Australia

As debate about currency wars heats up, there's been little talk about which currencies will prove safe havens. We think the Singapore dollar tops the list.

Currency War ... Trade War ... Hot War

The Global Currency War Is Escalating

Perhaps the biggest news of the night was the resurgence of Silvio Berlusconi, who managed to close the lead to the Democratic Party leader Bersani, embroiled in the fallout from the Monte Paschi scandal, to just 3.7 points, or within the 4 point margin of error, before the February 25th elections. According to a SkyTG24 poll, support for Bersani’s bloc dropped 0.2 point to 33.1% from yesterday while support for Berlusconi’s bloc rose 0.1 point to 29.4%. This is certainly the most catalytically destabilizing event on the horizon for Italy, and Europe, as should Silvio win the Italian elections, an outcome unthinkable as recently as a month ago, all bets about Europe's technocratic/Goldman-forced "recovery" in which only the banks are recovering, if not the people, are off.

The Chairman of Goldman's Asset Management group, unwise supporter of Man Utd, promoter of 'decoupling' myths, and creator of the BRIC mnemonic has decided, with everything looking so tickety-boo, to retire. Whether his great Buy BRICS fail or his BoE leadership bid fail was the final straw is unclear, but for now, the erstwhile permabull (and mocker of market skeptics) leaves us on a bright note:

• *O'NEILL SAYS CLEAR EVIDENCE OF THINGS DOING BETTER ECONOMICALLY

20 years of 'broken record' survival and the Brit throws in his chips now - just as everything looks be taking off? Leave your farewell message below...

One-stop summary of the key events and issues in the week ahead.

• Euro Tremors Risk Market Respite on Spain-Italy, Banks (Bloomberg)
• Obama Says U.S. Needs Revenue Along With Spending Cuts (Bloomberg) 
• China Regulators Moved to Restrain Lending (WSJ)
• Low Rates Force Companies to Pour Cash Into Pensions (WSJ)
• JAL wants to discuss 787 grounding compensation with Boeing (Reuters)
• Abe Shortens List for BOJ Chief as Japan Faces Monetary Overhaul (Bloomberg)
• Monte Paschi probe to widen as Italian election nears (Reuters)
• Hedge funds up bets against Italy's Monte Paschi (Reuters)
• Spain's opposition Socialists tell Rajoy to resign (Reuters)
• Electric cars head toward another dead end (Reuters)
• BlackRock Sued by Funds Over Securities Lending Fees (Bloomberg)

Here are eight considerations that will shape the captial markets in the week ahead.  

Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.

G4+CHF can fight the currency wars longer and more aggressively than small G10 and EM countries can.  However, as Citi's Steven Englander notes, it also takes a lot of depreciation to crowd in a meaningful amount of net exports. His bottom line, GBP, CHF and JPY have a lot further to depreciate.  In principle, the USD can easily fall into this category as well, but right now the USD debate is focused on Fed policy – were it to become clear that balance sheet expansion will end well beyond end-2013, the USD would fall into the category of currency war ‘winners’ as well. Critically, though, the reality of currency wars is that policymakers do not use FX as cyclical stimulus because of its effectiveness; they use it because they have hit a wall with respect to the effectiveness of fiscal and monetary policies, and are unwilling to bite the structural policy bullet. The following seven points will be on every policymakers' mind - or should be.

Some time ago when we looked at the the performance of the world's largest and best returning hedge fund, Ray Dalio's Bridgewater, it had some $138 billion in assets. This number subsequently rose by $4 billion to $142 billion a week ago, however one thing remained the same: on a dollar for dollar basis, it is still the best performing and largest hedge fund of the past 20 years, and one which also has a remarkably low standard deviation of returns to boast. This is known to most people. What is less known, however, is that the two funds that comprise the entity known as "Bridgewater" serve two distinct purposes: while the Pure Alpha fund is, as its name implies, a chaser of alpha, or the 'tactical', active return component of an investment, the All Weather fund has a simple "beta isolate and capture" premise, and seeks to generate a modestly better return than the market using a mixture of equity and bonds investments and leverage. Ironically, as we foretold back in 2009, in the age of ZIRP, virtually every "actively managed" hedge fund would soon become not more than a massively levered beta chaser however charging an "alpha" fund's 2 and 20 fee structure. At least Ray Dalio is honest about where the return comes from without hiding behind meaningless concepts and lugubrious econospeak drollery. Courtesy of "The All Weather Story: How Bridgewater created the All Weather investment strategy, the foundation of the "risk parity" movement" everyone else can learn that answer too.

As Japan and China increase naval and air activity around the disputed Senkaku/Diaoyu islands in the East China Sea, the United States is steadily increasing its active involvement to reassure Tokyo and send a warning to Beijing. But Beijing may seek an opportunity to challenge U.S. primacy in what China considers its territorial waters. In this succinst summary, Stratfor analyzes the current state of affairs, the potential for escalation, and how the US' presence in the Pacific will play tactically and strategically into the evolving crisis over the Islands.

With the BoJ and the Japanese government set to announce the now much-anticipated (and oft-repeated rumor) 2% inflation target in a joint (yet, rest reassured completely independent) statement, we have seen JPY swing from a 0.4% weakening to a 0.6% strengthening (sell the news?) and back to middle of the day's range by the time Europe closed. Cable (GBPUSD) has quite a day, dropping almost 100 pips top to bottom before bouncing back a little. This is 5 month lows for GBP as the triple-dip response of Mark Carney's new deal starts to get discounted. The USD ended practically unchanged despite all this as European sovereigns leaked wider, CHF strengthened modestly (2Y Swiss positive) and US equity futures did a small stop-run helped by the JPY crosses. It seems the zero-sum game in global FX competitive devaluation, as Steve Englander notes, has a long way to go, for if the UK and Japan, among others, are determined to crowd in growth by boosting exports, their currencies will have to fall a lot more than is now priced in.

Demand for gold is likely to rise as the world heads towards a multi-currency reserve system under the impact of uncertainty about the stability of the dollar and the euro, the main official assets held by central banks and sovereign funds. This is the conclusion of a wide-ranging analysis of the world monetary system by Official Monetary and Financial Institutions Forum, (OMFIF), the global monetary think-tank, in a report commissioned by the World Gold Council, the gold industry’s market development body. The report warns of “twin shocks” to the dollar and the euro and of a “coming dollar shock” and points out how gold would be a safe haven in a dollar crisis. “Gold has a lot going for it; it correlates negatively with the greenback, and no other reserve asset seems safe from the coming dollar shock.” “The world is preparing for possible twin shocks from the parlous. position of the two main reserve currencies, the dollar and the euro... The OMFIF offers a confidential, convenient and discreet forum to a unique membership of central banks, sovereign funds, financial policy-makers and market participants who interact with them. They note that “western economies have attempted to dismantle gold's monetary role. This has failed.”

• Obama's Gun Curbs Face a Slog in Congress (BBG)
• Euro Area Seen Stalling as Draghi’s Pessimism Shared (BBG)
• China Begins to Lose Edge as World's Factory Floor (WSJ)
• EU Car Sales Slump (WSJ)
• Fed Concerned About Overheated Markets Amid Record Bond-Buying (BBG)
• Australia Posts Worst Back-to-Back Job Growth Since ’97 (BBG)
• Abe Currency Policy Stokes Gaffe Risk as Amari Roils Yen (BBG)
• Japan Opposition Party Won’t Back BOJ Officials for Governor (BBG)
• Fed Reports Point to Subdued Economic Growth (WSJ)
• China Set to Exit Slowdown by Boosting Infrastructure (BBG)
• Greece not out of woods, must stick to reforms: finance minister (Reuters)
• Russian Rate Debate Flares Up as Cabinet Seeks Growth (BBG)