trading much higher as UK interest rates and expectations have risen far faster than their US counterparts. Data courtesy of Bloomberg.
This chart suggests that GBPUSD should be trading much higher as UK interest rates and expectations have risen far faster than their US counterparts. Data courtesy of Bloomberg.
Chart: GBPUSD vs. CDS prices
But a look at relative CDS prices shows what may be holding the pound back from rallying more strongly versus the greenback – namely, worries are increasing more quickly on the UK’s sovereign credibility than they are for the US and the spread is actually at the lowest level it has seen in the last six months. Data courtesy of Bloomberg.
But a look at relative CDS prices shows what may be holding the pound back from rallying more strongly versus the greenback – namely, worries are increasing more quickly on the UK’s sovereign credibility than they are for the US and the spread is actually at the lowest level it has seen in the last six months. Data courtesy of Bloomberg.
Chart: GBPNZD and rate spreads
Another chart we would like to show here shows how the relative move in UK vs. New Zealand interest rates, which suggests that the pound is a bit cheap in this cross. We’re not sure of the source of the strong bid in NZD – perhaps some heavy trading in AUDNZD, but something looks mispriced here…..NZDCAD looks expensive by the same token, for those that would like to make a low-sovereign risk commodity currency to commodity currency comparison. Data courtesy of Bloomberg.
Another chart we would like to show here shows how the relative move in UK vs. New Zealand interest rates, which suggests that the pound is a bit cheap in this cross. We’re not sure of the source of the strong bid in NZD – perhaps some heavy trading in AUDNZD, but something looks mispriced here…..NZDCAD looks expensive by the same token, for those that would like to make a low-sovereign risk commodity currency to commodity currency comparison. Data courtesy of Bloomberg.
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