Where In The World Is Currency Value Going Up
Its no secret to investors domestic and international that the value of the American dollar has gone south in recent years
. And with talk in the past year of reforming U.S. health care, plus more talk of a second stimulus package, the dollars value isnt going to go north anytime soon.
So what are currency investors to do? Look overseas. Its true the economic crisis were in now isnt suffered in America alone; many countries from Europe to Asia are taking a hard hit. But that doesnt mean there arent any opportunities for growth.
While many economics look at the BRIC countries (Brazil, Russia, India and China) as hubs for long-term growth, they might not necessarily have the best currencies to give you the best return on your investment. But I know one currency that could and its in a place you might not expect (more on that in a moment). First, Id like to talk about how currencies are affected by forces outside of the market
The Politics of Currencies
Currencies, because they are fiat by nature, are political things. While it is the fundamentals that drive them, one of the overarching problems in our market is the absence of reliable fundamental data. It is hard to debate against the fact that governments manipulate what is released.
But some things provide reasonable markers to see what a currency is doing. One of my favorites, although I hate to call it that, is the civil unrest factor.
Across the Eurozone escalating economic problems and disagreements between members and neighbors have touched off riots and outbreaks of violence. People involved in civil unrest are a multifold problem. First, they have too much time on their hands because they are not working. Jobless citizens, especially in a heavily socialist culture, are a continual drag on the system. Second, it costs money to keep repressing social upheaval presenting another drag on the system. Additionally, the passions and fears of men being what they are, such activities tend to draw in more normally productive folks as the snowball gains speed and volume.
Here in the United States, we are not facing such difficulties (yet). This means a more reasonable system of work and distribution of goods and labor. All in all, this is good for a culture, the body politic and the economy. As a result, it also breeds greater confidence in the currency. And when all is said and done, investment money will go where there is a reasonable likelihood of return, even if the return may be lower.
Specifically, there are several exotic currencies that have offered high rates of return for speculative investors and traders, like the Brazilian real and the Indian rupee, just to name two. But it is difficult to place large sums of money there simply for the sake of the wild swings in value. A high interest rate is no good if the principle of the investment is destroyed by currency depreciation.
This is what has been good up to this point in the recession/depression for the U.S. dollar. And if this continues to unfold over the next year or two in similar fashion, this would still produce U.S. dollar strength compared to the euro simply by the fear factor.
Now lets end with a look at my favorite currency, the Australian dollar.
Why the Aussie Dollar Is My Favorite Currency
The Aussie dollar chart looks remarkably like the euro going back to the beginning of June. All things considered, thats rather remarkable given the relative strength of the Aussie economy compared to the Eurozone. Nevertheless, fundamentals will eventually rule the day, and though we may have to wait it out a bit, we look for the Aussie to rebound in the future.
One of the difficult parts of the equation at this point is the widely reported and detrimental riots in Chinas western Urumqi (pronuonced U-rum-CHEE) province. Ethnic fighting between Muslims and Chinese citizens has threatened to overpower the police force.
As you know, Australias success going forward is inextricably tied to China. So worries about riots in one part of the country can certainly be detrimental in other parts as well. Even though the violence in other provinces may not be ethnically related, once a group of people feel they have been wronged and have the sheer numbers to overpower a military or police crackdown, all heck can break loose.
Remember, there is significant fear of unrest all over China as the depression sets in. The people were just getting their first dose of la dolce vida, only to have it stripped away. And gone are the days when they trusted their government to provide for them. Now it is beginning to look more like the enemy than a loving big brother.
For now, though, the Aussie dollar hasnt been impacted by the fray. It has been well supported at the 78.25 level. A strong close below 78 on the daily chart would invalidate that forecast, and likely lead to more downside. Well just keep our eyes open.
If You Cant Speak Australian
So what if the Aussie dollar isnt for you? You dont like the connection between it and China? This kind of risk isnt for everyone. But just because one countrys currency is linked to another countrys socioeconomic woes doesnt mean you should stay away from foreign markets.
On the contrary, it just means you should find a market that best supports your investment strategy. And there are plenty of currencies to go around if thats the case. But as is the case with any type of investment, you really need to do your homework before finding the currency for you. As we said earlier, take a look at that countrys government, society and history before putting yourself into it.
With that said, there is another currency you could make some good gains inone that could do it once you get past the problems of a stagnant, recessed economy in its home nation
Profit from Japans Deflationary Woes
All is not well in the Land of the Rising Sun.
While most investors have kept their eyes glued to American markets over the course of the recession of 2008 and 2009, Japan has been host to its own set of economic problems. And as more eyes turn to the Japanese economy, a potentially profitable ETF play is emerging right before us.
Heres how you could benefit from Japans deflationary woes
Boom, Bubble, and Bust
More than twenty years ago, Japan was experiencing an economic boom unlike anything seen in a generation. The Japanese car industry was gearing up as a serious competitor to the big three American automakers, and Japans tech sector was beginning to find its legs. Ever-climbing Japanese stocks became hugely popular in the financial world, and real estate in Japan rocketed along with them.
By 1989, property prices in Tokyos most desirable neighborhoods reached as high as $93,000 per square foot, making it the most expensive city in the world. But that prosperity wasnt to be long-lived.
Over the course of three days in 1990, Japans asset price bubble burst, and the Tokyo Stock Exchange lost $400 billion in value. But that was just the tip of the iceberg. Over the course of the next 14 years, the Japanese economy continued its fall and subsequent stagnation a period of time known simply as the lost decade.
Japans problem wasnt unfamiliar. In the years after World War II, Japans fast-growing economy became a hotspot for stock market and real estate speculation fueled by high-risk, subprime debt. When the asset price bubble popped, it caused a chain reaction that put the Japanese economy at a standstill.
In 2007, Japan looked like it was finally regaining economic ground as real estate prices rose for the first time since 1990 then the subprime mortgage crisis happened here in the United States, throwing economies across the world into a tailspin.
Ironically, it was almost the exact same circumstances that lead to Japans asset price bubble that ushered in the recession were facing today.
Does Deflation Spell Doom for Japan
But the economic problems facing Japan and the United States are far from the same. Thats because while the U.S. has maintained a moderate rate of inflation for the duration of the recession, Japan is currently on a crash course for deflation.
In essence, strong deflation is the equivalent of pulling the handbrake on the economy.
Unlike inflation, where the buying power of a dollar decreases over time (the reason you cant buy a McDonalds hamburger for 15 cents anymore), deflation causes the buying power of money to increase. And while that might sound attractive, the economic consequences of deflation far exceed the benefits.
Thats a serious concern according to Fed Chairman Ben Bernanke and his league of economists. Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero, explained Bernanke to Washington D.C.s National Economists Club back in 2002.
Once the nominal interest rate is at zero, he continued, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash.
When holding onto cash is more lucrative for lenders than making loans, credit markets seize, and economic activity screeches to a halt. Deflation also means that current debts like a $300 car payment become comparatively huge amounts of money to dole out.
Profits fall, then wages come down, then consumers stop shopping, Junko Nishioka, chief Japan economist at RBS Securities Japan told Bloomberg. And because people arent shopping, companies lower prices. Thats the process that were starting to see. It isnt easy to break out of.
Ben Bernanke and the powers that be have made it clear that theyll do whatever it takes to avoid deflation right now here in the U.S But thats not whats going on in Japan.
The inflation (or deflation) rate is measured by the Consumer Price Index an index that measures the prices of a basket of consumer goods. As the CPI drops the risk of deflation rises substantially. In May Japans main index of consumer prices dropped 1.1%, the biggest decline since 2002. That marks the fifth straight month of price decreases in Japan.
Land of the Rising Yen
Through all of this, the biggest winner has been Japans currency, the yen. As deflationary pressures rise, giving each yen more buying power, the currencys value relative to other countries money rises as well.
Since last August, the yen has gained 17.9% against the U.S. dollar and nearly 30% against the Euro, making it one of the most attractive and powerful currencies right now for Forex traders.
That deflation-driven bull market in the Japanese yen has made for an interesting ETF play as well. At present, there are a number of ETFs and ETNs that trade in concert with the ebbs and flows of the yen. Some of the more popular funds include the CurrencyShares Japanese Yen Trust (NYSE: FXY), iPath USD/JPY Exchange Rate ETN (NYSE: JYN), and WisdomTree Dreyfus Japanese Yen Fund (NYSE: JYF).
While each of these funds has a somewhat different investment objective, FXY is the most heavily traded by far, and most liquid.
As you can see from the chart above, FXYs price action hasnt been calm and steady, but it has followed an overall uptrend over the course of the last year. After a double top in January, the funds price retraced around half of its previous rally before pushing back up. Thats a good sign that suggests shares of the ETF are set to break or at least match the previous high.
Surging volume on upward price movements confirms that investors see the yen pushing up.
FXY looks like it could be finding support on at its 200-day moving average on a pullback. If that happens, its time to think about going long on the yen.
While its very likely that the Japanese government will step in and attempt to curb deflation before it starts in earnest, their actions wont be felt until much later in the game. Currencies are very susceptible to politics and world changes, so keep a tight stop on this ETF if youre considering a short-term trade.
In the meanwhile, between Japan and Australia youve got some good ideas on where you can best be served in the currencies market. And even if you dont go with either the Aussie dollar or Japanese yen, at least you know what to look for and can decide what you want and dont want from your investment.
by: David2
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