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Deutsche On Five FX Lessons Learned in 2011
It is often useful to learn from one's mistakes, or in some cases from one's successes, and as they prepare for their 2012 Blueprint, Deutsche's FX research team focuses in on lessons they learned from the travails of an asset class that was at times chaotic and at others baffling in its stagnation. Digressing from the high levels of uncertainty accompanied by strange periods of low volatility to a recognition that emerging markets did not decouple and there are no more safe havens, the five key insights offer practical views on what worked and what didn't and critically going forward to focus on the flows emanating from the Euro-zone as opposed to monetary policy.
1) High level of uncertainty does not mean large market moves.
Given the shocks that hit markets over 2011 from earthquakes in Japan to US downgrade to the Euro crisis, one would have thought 2011 would have seen some of the largest market moves in recent memory. However, the ranges for G10 currencies over 2011 were below average and most currencies have ended the year close to where they started the year. Fear has been high as suggested by high levels of implied volatility, but it seems the fear has paralysed the market into small ranges (see first chart).
2) Monetary policy no longer mattered for FX.
For years, we've used rate expectations to determine FX moves in a linear fashion and it has worked well for much of the past five years. However, 2011 proved that correlations do not last forever as the rates/FX correlation collapsed to negative territory (see second chart). So it didn't matter that Aussie rate expectations were scaled back significantly over 2011, while Norwegian rates were not, their currencies performed the same.
3) Best way to play the Euro-area crisis was not to use the euro.
We were all trying to play the euro crisis through selling the euro, yet the best way was to have bought CHF as the euro crisis was building up in the first half of 2011 and then to have sold HUF as the euro crisis became global (see third chart). The moral of the story was to have followed the flows that were triggered by the euro crisis (first Euro-area safe-haven flows to Switzerland, and then Euro deleveraging flows out of Eastern Europe).
4) There are no new safe havens.
In the middle of the year, it became fashionable to talk of NOK or SGD as the new safe havens. They did briefly perform well as the USD dollar faltered. But when it came to the crunch, both the USD and JPY were the best performers as risk aversion escalated towards the end of the year.
5) There is no EM.
We split the world into developed (G10) and emerging, yet grouping currencies in such a way has no bearing to their performance. Over 2011 some EM did better than G10 and vice versa. One could argue that there is G10+Asia versus the rest, but the better grouping could be to look at the underlying features of the currencies. For example over 2011, we could have grouped currencies into five camps: 1) safe haven/managed FX, 2) solid FX fundamentals or reserve FX, 3) trade surplus/growth FX ,4) high beta/risk FX and 5) deficit/inflation (see final chart). That gives a truer sense of the world, rather than sticking to labels from the 1980s.
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Why didn't they listen to the blogosphere when they had the chance?
We got everything 100% correct in our predictions for the past 15 years. 100% correct!
Why didn't they listen?
Link?
I remember the beginning of the housing bubble bust as if it were yesterday. There was so much denial among the sheeple. I remember telling a house full of guests at the Christmas party; You see all these new houses built around here? They'll all be 50% off this time next year. Buy one get one free. And all the other house will be 50% off too.
They didn't like what I had to say. Mind you I live at ground zero of the housing bubble bust SW Florida Lee County. This is the beginning of 2007 and we know what the prices of housing in SW Florida fell to by the end of 2008, a good 50% off. Mind you, I also had been following the housing bubble and subsequent bust from its inception. I made a good personal call. Now all the leftovers in my area are going for about 65% off the peak.
I was going to make a point but I'll leave it at that.
That would be exactly what is expected in a manipulated market.
If it looks like a dog, barks like a dog...
The fx rate might be the same, but access to money certainly isn't. What gives?
The problem is psychological. A lot of people operate with magical thinking. They think that if they are truely convinced about something than the reality will accomodate their desires. A few people are not afraid of pain and as a result it is easier for them to put 2 and 2 together, their brain will not block the logical thinking process out of cognitive dissonance. Some people will have a part of the brain block certain ideas because those ideas create a cognitive dissonance that is unbearable to them. So it did not make a difference for the people listening to you whether your arguments made sense, what was more important was the displeasure with the idea and their urge to shut down the idea and and hte man ( I assume you are a man) promoting it. The same process explains bouts of totalitarism in history. Psychology of crowds is a very interesting topic. I recommend "The Crowd" from Le Bon (I assume a lot of bloggers here probably have heard of it). It is free.
http://www.archive.org/details/thecrowdstudyoft00445gut
Tyler, less money at the ECB deposited? Maybe they start to whitdraw and reinvest in stocks??
Put a ban on FX leverage to maximum 1:5 and the FX market will start becoming perfectly normal. Until then you have pack of wolfs such as Top 5 Investment Bank in the world, who are moving FX market to empty clients account appropriately, causing enormous volatility. FX trading is the biggest revenue market for them since IT boom in 1995, just take a look at BIS data . As result of this poor Europeans are conducting summits every week thinking something is wrong with them and this turn the money making cycle once again by TOP 5 to have an excuse to move the market in their favor not their clients.
bearing in mind I'm cranky for being caught long e/u(and it'll take a while to fix this):
"For example over 2011, we could have grouped currencies into five camps: 1) safe haven/managed FX, 2) solid FX fundamentals or reserve FX, 3) trade surplus/growth FX ,4) high beta/risk FX and 5) deficit/inflation (see final chart)."
really, who has 2)? Solid fundamentals? And don't say NOK or such... with that depth, you can't do much. Beside some 10M< pop. countries, everything is a mess fundie wise...
3) trade surplus/growth FX - err... growth? where?
"1) High level of uncertainty does not mean large market moves."
the post Fukushima flash crash in jpy made my year...
Otherwise, obviously things are ranging; we're all going together in the same hole...
"1) High level of uncertainty does not mean large market moves."
really? what is their definition of large?
don't they watch AUDUSD? 10% in 10 days doesn't cut it? Looks like there is still enough money for the nightly coke parties.
Chaos and unpredictability, didn't you guy predict that also?
The chicken feces came home before the chickens did.
OT :
I now think I know why Merkel did not insist on Private sector banks taking a 50% haircut on Greece, as previously agreed: It was at demand of N. Sarkozy. Apparently, the euro meltdown is putting big liquidity-now, as solvency pressures in 1 year, on french banks. They have to ratchet up their equity to Basel 3 levels, 9% by mid 2012. So all help along the road is vital; no french and german bank write downs on Greece! And, Lagarde of IMF is now saying she will balk at any additional claims of money from bottomless Greece and its sinking sovereign ship. Greece may slip down greasy slope of sovereign debt any day...one domino down, as dangerous domino dancing dominates financial salsa festival.
Merkozy protecting their banks, but this greek play is small stuff compared to when tsunami hits Italy/spain and riccochets on to France. MArkets are full of piranhas on the prowl. Those notational firms will grease the plank of eurozone...slippage. FED will be sweating blood waiting for this to blow up. Ah, what a bunch of crazy wankers. Makes you want to become a chip-monk not on financial crappy junk food.
LMAO!!....DB?? with "analysis"?
Technical analysis from a criminal organization, now THAT's rich. I love how a completely manipulated and corrupt global fiat-fest is rationalized with post mortem charts and reasoned wording that distracts from shadow banking realities.
F'ing BS!
Stop sitting on the fence. Say what you mean!
SP500 daily chart resumes choppy downtrend. Opposite for USDX.
My long term indicators have continued to warn of USD strength and EURO weakness and these signals have increased since 2009. The overdue dollar rally should be substantial.
http://stockmarket618.wordpress.com
Aw crap, are you back again... posting your garbage on every thread. Fuck off for good this time.
I would agree that there is no safe haven other than pulling out of the market entirely and buying physical, cash flowing businesses, and productive land as funding currencies and safe havens are not the same thing