Relative Value is Still Out There, Just Take a Look

Interestingly (and I won’t be going into it at all) it’s worth having a look at where some of the major financial assets are currently trading. Look closely enough and you’ll see that in most instances it’s not too far away from where they started the year. For some assets this can be perceived as a good thing, while for others, it’s quite the opposite. In the positive instances, this to me smells of consolidation in what has been a tumultuous year, looking to build a base and better case scenario for the year ahead (read yesterday's post about the US and their equity market), while on the other side, ending up where you started can in my mind only be a precursor to far more pain to come.

Ultimately though there is no denying how volatile and inconsistent this year has been and as noted in the last few days unfortunately next year not only promises more of the same but likely even worse. Enough of the doom and gloom chatter, lets continue where we left off yesterday and take a look at the remainder of the G7 universe in the upcoming year. (For my views on the other G7 members see my post yesterday: My global macro take on 2012.)

The Sterling, my newly adopted local currency. This one is interesting. Cameron’s big up yours to the Eurozone is the biggest thing anyone here has really been talking about in the last month or so. Pundits will sit on both sides of the fence and tell you how good and bad this is for England, its economy and its currency. Me? Well I think it’s the best thing he could have done. In reality his veto meant nothing in practical terms because ultimately the motion carried and in my understanding a veto was always meant to be the kaibosh on any matter, clearly not here. What it has done is send a message that the UK will stand on its own two shaky feet as best it can and try not to get too sidetracked with European woes. As far as I’m concerned this innate desire to distance themselves from the rest of Europe has been what has proven resilient and stable for the currency this year and should, if anything, prove to be a further modest positive in 2012. I’m not saying that Cable will do anything stellar (after all there is the USD leg to consider) but do keep a very close eye on the EURGBP, this cross really has the potential to really move. The short version is that I am modestly bullish on the Sterling for 2012 and will look for ways to express this that don’t involve the EUR or USD legs if possible. Think GBP/CAD, GBP/CHF, and perhaps even GBP/JPY.

The Japanese. I love the JPY. It’s out there, I’ve said it and I’m not ashamed. This does not mean I am as anxious to own in 2012 as I was all the way through 2011. What it does mean is that despite what all logic, economic rationalism and fundamentals tell you, it is still better to own JPY than not. Perhaps it’s their consistency as a nation to just be rubbish for so long, perhaps it’s some ill fated poorly regarded risk aversion trade, but whatever it is, for consistency this currency cannot be overlooked. Yes, the Bank of Japan would like us to believe otherwise, but despite some very well placed intervention action through the course of this year, the market has taken the currency right back to where it belongs. As I said I might want to own it in 2012, but not as passionately as I did this year. By the way, has anyone seen what EUR/JPY has done in the last week or so...

The Loonie. I’ve always had a special place in my heart for the Canadians. Having spent some time living there, perhaps it’s just nostalgia. Either way, 70 percent of the time trading the USD/CAD is like watching paint dry while inhaling the fumes. But it’s the other 30 percent of the time that allows me to forgive its docile nature and really enjoy it for its worth. So, gold comes lower in 2012 and stabilises (against the USD of course), oil despite threats from Iran continues on its merry way and does next year what it did this year and commodities, in general, start to peel back to demand/supply mechanisms, the Loonie? It really starts to creep back to where it should be trading, which is lower. Most of the damage to its strength will likely be felt through the USD leg, but again it’s all about relative value and I do believe that something like CAD/JPY is definitely worth keeping an eye on.

The Swiss Miss. I don’t have a view. I just don’t. I do however have a gut feeling.... Drum roll please..... I think EUR/CHF will be 1.4000 paid at some point in the new year....

There it is folks.... I have nothing more to give.... As always though remember that even in the G7 universe, not everything needs to be traded against the EUR or USD. It’s like playing dress ups when you were a kid, mix and match. There is relative value to be found out there, it’s just a matter of finding a way to express it.

On a side note, I would like to thank everyone for their continued support, not only this year but certainly over the last few also. It has been a tough year, but equally so, very exciting by all accounts. I firmly believe that 2012 has plenty more of the same in store and thus wish all of you all the best of luck to deal with whatever it is that comes your way.

Until next year folks remember: Helmets on!