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How to Trade and Win from Risk Aversion in 2009

Monday, 22 December 2008 14:29:45 GMT  |  Antonio Sousa, Chief Strategist

In 2009, we expect the world economy to be tested by a second wave de-leveraging in the financial sector, possibly triggered by a new round of payment defaults in the U.S. mortgage sector. This will probably help lower yielding/risk currencies like the yen, against higher risk commodity currencies like the Australian dollar.

In 2008, a perfect storm hit the world financial markets, flooding hundreds of firms to the level of bankruptcy and forcing many investors to liquidate their leveraged positions. Many were quick to blame Wall Street, but only history will tell what was the real cause behind such a terrible year from an economic stand point. The truth is that the biggest housing and credit bubble in history continues to threat the entire global financial system and the once resilient global economy is slowly succumbing to tight credit conditions. In fact, I expect more pain in 2009, possibly triggered by a second wave de-leveraging in the financial sector and by more payment defaults in the U.S. mortgage sector. Having said that, I expect risk aversion to dictate most of next year’s price action in the currency market which will probably help lower yielding currencies like the Japanese yen and safe-heaven currencies like the U.S. dollar. On the other hand, with the global economy slowing down is reasonable to think that the demand for commodities will also begin to slow down which could make the Australian and the Canadian Dollars very vulnerable going forward. I have been short AUD/JPY since the beginning of October 2008 and I expect the Australian dollar to fall to 50 yen in the first half of 2009.

 

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