The Fallout from Equity Weakness

The tumultuous events of the past 10 days have seen the major currency blocks of the US dollar, euro and pound largely untouched. They remain trapped in a volatile sideways pattern.

However, it has not been the case for the Australian dollar. My post on 21 April highlighted the currencies particular sensitivity to global economic concerns, and this has come to pass as the currency has collapsed. Those with exposure to the currency will have to consider hedging strategies.

The Swiss franc has continued to soar which emphasises the reality of global woes and that currency intervention is nearly always doomed to failure.

Thus far, the European Central Bank’s (ECB) decision to buy Italian and Spanish debt has seen these markets stabilise, but it is worth remembering that this is what happened on the first intervention with Greece. The relief was temporary – and is likely to be so again.

The Fed’s announcement that rates will stay low until 2013 has created a knee-jerk positive reaction to stocks, but it is likely that once again it will be a brief respite. It is not short-term interest rates that are the problem – it is long-term rates – and with the Fed funds rate close to zero anyway, saying they will stay there has little practical use. The lack of any mention of quantitative easing (QE) 3 highlights how politically unpalatable that policy is.

For treasurers the outlook remains relatively benign for major currency exposure. However, attention needs to be applied to long-term American interest rates. Yields have fallen, but any sign that further downgrades are possibly could see this reverse sharply and have implications for US dollar weakness.

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