The amount of liquidity swishing in the global economy, it is unlikely to see any equity led correction in the forseeable future. Cyprus was but a blip, maybe if the same thing happened to Spain or Italy would we see anything resembling a major correction. No one seems to be ready to take back the liquidity from the financial system, not anytime soon.
The rising tide has brought up most equity markets, however, some hefty action may be seen in currency realignment battles. Why? Since most major economies are setting interest rates close to zero, that is as good as it gets to try to pump up the economy. What is left is a corresponding decline in purchasing power which lifts competitive advantage to further boost their economies.
Japan has thrown a spanner into the works by being aggressive in printing money following decades of inertia. When that happens, it negates the weaker Euro and US dollar, which may curb their economic intentions.
Safe havens such as yen, Swiss, the loonie and Aussie currencies may have seen funds leaving their shores as the need for safe havens seems to be dissipating. That could be because the US economy's recovery seem to have a bit more legs in it, plus Asia and Latin America are holding well. China seems to have navigated its excessive speculation in property and stock markets well enough by driving it down without a hard landing. China still has to grapple with State companies debt levels and some inroads seem to have been made there.
So, how should the currency wars play out. Soros was rumoured to have been shorting the Aussie dollar but the rumoured size of $1bn is not going to move markets. I would still short the Aussie dollar, not on betting on interest moves, but on usual holders of high interest rate papers in NZ and Aussie bonds (i.e. Japanese) to liquidate to move back to Japan as thing are rosier there.
Overvalued currencies are there for many reasons: mainly because they were largely unscathed from the 2008 crisis and a solid local economy.
The most undervalued major currency has to be the HKD. Its economy is not tied to the US but the currency is. What you get is smart investors would just keep piling into HK dollar assets until it is so frothy that they cannot take it anymore but will change it to a different basket weighted currency of yen, yuan, dollar and euro. The HKD is so artificially weak which is good for the local economy, tourism and MICE related events. I guess they will wait till things boil over in property and stocks before they have the political will to act.
For the rest of the year, these are my shorts and longs:
SHORTS - Aussie dollar, NZ dollar, Canadian loonie, Japanese yen
LONGS - Malaysian ringgit, Indonesia rupiah, Thai baht, HKD, Taiwan dollar, Chinese yuan
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