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Relative devalue trading

Someone I have the utmost respect for as a trader told me this week that the dollar is a pile of pooh. While that is possibly true, it appears that, for the moment, it is a less smelly turd than many other currencies.

In fact, it looks like we have entered a new paradigm because there are very few currencies or other assets that look in the slightest bit attractive – welcome to the era of relative-devalue trading.

From a UK perspective, it has started to dawn that our economy is in severe trouble and that rates are going to have to fall a lot lower. As Bank of America has pointed out, the BoE’s November inflation report, “prepared the ground for further significant cuts... we now project the BoE to cut the bank rate 100bps in December.” With fiscal stimulus also on the cards, it is clear the UK’s policy makers are seriously worried about deflation. Those fortunate enough to have savings are naturally wondering where they should put their money.

Investing overseas poses problems. Headlines have been screaming about how weak the pound is, and cable looks set to overshoot on the downside as much as it did on the upside – this could take it down to 1.2500, making investing in the US not very attractive. Against the euro, it may be another matter. Referencing Bank of America’s excellent research again, the eurozone looks like it is headed for its worst recession since 1992/93.

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