Explosive moves in currencies

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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.


Source: StockCharts.com

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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10 comments to Explosive moves in currencies

  • The odds of a recession have grown this year. Still, Fed officials and many other economists remain hopeful the country will weather the financial storm without falling into recession.

    Do you remember the Great Depression from learning American History? In 1932, the Great Depression was sending the world economy into a deep recession, and in the United States, a popular candidate was running for President on the platform that he and government were going to come in and fix things with his “New Deal.” Franklin Delano Roosevelt made good on those promises, and expanded governments’ role in the economy on an unprecedented scale. It worked, in the short term, but long term effects were far reaching and damaging. Paul Rubin outlines in this Wall Street Journal article that whilst the economy has not reached the state of 1932, many parallels exist. The stock market is hovering near the bottom, credit is virtually nonexistent, and a popular Democratic challenger is running on a platform of government spearheaded change in the economic system. Barack Obama, if he wins the presidency will also have a 60 seat Democratic majority in the Senate, which would be safe from filibuster and put the US closer than it ever has been to a purely liberal government. Free market economists are deeply concerned with his policy of “hands on” involvement, as they believe it would not correct the economy’s problems in the long term. They would probably not tell you that we’re as bad off as we were in 1932, but they would probably say that we’re about to get the same thing – a “New, New Deal.”

  • Kurt Schoeneman

    A strong dollar, and to a lesser degree, a strong Yen are terribly deflationary. South Africans paying back dollar and yen notes are getting killed. If it continues there is risk of collapsing emerging market economies.

  • tony

    Are you and Bill King honestly suggesting that deleveraging of assets is going to come to a sudden halt at end Nov? And that there will be no further Banks, hedge funds etc. hitting the proverbial wall? Hardly!
    In my opinion a more balanced view of all these issues is published at http://www.kitco.com under the authorship of Jon Nadler. Hopefully you will take the time to read it and even comment on it. Kind regards.

  • Tony: I am familiar with Jon Nadler’s article (http://www.kitco.com/ind/GoldReport/oct242008.html) and do not fundamentally disagree with his arguments. Bill and I are by no means suggesting that hedge fund deleveraging and bank problems will come to an abrupt end in November. Difficult as it is, we’re merely debating when an overextended US dollar may see some softness again. However, I remain cognizant of the fact that that the current shortage of dollars is amounting to a short squeeze.

  • Michael Ernissee

    I have been hearing a lot of talk lately of Obama’s pending presidency and how his liberal attitude will be the ruin of the free market system as we know it. I believe that what most people in the wealth-development world are either missing or ignoring is that what they are afraid of is happening now, and has been going on since the first of this year. Government intervention in the free market is the greatest it has been since the Great Depression, and it will not end anytime soon. Conservative-minded leaders from the political right are spearheading the bailout and other efforts to stabilize the world economic system, not liberals like Barak Obama. Why don’t the critics of the liberal left drop their personal political biases while this economic house of cards is collapsing, and direct their energies toward something constructive and long term? The redistribution of wealth, which seems to be such a hot-button idea these days, is an idea that has been around as long as taxation and the IRS. The redistribution of wealth is the main purpose of tax collection, and taxation is not just about paying the bills. It’s about using the money collected in a manner that befits a great democracy and contributes to the well-being of its citizens. Keep up the good work. I read you often.

  • SA

    Hello, 2 things

    1. I am confused by the chart of major currencies, what is that against? As I understand currencies have to be measured against some base… I might be wrong.. any guidance would be much appreciated

    2. Can we get a YTD graph like the EM currencies for EM + Major currencies.. that would be nice to see and compare countries.. maybe we can see a theme of material based countries currencies being destroyed??

  • SA: I have added a sentence to the post: The left-hand bar represents the US Dollar Index (i.e. the dollar vs a basket of currencies), whereas al the other currencies are the normal exchange rates against the dollar.

    I will put together a chart as requested during the course of next week.

  • SA

    Thank you sir, that is perfect!

  • james whitehead

    good article on exchange rates!It appears to be time to visit your country. E-Mail me to let me know you are alive! jim

  • Frank Wordick

    The Ozzie dollar, which as you have seen, is far down the tubes, having dropped from 98 cents to 60 cents in a couple of months. It constitutes one of the primary footballs of the currency market, being a very heavily traded currency. Its previous all-time low was 47-48 cents. Most people still consider it a commodity currency, altho commodities are far less important than they used to be in its economy. Falling commodity prices do make an important contribution to the $A or AUD’s decline, but one wonders whether the fact that it is frequently employed as a surrogate currency for unmarketed or illiquid Asian-Pacific currencies contributes more to its fall. Fair value may be closer to 75 cents.

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