Forex Portfolio Review

The ForexDisco currency portfolio is less than a week old but is off to a good start.

Portfolio Thesis

There are three main themes the portfolio is trying to capitalize on:

1. Which region is worse off? Out of the three major regions in the world (Asia, Europe, North America):

  • Asia is in the worst shape because of China’s credit issues and Japan’s currency problems. As the credit environment deteriorates in China the region’s financial markets will become more unstable.  Japan will eventually ramp up its liquidity machine but it’s unlikely to happen before the G7 meetings later this month; however, it would not surprise me if the BOJ enters the market and sell my in order to weaken its currency before the end of May.
  • Europe‘s economic condition is similar to the United States where it is “pottering” along but the anxiety created from the UK’s referendum vote to stay in the EU has created an opportunity to buy a GBP.
  • North American is in the best shape out of the three regions but it is not going gangbusters. It will have to follow suit with the other major central banks and weakening its currency in the future. It’s not that the dollar will be reflecting a strong US economy, the dollar will strengthen because it is a safer bet compared to the other options.

2. Brexit is going nowhere so buy GBP. The most recent poll in the FT shows 46% stay, 43% leave with 10% undecided.

This margin has shrank in last week but the reward/risk is large enough to buy GBP versus USD and selling it versus EUR. A boat to stay in the EU will move GBPUSD up to the one .53 level in short time and pushing EURGBP to around .73.

3. As China comes under more stress so will AUD and NZD.

Both the RBA and RBNZ want a weaker currency in order to keep their exports attractive to global competition.

The above  opinions are put into practice by selling AUDUSD, EURGBP and buy GBPUSD, USDJPY and EURJPY.

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