Currency Pairs
by Richard
Put on your hard hat with the miner’s lamp. We’re going deep into the mine.
The data mine.
We’ve been fixated on the dismal domestic and international markets all year, and in the process we’ve missed out on a seldom reported phenomenon:
The wild swings in currency pairs as measured against the dollar.
The undisputed champ for 2008 is the Japanese Yen, up some 20% as compared to the dollar, year to date through the end of 2008.
This does not imply that the Japanese economy has outperformed by the same degree, but reflects massive yen buying by global speculators who are unwinding their leveraged bets.
The basic bet was known as the “carry” trade. Hedge funds and speculators borrowed Yen, due to it being the favorite reserve currency available at the lowest interest rate, and re-invested the proceeds in other markets to arbitrage the spread in interest rates.
Like any leveraged investment, it worked like a charm in up markets, but when the newly financed assets declined, there was a massive pile up as chastened borrowers bid up the spot yen rate to unwind their positions.
The other major currency that gained on the dollar this year was the Chinese Yuan, up about 6%.
Rather than a one off re-valuation reflecting this currency’s underlying strength, China has allowed a steady and gradual re-pegging. This may not continue if our imports from China continue to decline.
Most remarkable for the year are the out-sized gains the dollar made against the currency of our other global trading partners. Including:
- Brazil 32%
- Canada 23%
- Mexico 20%
- Australia 28%
- India 20%
- New Zealand 33%
- South Korea 37%
- Norway 29%
- Russia 15%
- England 33%
- South Africa 43%.
Even the vaunted Euro is still down 5%, after retracing most of it’s decline in the past month.
Which leads us to several conclusions.
- We know why it was so easy to lose money on foreign funds this year. It wasn’t just the normal decline that results from a global slowdown. The drag from the currency conversion compounded the loss, as it was simply much too strong a headwind to overcome.
- We will have a difficult time exporting to these countries, as our goods and services have become much more expensive in terms of their national currency.
- There is no certainty in relative valuations, since the major reserve currencies were severed from gold convertibility. In the global economy, uncertainty increases when every factor in the equation is a variable, with no fixed lodestar.
Currencies are just another tradable commodity, like oil, soybeans or coffee.
We’d like to think our stronger dollar reflects favorably on our economic prowess.
More likely, it highlights the essential fragility of the global economy, and its secondary and tertiary powers.
It’s easier to be the bully on the beach, when everyone else is a 90 pound weekling.
