Thin slicing is both a reality and a biological necessity. Whether it’s Malcolm Gladwell in “Blink”or Daniel Kahneman’s System 1 in his latest brilliant book, “Thinking Fast and Slow” the reality is that there is a part of our brain that, in Kahneman’s words operates automatically and quickly, with little or no effort and no sense of voluntary control.
Certainly when it comes to investing and trading you’d expect much deeper analysis. In truth that is what investors try to do. But equally the reality is that in a busy world with a myriad of drivers and inputs, new news and old news rehashed people, both novices and professionals alike, tend to have a top of mind thought for each of the potential investments they are following.
As a quick test evaluate what your instantaneous thoughts are when I write: Apple, and now when I write: Orica. If you are in the Hunter like I am you’ll have two very different views on each of these companies but they will come to you quickly, without too much effort.
And so it can be with currencies and foreign exchange markets. Indeed there are many ways to explain why the Australian dollar is doing so well. I can break out my toolkit and look at the longer term drivers and you’ll see things have picked up. I could break out the technicals and talk about the outlook or I can take a different approach – which is what I plan to do in this post.
Imagine, if you will, that you are a very busy Central bank Reserves Manager or a Portfolio Manager for foreign bonds. You have been assailed by issues of sovereign debt in Europe, debt ceilings in the US, Chinese property bubbles and fears about the growth outlook and any other myriad of issues that assail managers of global investment pools – or any other trader for that matter.
What do you do when you make your investment decision? You assiduously study all of the relevant economic data and outlooks, look at budgetary positions and so on. You read widely from all manner of analysts and pundits and then – because you have no other choice – you distill all your options down into 1 thought or sentence per country.
What might you say about the world?
We’ll, my best “something I prepared earlier” voice, here is a snapshot of the headline for each country covered in HSBC’s Global Macro Economics publication “When the Wheels fall off” from December 21st which I read last Thursday night when trying to catch up on things
| COUNTRY | HEADLINE | G10 |
| US | Trouble ahead | Yes |
| Canada | External Headwinds | Yes |
| Mexico | Making the best of it | |
| Brazil | Some recovery in 2012 | |
| Argentina | Reality Check | |
| Chile | Bracing for external impact | |
| Eurozone | Starting to bite | Yes |
| Germany | Consumption the only buffer | |
| France | Latest victim of the Eurozone crisis | |
| Italy | Aggressive austerity | |
| Spain | Stand by me ECB | |
| UK | 2012: An Olympic challenge for UK Monetary policy | Yes |
| Norway | Turning Inwards | Yes |
| Sweden | Export-led slowdown looms | Yes |
| Switzerland | Export-led recession in sight | Yes |
| Hungary | Going up the slippery slope | |
| Poland | Focus on Financial stability | |
| Romania | Rising NPL’s highlight risks | |
| Russia | Locked up between elections | |
| Turkey | Imbalances to correct at a glacial pace | |
| Egypt | Entering the green zone | |
| Israel | Steady domestic demand to offset some export vulnerability | |
| Saudi Arabia | What crisis | |
| UAE | Feeling the squeeze | |
| South Africa | Trapped in stagflation | |
| Japan | Carried by stimulus | Yes |
| Australia | Still in good shape | Yes |
| New Zealand | Better than some | Yes |
| China | Time to reflate | |
| India | Cooling amid high inflation | |
| Hong Kong | Sandwiched between the heavyweights | |
| Indonesia | Domestic resilience | |
| Malaysia | Feeling the global chill | |
| Philippines | Looking for growth from within | |
| Singapore | High beta blues | |
| South Korea | Steady, steady | |
| Taiwan | Sitting on the edge | |
| Thailand | After the floods | |
| Vietnam | The promise of reforms |
Have a look at each country and then have a look at the headline – I know this is not scientific but in a time constrained world full of thin slicers who do or need to break everything down into small chunks I think this is probably instructive of most traders, investors and portfolio managers thoughts at the moment.
Now if we think back to early October when the worst of the global pessimism and stock markets rout’s were about we can see the currency returns of the top 16 currencies of the world in the graphic below:
The Australian dollar is the clear winner.
I always say that currencies are least ugly contests and as you can see above in a world of challenges, fear and worries the Aussie, to quote HSBC, “is still in good shape”.
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