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15 May 2013
Forex Flash: Salmon fishing in Yemen, USD on the rise - Societe Generale
FXstreet.com (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale notes that the USD is rising, while safe havens are taking a hammering as part of a second phase of the rush for yield. Further, US empire and PPI were weaker than expected (marginal USD negative).
He continues to set a scene, writing, “If you imagine central bankers sitting on the mountain and lighting fires to melt the iceberg of cash, the trickle of water turns to a torrent downstream. Ever heavier pebbles (e.g. High Yield) roll down at increasing speed so that correlations cross assets tend to increase. The lightest flows (e.g. Gold, FX vols) move ahead. The slope of the mountain or response of the economy to policy action is the steepest initially. At one point the lightest flows move far faster than an easing slope of the mountain, the divergence means a slowdown back into the flow of cash.”
Galy believes that these incoherencies between asset prices and the economy is moving to heavier elements (back end of curves, USD vs world) leading to corrections. Further, with Asia and Europe still slowing but the US still outperforming, the incoherence remains subdued. Nonetheless, he writes, “We have moved to a second phase of the rush for yield. Glaciers are suffering the most (safe haven CHF, JPY, their curves) but the heavier boulders (high yield) are still stumbling down the market. The pattern of localized asset class correction is therefore set to remain, while we look for the heavy boulders coming down the stream and just hope most will end up as well mannered polished stones. Or my two cents on how to look at a complex system visually.”
He continues to set a scene, writing, “If you imagine central bankers sitting on the mountain and lighting fires to melt the iceberg of cash, the trickle of water turns to a torrent downstream. Ever heavier pebbles (e.g. High Yield) roll down at increasing speed so that correlations cross assets tend to increase. The lightest flows (e.g. Gold, FX vols) move ahead. The slope of the mountain or response of the economy to policy action is the steepest initially. At one point the lightest flows move far faster than an easing slope of the mountain, the divergence means a slowdown back into the flow of cash.”
Galy believes that these incoherencies between asset prices and the economy is moving to heavier elements (back end of curves, USD vs world) leading to corrections. Further, with Asia and Europe still slowing but the US still outperforming, the incoherence remains subdued. Nonetheless, he writes, “We have moved to a second phase of the rush for yield. Glaciers are suffering the most (safe haven CHF, JPY, their curves) but the heavier boulders (high yield) are still stumbling down the market. The pattern of localized asset class correction is therefore set to remain, while we look for the heavy boulders coming down the stream and just hope most will end up as well mannered polished stones. Or my two cents on how to look at a complex system visually.”