Risky business

I struggled really, really hard to start this commentary with something other than ‘sell euro’ but seeing as that has done rather well over the past few months, what the heck, sell euro.
The market volatility has really picked up, good for traders, bad for trying to offer advice, the current market trade is ‘risk off’; by the time you read this we may be back into ‘risk on’. 
‘Risk off and on’ is just a cover all expression sometimes used to explain major market trends. It is a broad brush in explaining why a bunch of currencies are being sold (or bought).  It’s not a very technical term and has no defined lines of inclusion of which currencies are included in the ‘risk’.  Start with the premise: come 2012 (that unfortunately close date in the Mayan calendar), which of the world’s economies would be the last one standing? Current feeling is that it will be the US, followed closely by Japan, sometimes Switzerland makes an appearance. These then are the currencies to be bought when you are looking to reduce risk; simply sell everything else, risk off.
The problem with risk off is that the lure of higher returns soon drags the pessimists out of hiding one by one. As I have said before, you can never eliminate risk entirely, so when is the right time for buying back a currency?  I like to use a regression as a good starting point. If the currency you are interested in is trading below its ‘normal’ range you can usually do ok by buying it.
It might turn out to be a very long trade to make money but the mean isn’t there by accident.  There is one very big caveat: if you are in a trend market  – where there is so much weight or interest in that particular currency you would be perhaps a little daft to get in its way – the expression ‘the trend is your friend’ has been used by many markets and for many, many years for very good reason.
So what of the mean?  Sterling has a 20 year mean of around 1.65, the Loonie 1.17, the euro I’m going with its ‘birth rate’ of 1.18 and Aussie at 0.75.  This is very untechnical and really shouldn’t be relied upon except for an ‘oh right’ type moment.
I thought I would throw in a few stats this month. The risk off trade has seen euro fall by 8.6 per cent, Sterling by 6.2 per cent, Aussie by 8.8 per cent, Swiss 8.7 per cent (shocker), the Loonie 2.9 per cent with Yen seeing a 0.6 per cent gain against the dollar over the past month.   There are probably a couple of currencies in there that are surprising, given all the column inches in the financial press given over to the demise of the euro. “Misery acquaints a man with strange bedfellows”.

Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited.  The Bank accepts no liability for errors or actions taken on the basis of this information.


Money Markets by Butterfield Bank’s Phil Turnbull