My Choice - High Yielders!

I have seen rising retail investors are back buying foreign currencies. In particular, there are strong shift towards high yielders, despite that predicting the end of the high-yield heyday has become one of currency analysts' favorite tricks after the bull run of high-yielding currencies in 2005. A Japanese friend of mine shared with me last Sunday that Japanese retail investors are buying large quantities of AUD and NZD, and the outstanding position now exceeded the peak that was seen before the outbreak of sub-prime loan problem August 2007.

Retail investors in Malaysia and Singapore that I talked to over the last two months are showing similar behaviour. They don’t really care much about the slowdown in these two countries as long as the large yield gap remains against their own countries. They believe that despite monetary easing in Australia and New Zealand that I think is likely next year, the large yield gaps versus Malaysia and Singapore will be maintained for the foreseeable future. Besides these two currencies, I also take note of rising interest of South African Rand (ZAR) and Brazilian real (BRL) purchases among investors in Taiwan, Korea and Japan.

Signs of a real unwinding of the so-called carry trade have gained strength in recent days and weeks, hinting that the currency markets could be on the verge of something big. I continue to find carry trades attractive despite recent volatility. One should take note that the high yielding currencies, like the Australian and New Zealand dollars and many of the emerging market currencies may also be played under momentum strategies, not just a carry strategy. For the most part, it seems as if the recent price action in the currency market can be better explained by the momentum strategies than carry trades.

The RBA left the door open for more interest rate rises from the current 11-year high of 7 percent to cool the country's inflation pressures, with the market expecting another hike soon. The Aussie's rise helped pull the New Zealand dollar up to a seven-month high of $0.7987 , drawing investors to its high yield on expectations interest rates will be kept steady.

I should caution readers that the risk with high yielding notes are the 'hidden' potential for currency devaluation. Both Australia and New Zealand ran a current account deficit even larger than US! Unless they can continue to maintain their GDP growth rate, any slow down will just widen the deficit, cutting rates will just be a matter of time. Having said that most of the fixed deposits are short term – 1 mth or 3mth. So depositors are implicitly betting against devaluation within these periods.

In a nut shell, the higher-yielding currencies once again began to find buyers. Sort of like a scene from Wayne's World… Game On!