Currencies

One way or another, either EU or IMF will bail out Greece. Germany will be reluctant but pressure on the country's responsibility to save its brethren is high and things will get worse if they don't. German exports primarily flow within the eurozone, when looking outside the continent, nothing has significantly improved in the broader market since January.How can Germany stay calm when its own survival depends on the survival of other consumption-oriented economies like Greece? Kicking a profligate member out of the zone is just populist talk, a break-up of the euro is worse. For starters, devaluation of new sovereign currencies in response to export competitiveness will have Germany cry foul for decades to come. EUR should stabilize any day now when a concrete rescue package(or a concrete promise to rescue) is on the table, but euro-wide sovereign crises will likely to make the currency go for another dive before coming back to 1.5-1.6 at the end of 2010.

AUD/JPY, carry trade back in vogue? Japanese households are not earning enough in their own economy and have been looking at outside opportunities. Evidently There has been strong trends of yen-denominated managed funds making their way into the high-yielding overseas markets such as Australia, where cash rate stands at 4% and will likely to rise another 50bp within the next 6 months. AUD/USD will probably challenge parity once again. It was very close to reaching its goal pre-crisis. Meanwhile the Fed is still stubbornly cautious about rate hikes so there will probably be another 6-9 months of doing nothing other than refraining the "extended period" cliche, further flaming the Aussie.

One caveat is what looks about to happen in China. the Chinese steel industry is secretly suffering from overcapacity but everybody does seem happy about buying commodities non-stop. Rio Tinto reconciliation with Chinalco paves way to another promising JV so presumably everything is fine again? Another sticking point is China's unrelenting attitude towards iron-ore pricing. Should that persist and China decides to slow down or finds ways to diversify its resource dependency, AUD can kiss dollar-parity goodbye.

Taken the country's internal problems into account, the currency trade will be even more risky. NAB, the big 4 Aussie bank, has recently revealed debt losses totaling more than 1,6billion, the other three have skeletons hidden in their closets too. Moreover, Australian households are incredibly leveraged and banks heavily rely on foreign financing. Let's see if the debt bubble will prick this year.