MARKET INSIGHT: Currency Markets; High yield / commodity currencies take the lead

The following is a summary of a recent article written by Hong Kong based Mitul Kotecha, Managing Director and Head of Global Currency Strategy at Calyon. Mitul has kindly agreed to share his expert currency market views with The Banker's Blog.

The article can be viewed in full on Mitul's website, The Econometer, by clicking here.

• Even though equity markets have fallen in recent sessions, the trading community continue to show an appetite to take risk onto their books
• As a result, high yielding and commodity currencies have emerged as winners in recent trading sessions, particularly AUD, CAD, NZD and NOK. Emerging market currencies have also risen
• Mitul backs a continuation of this trend and is in favour of backing long positions in the above currencies, particularly against JPY, which he expects to come under pressure as the year progresses
• Expect the Reserve Bank of Australia (RBA) to hike rates 25bps for a fourth consecutive time to 4%, at their next meeting on 2nd February 2010. Recent economic data releases from Australia are supportive of this view, while technical resistance awaits at 0.9326 on the upside
• In an interesting piece of analysis, the AUD/USD currency pair is currently showing a high correlation with interest rate differentials between the two underlying countries. The correlation resides at 0.85. Should this continue, AUD/USD would be highly sensitive to forthcoming economic data releases in Australia and the US
• Mitul expects rates in Australia to rise to 6%, which is more than what is currently priced in, leaving upside potential
• Turning to the US, the minutes of the last FOMC meeting on 15 December 2009 were interpreted as "slightly dovish" due to discussions over expansion of the size and length of the asset purchase programme

Source: The Econometer