With the ZAR firmly reaching intended targets, that leaves us the IDR, BRL, TRY and INR left to progress. I think the title of the Fragile Five post is a bit of a misnomer, for currencies like the BRL and the ZAR since I didn't expect them to achieve such sell-offs as fast in December, but here they are. At the time of the posting, spot USD/BRL was at 2.560 and currently, it's at 2.65, breaking off of the highs posted in mid November. The USDIDR is also approaching 2008 highs as expected, we'll see if the forces of mean reversion get nasty over the next year!
Right, oil sub $60. US and EU inflation breakevens are steeply falling along suit, although I'd like to be in the camp to think that this is largely attributed to oil's fall is a false notion. Jeremy from MacroCreditFX explains this well in his latest post. Currencies that are severely hit include the CAD, NOK and the RUB, of whom depend on oil extensively as part of their economies. The WSJ has made an informative graphic regarding the effect it has on global economies, on the top right.
With oil falling, the comm-dollar bloc has been hammered heavily over the past few months. Although in reality a flightless bird, I think it's the Kiwi at the moment is in the process of growing its (metaphorical) wings. With the AUD,CAD, and NOK falling, the NZD remains relatively strong, as seen above, with basing price action as opposed to trending to the downside. This action is quite similar to the action seen in July 2013, where a volatile range was made in the NZD, prior to a rally. Some historical studies (post 2008) also show that the gravity of the move downwards, has exceeded the average (a fall of 7.16%), and has reached an extreme seen in late July-November of 2011. I'm sure large market participants are already aware of the NZD's relative strength, and are likely to pile on non-USD pairs, such as the AUD/NZD (sad to say that It's late to join the bandwagon there for me).
On the macro side of the equation, yes, the fall in oil is likely to knock short term inflation expectations, but that is likely already priced in to the market. Because of this, the RBNZ is most likely at the plateau of their hiking cycle, rather than in a position to implement rate cuts. In its latest December meeting, the RBNZ re-inserted a tightening bias stating that 'some further increase in the OCR is expected to be required at a later stage'. This doesn't necessarily mean hikes are about to come round the corner, but it telegraphs a ruling out of rate cuts. The outlook for the unlikelihood of rate cuts is also emphasized with a reigniting housing market (rate cuts would only further exacerbate price rise!
I would also have to point out that I'm in Krugman's camp of a Fed that is unlikely to hike rates next year. In the absence of organic wage growth, and long term inflation expectations falling off a cliff, it is hard to see how the Fed would attempt hikes in such an environment. If they do, as expected in Q3 2015, they are very likely in my opinion, to do so with extremely cautionary language. Furthermore, I think it is also highly probable, that a large part of that alone is priced in to the market, and anything to fuel further USD gains would need an increasingly hawkish Fed on the back of stronger economic data (which is absent at the moment).
Holidays it is, for 3 weeks, though it's a very busy one incoming (holiday's a wrong term to use), with research to produce, studying to bury myself in, and .. well things of that nature! Above is a little retreat of a 5 minute-walking distance from home, with a peace that's always good to balance things out!
Stop losses are marvelous inventions in times like these (hence we use them!). The USDJPY is staging quite the sharp descent of circa 390 pips, and this move is 'blamed' on quite the set of numerous alleged factors; Firstly, the political uncertainty in upcoming Greek elections, has caused quite the jitter (understatement perhaps...) of a 13% drop in Greek equities today. On top of that, the USD/CNY has also lost ground, slipping the most since Dec. 2008, to add more to the headache of positive sentiment. It is not anything surprising that when market positioning is highly skewed to one side, the risk for price shocks increase in tandem. The question to ask really, is was it really risk-off trade? Perhaps, as concurrently, the Swiss Franc was bid as well along with Gold, which provides the argument that 'safe haven' flight was what occurred in yesterday's US afternoon trade.
What is interesting to note is that although one might think it's safe haven flight (which it very well could be), the USD was sold as well against the AUD, EUR, and slightly by the GBP. The traditional belief would be to think that comdollars would drop in tandem, and so would the EUR (Greece in Europe herp derp) but reality yesterday proved otherwise. The question that's poking my head then is : since the USD has starkly fattened up due to 'front-running' the Fed for 2015 hikes, will the USD play out as a loser when global sentiment deteriorates as market participants pare out positions?
Well the one that everyone gives a real rat's ass about : Do we or do we not - buy the [expletive] dip? My answer to that, for myself, is a very tempting yes but a very cautious one at that. No one wants to close a good year by eroding profits through some unnecessary risk taking in times where you aren't as sure.The Cyprus Bank Run last year in February was the point for blame when equities and the USDJPY to shat itself for a day sharply - but that was it, it rallied all the way after. The price shock in June as well took an approximate week to fade before the USDJPY just chugged along happily after. The whole Ukraine mess as well when the Crimea crisis was at hand, took approximately a week to fully fade away from the focus of the market. This one? Something tells me its different, as it's numerous things happening simultaneously developing globally at multiple angles, rather than just a country-specific risk that gets off the radar quite quickly.
I'd buy the dip, but I'd give it till next week before attempting anything. if nothing pops up nice, well that's closing books for this year!