Global Liquidity Conditions: So what should we be trading in spot FX world?
Global liquidity conditions were, according to quite a few learned commentators (eg Morris Goldstein 1998 https://econpapers.repec.org/bookchap/iieppress/pa55.htm) a contributing factor in the 1997 Asian financial crisis as well as the 2008 global financial crisis. Now when I read through the interbank research in the FXWW-Messenger chatroom, its all about Repos, TOMOs, POMOs and bills! Credit conditions in the G4 (US, EU, Japan and UK) can have a huge spillover effect into emerging economies and this is going to cause FX volatility.
Never having been a big EM trader, I am left looking to the major pairs and crosses for some ‘obvious’ trades. Seemingly the obvious play is so sell the traditional ‘risk-off’ pairs such as AUD/JPY etc but these trades are already quite mature and positioning indicators have the NZD for example at red-hot-extremely oversold. That doesn’t mean it can’t fall any further but the bigger moves have probably happened already. I also sense that the massive falls in these pairs in 2008-2009 came after about 5-6 years of carry-trade building, something which we haven’t had this time around.
So to the majors. The pair that seems most interesting at current levels is EUR/GBP. I suppose the first question to ask is whether the UK should even be included in our G4 list at all. Sure the City of London is still a major financial centre but there is still so much uncertainty regarding Brexit that I cannot be long GBP at the moment with any degree of comfort. Then there is the whole question of positioning; is the market really very short GBP and ready to panic buy? I’m really not sure on this as its hard to get definitive data. We will have to rely on market behaviour to tell us this one. Finally we look at the subjective area of technical analysis and I have decent support coming in at .8810/40 (but then again I was looking for a support level!)
If we are going to get a few bumpy months in the financial markets then I think its a decent risk-reward trade to be long EUR/GBP. I’m starting to build a long position and will reassess if we break below .8700.