Magazine article Global Finance

FX Update

Magazine article Global Finance

FX Update

Article excerpt

Commodity currencies become the focus of investor optimism

Risk appetite appears to have improved in recent weeks, especially since early March, as global investors attempt to catch the bottom of the financial markets downturn and allocate fresh funds that have thus far been parked on the sidelines. Looking ahead, pullbacks in risk aversion will likely weigh on the US dollar, which would be a departure from recent months that have seen the greenback benefiting from negative investor sentiment and the position de-leveraging seen during the latter half of 2008.

Indeed, in the currency markets, the quantitative easing announcement by the US Federal Reserve on March 19 coupled with the significant fiscal deficit the US is embarking upon has helped sour sentiment toward the greenback, which in turn has fueled a rise in commodity prices. The Reuters/Jefferies commodity index rose close to 13% from the beginning of March to April 2, while the US Dollar Index fell by more than 5% during the same period. As a result, we are beginning to witness cross-border investors beginning to make forays into select commodity-related markets.

As an illustration, the long-term moving average of our iFlow FX indicator, which has had a good predictive relationship vis-à-vis the South African rand, shows a pickup in net inflows in recent weeks. Not surprisingly, USD/ZAR has fallen sharply to as low as 9.0174 as of April 2 from levels as high as 10.72 in early March and 11.65 last October. Interestingly, our iFlow equity indica- tors reveal that a good proportion of these inflows are associated with fresh strong net buying of South African stocks. …

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