Killer currencies

The moves in equity and other markets has been bad enough.

However, adding insult to injury has been the sharp flight away from previously favoured currencies and back into that pariah of the (very) recent past, the USD.

To put this into perspective, the USD index was down 6.6% for the year to date as at the end of August: pretty much at its all time low. in the last three weeks the USD index has risen from 74.24 to 78.23 as of last night: a jump of 5.4% (albeit still down 1.3% for the year). The logical reasons for the weakness up to end August were several:

(1) Low bond yields made the USD relatively unattractive
(2) The Fed's continued commitment to a loose monetary policy meant that the official stance seemed to favour a weaker USD
(3) Political and economic sclerosis

The fact that, until the last few weeks, even the dire position of the Eurozone did not result in a flood away from the EUR, was illustrative of market perceptions, that in the "ugly contest" the reasons for hating the EUR were evenly balanced by the reasons for hating the USD.

The last few weeks have seemingly changed all that. Now, it's a question of forget the fundamentals, minimise the risk. In that environment, as we saw in 2008, it's the USD which is the favoured currency of choice. During that period of extreme stress the Dollar index moved from 71.5 on July 16th 2008 to a high of 89.6 on March 4th 2009 - an overall move of 25%.

It then proceeded to reverse most of that rise in the subsequent 7 months.

These moves are extreme and very rapid: not for the first time, does it feel as though markets of all types discount the best and worst of news in a time frame that previously seemed to take months or even years. There are plenty of reasons for this, but the end result is that it makes the job of perfect foresight even more humanly impossible than it was before.

We don't aim to predict short-term currency moves since we are not currency speculators. We do feel however, that, on a longer-term view the currencies of Asia and the emerging markets are in better shape and worth holding: government debt and deficits are manageable and not confronted with major structural problems, the economies are growing and consumers are spending. Painful as it is, we aim to tune out the currency noise whilst focusing on those core facts: if anything, we'd aim to buy more of these if weakness persists. At some point they will rebound. That moment will come when all the banks (which were aggressively short USD's last month) go long USD's.

Given the speed with which things are moving, that could be by the time I've finished typing this sentence.

Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186

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