When hedge fund managers make predictions then the currency markets sit up and listen, especially when the prediction is made by the likes of Jupiter’s Philip Gibbs. As one of the highest performing fund managers of the past decade his views carry a good deal of weight.
In a statement yesterday to a private client audience in London Gibbs predicted that sterling would remain the weakest of the currency pairs in the months ahead.
‘On a short term point of view I would say the Swiss Franc is the best currency bet for a bullish or bearish scenario but sterling looks weak.’ By singling out sterling in this manner he has hinted that he might well be entering into some hefty short sterling positions, a view which has been backed by a further weakening of the pound yesterday.
‘The UK stands out as a rather weaker economy. The new government has improved things but interference is so awkward. I hope the coalition stays together.’
‘We have the advantage in the South East that we are very outward facing. London is the capital of the world but we have less promising parts of the country where the economy will not be as strong.’
Gibbs describes the enormous debt levels in the US, UK and Japan as ‘very worrying’ especially if interest rates start to tick up further. This longer term concern makes him relatively cautious on putting too many of his assets in western financials.
Gibbs has said that he prefers investments in Gold which could continue to rise into the long term, driven by a de-regulation of the Chinese gold market coupled with heightened currency volatility and a flight to ‘solid’ assets.
He also favors the Swiss Franc as an investment class. ‘The Swiss Franc looks an absolute winner. Switzerland has such low indebtedness but also such a strong economy. It is not only a safe haven but also a safe economy.’
The bank of England minutes yesterday showed that the ugly specter of Quant easing has again reared its head. Under discussion was the fact that the economic picture had changed since their last meeting, with America considering another bout of cash injection, the BOE might not be far behind. This is never good for the pound and we saw the pound drop almost 1% against the Euro immediately.
Yesterday the pound traded in negative territory against every currency except the Canadian Dollar which suffered when they released much worse than expected retail sales data from July.
“The Canadian data seems to disappoint now on every release,” Steve Butler, director of foreign-exchange at Bank of Nova Scotia’s Capital unit. “If stocks don’t turn around, the Canadian dollar could easily give back all of the gains post-FOMC and more.” The Canadians fast advance in interest rates might well prove to be ahead of the game.
The Canadian Dollar still relies on its oil revenues and with the second largest reserves after Saudi Arabia it’s onto a winner. Most of Canadian oil is trapped in sand which costs $40 to break even but with oil at $78 and rising those fields should be feasible well into the future.
The Japanese yen has slowly meandered back to strength after Japan intervened in the currency market last week by selling yen for the first time in more than six years as its surge to a 15-year high against the dollar threatened to derail Japan’s slowing economy and worsen deflation.
Traders seem to be following the approach outlined by Lia Cavlione at Goldman Sachs. “It feels like the only way to get an answer is to take USD/JPY lower and see what the reaction is.” Playing chicken with the Japanese central bank seems the only way to test their resolve.
“I don’t think markets are bracing for imminent intervention with the dollar still above 84.00 yen. But if the dollar falls further to test 82 yen, markets will focus on whether authorities will step in again to defend that level,” said Ayako Sera, market strategist at Sumitomo Trust & Banking.
“Japanese authorities will intervene in the event of sharp market moves, regardless of whether Kan will be away from Japan or not. Japan has 200% debt to GDP, an ageing population and immensely low yields so you have to be very worried. I would not go anywhere near domestic Japanese equities.”
He warned that a big sell off in Japanese bond markets would have serious implications for its banking sector.
“The low yields will cause a big problem for older people who have a lot of cash but want to have assets. A big sell off in the bond markets will cause some chaos in the banks because Japanese banks have huge exposure to bonds.”
The Japanese Yen might be in for a very rocky road but whether this news will dampen currency transfers into the Yen has yet to be seen.