Explosive moves in currencies
Where will the credit crisis’s penny drop next? On centre stage at the moment are emerging market currencies, having crashed in many instances over the past few weeks. A picture tells a thousand words … (Yes, South Africa has been highlighted as it is my base currency, and my overseas overheads have just become exponentially more expensive. But, your holiday to this part of the world has also just become a bargain.)
Source: Plexus Asset Management (based on data from I-Net Bridge)
The jury is out on whether some of the declines in emerging currencies merely represent an adjustment from overvalued to more realistic levels. The risk of national defaults and corporate bankruptcies holds the key to what represents fair value.
The histogram below shows the performance of a number of major currencies since the middle of July 2008. The left-hand bar represents the US Dollar Index, whereas al the other currencies are the normal exchange rates against the dollar.
The only two currencies in positive territory are the US dollar and the Japanese yen – both previously carry trade currencies due to their low interest rates and weak price trends prior to the reversals. The surge in the value of the US dollar and yen and the concomitant decline in other currencies confirm the ongoing scramble to reduce liabilities and deleverage.
However, it appears that some of the currency trends have become overstretched, at least temporarily. A viewpoint that ties in with mine comes from Bill King (The King Report): “… dollar might be exhausted for now and a significant pullback could appear. However, there should be more hedge fund liquidations and commensurate dollar buying in November as investors try to meet the November 30 deadline to withdraw funds from hedgies and fund of funds.
“Then there could be one last dollar surge in December as banks, brokers, operators, non-financial companies, and other dollar shorts cover their positions for year end. But there could be an even larger dollar-buying force in December: foreign banks, especially the Japanese, which must procure term money for year end. But after year end obligations have been met, the dollar could be very vulnerable.”
Be careful out there!
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