Rally in risk currencies may still have legs despite IMF warnings
This week the IMF delivered a timely reminder that the recent bull market in risk assets including risk currencies such as GBP, EUR and AUD is built on fragile foundations. It downgraded growth prospects for the global economy, was particularly brutal over the UK's prospects and warned over capital flight from the struggling periphery Eurozone countries.
And in case anyone thinks that European Central Bank intervention will bring an end to the Eurozone crisis the IMF pointed out that further policy measures need to be taken to bring about lasting stability such as stimulating economic growth.
Though this is a reality check for risk currencies, it doesn't necessarily spell the end of their recent rally. Increasingly aggressive monetary stimulus actions from the world's leading central banks may well give added fuel to the rally in equities, certain commodities and for risk currencies for quite a bit longer.
In effect financial markets are becoming increasingly distorted by central bank activity and the values they prescribe to different assets reflect their fundamentals less and less. It is no wonder that Coutts, the bank which services high-net worth individuals, is advising customers to more than double their gold holdings in the face of currency debasement. It is of course all part of the plan by many central banks to get investors comfortable with risk again – it is risk capital which spurs the creation of new companies, jobs and economic growth.
For traders there's a logic of waiting to be long of risk currencies when they get routed by an out-break of fear and being very cautious of shorting them knowing central banks are ready to hose markets with massive amounts of liquidity.
But longer-term there's the risk that instead of stimulating creative investment, central banks are encouraging a flight to gold. Investing in the yellow metal is hardly an endorsement of the future and in effect represents 'dead' capital ultimately taking the form of bars sitting inside high security vaults. It's not that different to stuffing cash under a mattress. But for the individual looking to preserve their wealth holding gold is a perfectly rational response to the current environment and is likely to see further upside action on prices.