Forex Markets And Countries Battle To Have The Weakest Currency

Just when we thought it was safe to go back in the water the Greece debacle has blown up once again.

Greek debt has been on a truly epic journey recently and now ten year yields have moved from circa 7.5% to 8.9%. 2 year debt is now over 10%.

The value of the debt has fallen by almost 20% since the end of March 2010. On a comparable basis, the total debt owed is close to 300bn and we are looking at institutional losses of some 40bn.

Oddly enough the UKs debt position is actually slightly worse than Greeces yet we do not have somebody hovering over our shoulders forcing fiscal prudence on us. UK Gilts are stuck around the 4% level.

There are many reasons for this disparity but they generally boil down to the fact that the UK has the freedom to adjust interest rates, currency levels, run inflation risks etc. These are options which are not available to the Southern European states.

Unfortunately, of course, the long term prognosis for the UK is that:

a) Inflation rates are going to have to spike much higher

b) The Pounds value will have to plummet, or

c) The politicians will actually have to do something about the massive accumulation of debt, not just about the annual deficit.

This is not a very good list of ingredients for investors contemplating a foray into UK plc.

Having said all this, UK equity markets are holding up and the US markets are at recent highs. But if you are trading then the forex spread betting markets are the place to be at the moment, particularly with the Euro continuing to weaken under the glare of all its woes.

As Angus Campbell of Capital Spreads recently commented, In reality, I am quite surprised that the Euro is still so high. It is still significantly over valued on a cost basis versus every other major currency.

Longer term Euro sellers will be looking for a move towards $1.2450/$1.2500. However the hard pressed buyers will also be taking some comfort from the fact that the currency does seem to have quite a few supporters. With all the bad news you might have thought the price would have fallen far further.

Of course one of the things supporting the Euro is that most other leading nations are also in a spot of bother. We are not arguing about which currency is the strongest but which is the weakest.

As an example, Japanese GDP/Debt levels are now far in excess of 200% and with the Japanese experiencing deflation this total is increasing in real terms year on year.

With a rapidly aging population it is very difficult to see how they are going to extract themselves from this problem. Whilst the problems are currently containable, the future looks grim indeed.

The Yen may also be quite over-valued and, even though they are still a heavily trade surplus nation, the Japanese desperately need a weaker currency. Maybe we will see a long term battle to the bottom as the major currencies fight to lower their relative value.

by: Daniel Jones

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