>Currency Strategy (HSBC)

The USD is the reserve currency. Deal with it.

Market focus
The latest FX reserve data for 2008Q4 has just been released. The data is timely given that it captures the changes in FX reserve composition by central banks during a period of intense financial market volatility and when some central banks were intervening to support their domestic currencies. Also, given the discussion of USD’s reserve status around the recent G20 meeting, the IMF’s data highlights how the USD is still by far the pre-eminent reserve currency. This will be the case for some time to come. We have argued that the USD’s value will decline but we have never argued that it will suddenly be replaced as a reserve currency. The USD’s liquidity premium through its reserve currency status is not a valuation tool but helps to explain USD strength in a time of crisis.

The idea to switch to the SDR as the main global reserve currency may hold some merit as a concept but implementing it would take a long time and overall it is an extremely low probability event. That said, we outline what would happen from a flow perspective if it suddenly happened today. Undoubtedly this implausible development would be USD negative.

Gold investment is robust but consumer demand crumbles
Gold prices are likely to remain volatile as investors assess the impact of the authorities’ efforts to combat the global recession but ultimately we believe a lack of inflation will reduce the safe haven demand for gold.

Technical analysis
USD-CHF: Downward pressure is building again on support at 1.1160/70 and a break lower would be expected to release further selling energy towards 1.0900 and potentially 1.0620. To the upside, if support at 1.1160/70 manages to hold firm, then the focus will switch to the short term resistance at 1.1550, since a break above here should trigger a strong rebound towards 1.1750

IMM analysis
According to the latest CoT report dated 31 March net long USD positions were decreased for the second consecutive week. Investors increased their net short positions in JPY for the third consecutive week, in addition to increases in short positioning in GBP, CHF and CAD. EUR positioning was switched from short to slightly long while a small increase was seen in AUD long positioning this week.

To see full report: CURRENCY STRATEGY