Saturday, 11 February 2012By Forex Traders
Financial markets have been plagued by uncertainty for the past few years due primarily to the continuing debt crisis amongst Eurozone countries. Under these circumstances, making future predictions may be an exercise in futility, but, despite their miserable track record of late, analysts appear to have been correct in forecasting a resurgence in emerging market stocks. Such has been the case over the last month, driving up stock values in Turkey and boosting the Lira up nearly 8.5%.
Last fall, many investment managers advised their clients to convert to cash, rather than “experiment” with volatile market conditions. With so much cash on the sidelines, a brave subset of the investment community argued that emerging market stocks, which had taken a beating during the aftermath of the recession, were now poised to benefit from shifting tides in the global capital market.
Apparently, their logic has proved to be true, but is this recent trend temporary or does it portend better times to come, especially for the Turkish Lira? As noted above, the art of forecasting has suffered due to the malaise in Europe, but one can still look backwards and sideways for hints of what may transpire down the road, and then assess the fundamental economic forces at play and how they may react over time. To begin with, let’s look at a 5-Year history of the Lira versus the U.S. Dollar:
The Lira over the past decade has actually been gradually weakening in a step-wise fashion versus the greenback, tied to the ebbs and flows of capital to the developing markets of the world, the true investment “darlings” of investors since the millennium crossover. In the chart above, the Dollar is the “base” currency. The two upward “spikes” represent periods of appreciation for the Dollar and depreciation for the Lira. The first “spike” occurred when Lehman Brothers failed, the tipping point for the “Great Recession”, and the latter is associated with the ongoing financial debt debacle that has confounded European member states. Preceding these periods of crisis have been relatively calm, range-bound pricing movements, a characteristic of stability and normalcy when it comes to economic matters.
Recent patterns look remarkably similar to those of 2008 and 2009. Can we expect more stability going forward or should “caution” be the watchword for the balance of the year? Timing will mean everything in the months ahead, as fundamental economic forces begin to take shape. In this era of globalization, the global economy is more interconnected than ever before. Subtle dependencies can shift capital in an instant, a worrisome fact that emerging markets must always be wary of when currency controls have been abandoned.
A “sideways” glance would reveal these topics for discussion:
• The U.S. economic recovery has been steadily gathering steam, but 2012 is a presidential election year, a time when “strange” things can occur on the political scene. Hopefully, commerce will continue to grow on its present track and create demand once again for imports from other countries around the globe;
• Asian economies, especially China and India, have already managed “soft landings” after ratcheting back from double-digit growth. They are now poised to resume their various growth strategies in a predictable fashion;
• Europe continues to languish, but there are hints that a mild recession may be avoided, but debt resolution discussions may drag on for years. In the near-term, Greece must rollover much of its debt in the coming months. A “hard” default may send a shockwave through credit markets that in the past has led to a massive flight of capital to “safe havens”, namely U.S. Treasuries and precious metals;
• Such a shockwave would surely depreciate the Lira once again, as in 2008 and in the last eighteen months. Capital flight is often driven by two concerns. First, the fear factor alone starts a flood of withdrawals. Secondly, the infamous “carry trade” strategy adds to the ramifications in short order. Major global banks, large hedge funds, and even individual investors borrow funds from low interest markets and then reinvest them where returns are inordinately high, generally in emerging markets. When the crisis hits, margin calls necessitate an unwinding of the strategy to repatriate much needed cash.
How will these actions unfold in 2012? Hopefully, Europeans will defuse the financial “powder keg” that threatens to derail the present global economic recovery. In the absence of any other natural or man-made crisis, the forecast will be steady as it goes. The Lira appear to have found current support in the “1.75” region. Turkey still has a trade imbalance that worries economists. The recent appreciation in the Lira may help stem the tide of imports and curtail consumer spending, leading to an increase in domestic savings. Only time will tell.
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Saturday, 11 February 2012
Forex Traders
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