At the start of 2011, I predicted that there would be lot of intervention in the currency market from the advance economies. Its happening now. Best position to take as an investment: Swiss Franc, Japanese yen, Chinese Yuan , Canadian dollar, Norway Krone, Brazilian Real and Indonesian Rupiah. Is currency war becoming going forward? I dont think so that would happen as it would be disastrous for the global economy.
What a week this has been already. Despite the Labor Day holiday, it has been an intense week in the currency markets globally. Lets start out last week when the Central Bank of Brazil shocked the markets with an interest rate cut. Investors, you read it right – an interest rate cut. And this is despite a high level of inflation in the country and excess liquidity in the real markets. To cut the rise in Brazilian REAL.
Granted, this is not the first shocking move by the Brazilian government which is trying to stop the rise of the real. They have taxed, restricted and controlled the currency markets. Basically, they have thrown the kitchen sink at this perceived problem. And yet the real has stayed strong, falling by only about 4 percent.
Next there has been lot of noise and heard the rumblings on and off about the possible slowdown of growth in China and India. While there are some signs of a slowing of the hot growth rates in both countries, it wont see a dramatic fall in their currency rates. In fact, the Chinese currency has barely moved.
JAPANESE YEN
The Japanese yen has also soared to new heights. While this has been a challenge to businesses, the Central Bank of Japan, which has tried currency market interventions in the past and failed, has stayed out of the market – so far. It has grumbled and threatened the world a bit, but has stayed on the sidelines – so far.
SWISS FRANC
Yesterday was the witness to one of the most strange acts in the currency markets in recent history. The Swiss National Bank [SNB] capitulated and gave up its sovereignty completely. They have effectively pegged the Swiss franc to the euro at 1.20. And with that, they have effectively announced that they will keep buying euros to manage their currency rising versus the euro. Gold, Swiss franc and agricultural products are becoming a safe haven.
I am not sure what benefit this will bring the franc or the currency reserves of Switzerland. The euro is under a cloud these days. And to peg your currency to that, in this day and time, seems like a very risky move. In any case, as a consequence of the SNB move, the franc-U.S. dollar rate fell by 10 percent immediately. But that will not help Swiss businesses which run their biggest trading relationships with Europe, not the U.S. The SNB move just ahead of this makes the decision of pegging to euro even more confusing and ill-timed.
GERMAN COURT DECISION.
Let’s also talk about the euro. Germany's high court on Wednesday upheld the country's participation in eurozone bailout funds, but ruled that lawmakers should be more involved in such decisions. The ruling means that while Germany's agreement to take part in the financial rescue of Greece will not be affected, participation in future bailouts might become more complicated.
Imagine, if the Federal Reserve and the White House had to get Supreme Court approval to print money, bail out private banks and car companies? What a novel idea to have some authority keep our runaway officials in check.
US DOLLAR LOSING VALUE
And yet, after all of these events, the U.S. dollar has risen by 1.35 percent in the past week (as measured by the U.S. Dollar Index). So in the race to be the cheapest currency, Central Banks are outdoing themselves to malign their currencies. And yet the U.S. dollar is not rising.
What does that inform us? What the market is conveying us, is that despite all of these well-meaning but ineffective moves, the U.S. dollar is still the ugliest belle at the ball, and that the U.S. dollar problems are much more deeper than all of the worries in the world.
And finally, what does gold at $1,900 per ounce demonstrate us? It is informing us that the markets have no faith in the U.S. dollar or the Federal Reserve Bank keeping the U.S. dollar safe. US Dollar has lost 98% of its value against Gold in the last 100 years. It is the biggest no-confidence motion against the Federal Reserve. DEAD DOLLARS DONT BOUNCE BACK. I am glad to see that I am not the only one who has no faith in the U.S. dollar. Diversification is the key and getting out of the U.S. dollar should be investors priority. Buy Gold & Silver to get insurance of your wealth.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.
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