Currencies can leave monetary union-----By Shan Saee

Currencies can leave monetary union and no harm can be done. It could be devastating in the short run but in the long run, its perfectly normal for the financial markets as they factor in the risk of that particular monetary union.

I have analysed least 87 examples of countries leaving currency unions and establishing their own money since 1940. Establishing an independent currency allowed the country concerned to set more sensible interest rates and exchange rate to help them grow. In every case it gave them more independence, strengthening their ability to make their own decisions free of foreign interference. They can have internal devaluation ---lower price and wages to boost their competitiveness in order to remain float in the global economy. The biggest advantage to the countries leaving Euro zone is they can print money in their own currencies and have control of monetary inflation or deflation i.e. money supply in the financial market

The Euro remains under pressure severe pressure. Its down from 1.43 to 1.32 [ lost 7.5% value against US Dollar] . Leaders in Euro zone are waiting for Mrs Merkel to relent. They just want her to say the ECB can buy up many more EU country bonds, and QE/print the money to do so. The Governor of the Bank of England this week in his press conference explained her reasons very well. He pointed out that a Central Bank has a role as the lender of last resort. That means it acts as the lender who supplies cash to commercial banks in its jurisdiction if they are solvent but in need of temporary loans. They are lent money at a penalty rate to see them through. It is not the job of a Central Bank to act as lender of last resort to countries that have run out of credit and whose solvency is in doubt.

Within Western Europe the latin currency union led by France and the Scandinavian currency union both broke up without great calamity at the time of the First World War. Between 1945 and 2007 according to the Monetary Authority of Singapore 69 countries have left currency unions. This figure leaves out a good number, including the break up of the rouble currency in the early 1990s. It also excludes the split of Czech and Slovak currencies in 1993. It includes the ones which left the sterling area, like New Zealand in 1967 and Ireland in 1979. It happened by agreement with a relatively smooth transition. Some like Bangladesh left the Pakistan union. Others left former colonial unions: Mozambique for example left the Portuguese area in 1977 and Algeria left the French franc area in 1969. Eritrea left Ethiopia. Again these changes caused so little disruption that most have forgotten they ever happened.

The uncertainty about the end game for the Euro continues to damage the markets. The battering of the bonds does make things far worse. It means banks will lose yet more money on what were meant to be safe holdings. This in turn means they will lend less, slowing growth still further. It is surprisingly common for countries to leave common currencies. So, if Greece, Italy , Portugal or Spain leaves the Euro zone, its perfectly normal and will continue to compete globally with their own independent currencies.

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.

Why money is flowing into Dollar--By Shan Saeed

In late October, I started noticing a tug-of-war going on in the stock market. It shows up on the charts by forming a symmetrical triangle turned sideways on the chart. Triangles typically have five major pushes to each side of the triangle before breaking out. Last week, it was nearing the completion of the fifth pass, so I told my valued clients that a stock market breakout was likely coming within the coming week or two maximum.

Well, sure enough just a few short days later, the stock market broke out of the triangle pattern on the daily chart of the S&P 500 and started heading south. This was a huge tip for currency traders.

You see, when stock market breakouts happen like that, it illustrates currency traders which currencies will likely benefit and which ones will likely suffer from the breakout. In the industry, we call it the “risk on” or “risk off” trade.

When stocks breakout southward the risk-off trade is in play and when stocks breakout northward on the chart, the risk-on trade is in play. Now as investors, you just need to know who’s in the risk-on and risk-off camps.

RISK ON

The risk-on currencies are the ones that tend to track stocks and commodities closely and often carry higher interest rates.

So some of the risk-on currencies are the Australian dollar, New Zealand dollar, Canadian dollar and even sometimes the euro and the pound.

Emerging market currencies like the Mexican peso, South African rand, etc. are also risk-on currencies since they are influenced by commodities and have higher interest rates.

RISK OFF
The risk-off currencies are the defensive currencies like the U.S. dollar, Swiss franc and yen. The dollar is really taking the lead right now as the “defensive currency of choice” because the central banks of Switzerland and Japan have made the other ones essentially bad defensive choices because of these central banks intervening in their currencies to weaken them.

So if you have an opinion on where stocks are heading, whether up or down…then you also have an opinion of whether the risk-on trade will be in play or if the risk-off trade will be in play. And knowing that, you’ll be able to know which currencies have an edge and which ones don’t. Then you can play them against each other.

For instance, if the risk-off trade favors the dollar and hurts the Aussie dollar and New Zealand dollars then you can sell-short AUD/USD or NZD/USD and benefit from both dynamics going on there.

So keep an eye on what stocks [and even commodities] are doing and you’ll have a great take on what is going on in the currency market even though you may not have as much experience in the currency market. This is a great way to take your stock market experience and translate it into what that means in the currency market.

As investors , you will find that transacting your trades in the currency market (rather than the stock market) can carry some distinct advantages such as: no commissions, just the spread to pay…less slippage, quicker fills on your orders, 24-hour a day trading, etc. Happy investing in the currency market

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.

Why Currency interventions ultimately fail----By Shan Saeed

People/investors often ask me this question: is currency intervention good for the long run? My answer is No, it hurts the economy. I share this old investment saying, “There’s always a bull market somewhere.”. In the currency markets, there’s always a printing press being fired up somewhere. On Monday 31st October-2011, Japan fired up, so they could buy U.S. dollars and lower the value of the yen. Japanese government made an intervention in the currency market under pressure from its exporters.

Why does that matter? The Japanese yen has been making large gains against the U.S. dollar, reaching an all-time high until yesterday’s intervention, the second in three months. A strong currency (one that’s gaining in value relative to other currencies) is bad for a country’s exports. And Japan, the world’s number three economy, is a huge exporter of cars, electronics, robots, laptops and computers.

Those are high-value goods where astute customers are always looking for bargains. Japan needs a weaker yen to keep their economy afloat. That’s a hint to the market that the global economy isn’t as strong as expected.
The market expects a stronger price for the yen. That’s a bit ironic, as the yen is still seen as a “safe-haven” currency in times of tumult. But, like prior interventions, this one will ultimately fail.

A free market reflects the truth. Price is a market signal based on all aggregate knowledge, and it changes rapidly as that knowledge changes. In short, market prices are the best known information about the relative scarcity of one good versus another [including currencies]. When governments try to change that, they’re essentially trying to change that truth. The end result is a more chaotic system.

JAPAN / USA/ SWISS are making currency intervention. Is it working? No

Japan isn’t alone in intervening, although other countries use other means. The Swiss have tried to peg their currency to the euro. Swiss intervened on Aug 3, 2011. The United States has engaged in quantitative easing programs which have let the value of the dollar slide. US Dollar has lost 12.7% of its value against major currencies. Greece used the money it gained from the bonds it sold to finance a lavish retirement program for its citizens, and now can’t afford the full repayments.

The question investors have to ask about these interventions is simple: Who benefits from this, and who suffers as a result? The specifics always vary. Governments benefit first, as they get to spend the newly printed money. Individuals see the decline of their purchasing power over time, as they’re on the bottom end of the fiat currency food chain.

Japan’s numerous interventions are part of a wider attempt to print its way out of a multi-decade bout with deflation. So far, it hasn’t worked. Just like a child at the beach building a sandcastle too close to the water, eventually the wave of market forces will wash away that labor. When that happens, some children cry. Others laugh in delight and rebuild again and again. The latter, it would seem, grow up to be central bankers.

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.

3 Risk to the global economy-----By Shan Saeed

Since I have been travelling for the last 3-months to APAC region [ Singapore/Malaysia/Indonesia], I have tried to analyse various economies of the world and make my own calculation of the systematic risk and global economy risk in general. These won’t come as a big surprise to regular readers, but these risk are the three biggest risks to the economy currently. I wanted to share it with my readers and people who follow my blog to share market insights with them.

“(1) Co-ordinated fiscal tightening, with fiscal tightening of c1.8% of GDP in the US for 2012: Congress will vote on the report by the Super Committee on the targeted $1.2tn cut in the budget deficit. The report is due on November 23 –yet, various US rate strategists think the real deadline by which a deal has to struck is November 10 (in a way that the proposals can be evaluated by the CBO and put into legislation). So far, there is little sign of agreement between Republicans and Democrats. If they fail to reach a deal, there will be automatic cuts to discretionary spending worth $1.2tn and applied across the board. This would create subpar growth for the economy.

(2) Europe

(3) China housing turnover: I am also worried that the preconditions are in place for a sharp fall in Chinese housing starts. According to one commodity analyst, housing starts are running 80% above demand and highlights that property stock per capita in urban areas has risen to 27sqm from 10sqm over the last decade. Housing accounts for 10% of GDP directly, but double this once it is added to the indirect effects. I have highlighted on 29 October’s State Council meeting re-emphasised tightening on property, and urged local governments to strictly implement tightening measures. In order to facilitate property price correction, it plans to further increase land supply for private housing.

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.