Strange Happenings In The Currency Markets

Quick note that there’s no screen this week as I release my portfolio spreadsheet tomorrow evening.

The weekend’s Financial Times carried an article on the carry trade: “Carry Trade Makes Comeback.” I doubt fx markets will go back to pre-2008 conditions where the yen carry trade is so prominent but there is massive uncertainty in the foreign exchange arena. Throw in China’s public doubts about the US dollar’s (USD) reserve status and we may be entering really interesting times (as if today’s markets weren’t fun enough!).

The currency markets, like most every market, have been extremely volatile relative to its past trading history and with the G20 meeting coming up, most pundits expect this to continue. What I find interesting is the divergence in coverage between the two major financial papers, The Financial Times and The Wall Street Journal.

For several weeks now, the FT has been pushing a storyline that the Norwegian krone is emerging as an safe-haven alternative to the USD. Granted, Norway has major oil wealth without a severe case of Dutch disease (over-dependence on an export commodity that leaves the economy underdeveloped), a favorable twin deficits situation and massive reserves due to its sovereign wealth fund. But I still find the theme of the krone as a safe haven hard to believe.

If you only subscribed to the WSJ, you’ve missed this storyline entirely as they have made no mention of this, which is strange as stories in one paper closely track the other. If you see a big write-up on sovereign wealth funds or pension liabilities in one paper, you can expect a similar-themed story to appear in the other in a few days. Perhaps WSJ editors are more skeptical of the Norwegian krone but I think it’s emblematic of just how much uncertainty lurks in today’s markets.

Tim Geithner may grace the cover of the papers on a near-daily basis but at this point, it’s difficult to discern what the truly important stories are. Know this: they usually don’t appear on page A1.

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One Response to “Strange Happenings In The Currency Markets”

  1. Dax Says:

    I think the FT has been suggesting the Norwegian Kroner as a substitute for the Swiss Franc, but not for the Dollar. It’s just neither big nor liquid enough to absorb flows from the Dollar.

    The Swiss have starting the printing presses on their Franc, hence the FT’s lack of faith in their currency.

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