I have not written here for a while, mainly because I have not had a lot new to say. I continue to think that equity markets, particularly European equity markets, are extremely cheap. They continue to behave as if we are still in the midst of a financial or Eurozone crisis, when as far as I can see the data has been no more than mildly softer than expected, and yields remain incredibly low. Equities are extremely good value, and even though nothing very exciting is happening or likely to happen, I expect they will move sharply higher before too long.
In FX, the EUR is relatively chipper, helped, like the JPY and the CHF, by the prevailing gloom and lack of risk appetite rather than any optimism about the Eurozone. Most of the FX volatility has been seen in GBP, which is turbocharged by the big Brexit related options positions. Poor UK current account data and what I see as a big risk of a Brexit panic in the next two months suggests to me that GBP remains one bad poll away from a major tumble, so I see current GBP/USD levels (1.42+) as attractive to sell. Long EUR/GBP has been the better trade in the last few weeks, but has hit a big Fibonacci retracement level above 0.81, and without clear news is likely to struggle to break through that, especially if global risk appetite improves to be more in line with the global data. While GBP and the UK should not be the biggest beneficiaries of any improvement in global risk appetite given the Brexit risks, GBP does tend to benefit against the EUR, JPY and CHF from any improvement in risk sentiment. So in the absence of Brexit news GBP may prove more vulnerable against more risk positive currencies, if, as I suspect, the market starts to realise that they are priced for something much more dramatically bad than the rather dull and sluggish growth story we currently have. But too many people are probably now focusing on GBP to make their year. It may happen, but the big option exposure and reliance on news means timing could be everything.
Thematically, I prefer selling the other heavily overvalued major currency – the CHF. In the recent low risk appetite conditions the CHF has benefitted from its still large current account surplus, but there is nothing good to say about domestic growth, inflation is very negative and the currency remains dramatically overvalued (see real effective exchange rate chart above). In spite of that, The SNB has probably been intervening modestly to help prevent the CHF rising, because in line with the general gloom, Swiss investors continue to refuse to invest abroad so that their current account flows continue to pressure the CHF higher. What domestic investors find attractive in Swiss rates or the Swiss economy I don’t know, and I can’t see it lasting. As long as the Eurozone continues to grow, albeit sluggishly, the EUR represents vastly better value than the CHF. Long EUR/CHF consequently makes sense to me, as does long USD/CHF, though the USD is unloved at the moment and a little expensive too from a big picture perspective. Still, despite all the millions of words written about the US economy and the Fed, not a lot has really changed, with growth a bit sluggish but still OK, employment still growing strongly and inflation on target. If this state of affairs remains the Fed will hike again once or twice this year, and that should be enough to revive appetite for the USD. USD/CHF has important support at 0.9475, and I would stay long while it is above there.