As the Greco-Chinese drama unfolds in its ebbs and flows, strategic clarity is paramount. First, let’s separate opinions from facts.

  • It is still completely unknown whether there will be any material economic fallout from the Greece crisis (see my post from June 28th http://alexgurevich.tumblr.com/post/122713740067/greece-and-china-crisis-doesnt-happen-on).
  • It is safe to assume that there will be a global deflationary shock wave resulting from Chinese stock market crash and trading freeze-up. Hard to imagine recent events to have no effect on consumption and investment. Recent fall in commodity prices is an example.

In this post I will go over a few world currencies and their connection to the recent events.

USA:

  • Facts: US job market appears to be steadily improving. The Fed exited the QE program and is contemplating a timeline for tightening.
  • Opinions widely differ and how well the economy is actually doing and whether there is any imminent inflation threat.
  • Currency: Long dollar continues to be the theme as it is favored by the policy divergence and spiraling pressure on the Emerging Market and falling commodity prices.

Euroland:

  • Facts: The economic performance appears improving, but there is no immediate threat of inflation. Greek crisis postpones any possibility of slowing down the QE.
  • Opinions differ on the full outcome and impact of the Greek debacle.
  • Currency: Short EURUSD remains my core position. The QE is in progress regardless of the Greek outcome. And any rebound in the Eurozone economy is not necessarily currency positive as I’ve written on May 3, 2015. http://alexgurevich.tumblr.com/post/118071999752/eurozone-economy-bull-currency-bear 

    • China:

  • Facts: The economy has slowed down from its earlier tremendous pace and needs to work out some imbalances. The stock market is going through a massive correction and extreme volatility.
  • Opinions differ on how sound the overall economy is and on the necessity of the RMB devaluation.
  • Currency: Outright and options bets may offer a positive risk-reward as the potential for significant devaluation appeares underpriced. But there is no certainty of success and high likelihood of getting the timing wrong. Betting on the currency requires a strong China view.

    • Japan:

    • Facts: The inflation target is still not achieved and the economy is still struggling to accelerate. The QE is in progress and current government and central bank are extremely committed to achieving their inflation targets.
    • Opinions differ about the country’s economic future.
    • Currency: As short-term panic typically cause a flight to JPY as one of the “safe haven” currencies, I see any dips in USDJPY as an opportunity to build long USDJPY position. Indeed, Chinese slowdown is deflationary, and of all the central banks BOJ has the prime political mandate and tools to fight deflation. So the market’s tendency to strengthen the yen during stock market dips is completely counter-economic and a good entry opportunity.  

    Australia:

  • Facts: The economy is experiencing headwind from the China slowdown and falling commodity prices.
  • Opinions differ on whether the currency has reached an attractive valuation after the recent plunge.
  • Currency: Any bets the AUD have a strong component of expressing opinion on Chinese economic growth.

    • Emerging market:

  • Facts: Producer countries are suffering from falling commodity prices. The broad dollar strength is putting pressure on all dollar-funded carry trades.
  • Opinions differ on whether countries like Brazil or Turkey now represent value.
  • Currency strategy: I believe caution is still in order when investing in EM as the trend is abysmal, but if your portfolio is overall crisis resistant, some bottom-fishing may be in order.

    • South Korea:

    • Facts: Japanese currency weakness and Chinese slowdown are both deflationary for their neighbor.
    • Opinions differ of the overall economic health and debt problems.
    • Currency: I think KRW is on one-way train and this train is not going North. The current environment seems to offer very low chance of significant KRW appreciation. I am in favor of long USDKRW.

    To summarize: long dollar vs. USD, JPY, and KRW seems to be a good risk-reward proposition regardless of the crisis outcome.

    Image: “Money changer” by calamur

    Chart source: Yahoo! Finance

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    CIO, HonTe Investments. Ran global macro at JPM. Yahoo! Finance Contributor. Ph.D. in Mathematics. Author, The Next Perfect Trade. No investment advice.

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