Foreign Currencies Getting Stronger
Jun 21st, 2007 by Wealth Builder [This post is written and copyrighted by Wealth Building Lessons (http://www.wealthbuildinglessons.com).]
I’ve mentioned previously that in the long run, I think the US Dollar will continue to lose value and I also discussed several ways to profit from this scenario.
One of the ways, was to invest in foreign currencies. Apparently I’m not alone in thinking this might be a good idea. Amongst those who agree with me is Chris Gaffney, of Everbank. I’m a big fan of Everbank’s products, especially their Japanese REIT CD. According to Chris, who incidentally is Vice President of Everbank World Markets,
The Australian dollar saw some strength overnight as an Australian index of leading economic indicators rose in April, suggesting economic growth will accelerate as consumer spending and exports increase. The index’s annualized growth rate was 6.7 percent. The lowest jobless rate in almost 33 years and increased wages are prompting consumers to spend more, while sales of commodities to China are stoking export earnings. “The Australian economy is very likely to have entered a period of strong sustained economic growth,” said Bill Evans, chief economist at WestPac Bank in Sydney. The leading index is “now signaling that strong growth can be sustained through the first half of 2008.”
We agree with these views that the commodity currencies are set to continue to increase over the rest of 2007. The New Zealand dollar and South African rand have slightly more risk due to the large amount of investments which have flowed into them as a result of the carry trades. Australia and Canada seem to be the safest way for investors to take advantage of the continued commodity demand which is a result of the tremendous growth of the Asian markets. While our Commodity Index CD has been the best performing index over the last five years, our newest WorldEnergy Index CD combines these two currencies along with the Norwegian krone and British pound. If the trends we have seen shaping up continue, this new WorldEnergy Index CD could be our #1 performer going forward.
Finally, the yen is getting some love from the head of economics and strategy for the Bank of America in Tokyo. According to Tomoko Fujii of BOA, the yen will rise 4.5% against the dollar by year end as a Bank of Japan interest rate increase will discourage investors from borrowing the currency to buy higher yielding assets. The currency is expected to appreciate after an August rate increase and reach 118 per dollar as the so called carry trades fade. “The yen is likely to enter a moderate upward trend in late summer,” said Fujii. “The pace of BOJ’s rate increases will accelerate next year, making the yen carry trade lose its popularity.”
But according to the Deputy Governor of the BOJ, Toshiro Muto, the Bank of Japan remains committed to increasing interest rates gradually as the economy extends its expansion and prices rise. Not as aggressively as Fujii suggests. “The pace of needed interest rate adjustments will be determined based on improvements in the economy and price situation,” Muto said in a speech last night. “We don’t have any predetermined schedule.” Schedule or not, interest rates in Japan need to be increased, and the currency will need to rise in order to offset the tremendous global imbalances which have built up in the markets. The longer the Bank of Japan officials wait to increase rates, the larger the impact will be on the currency markets. The undervalued yen is a pressure cooker with the carry trade providing the fuel. As soon as the BOJ moves rates up, the whole thing could blow.
I’m bullish on the Australian and Canadian Dollars and on the Yen too. Accordingly, I’ve invested in a Japanese stock market ETF (JSC), Australian commodity stocks (like BHP Billiton), Canadian Income Funds, and dividend-paying currency ETFs like FXA.
As the famous wall-street saying goes, There’s always a bull market somewhere!
And its probably a good idea, to start slowing unwinding any carry-trades you might have. [Read this post on the carry-trade if you don’t know what it is].
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3 Responses to “Foreign Currencies Getting Stronger”
Great info, thoughtful too..
One thing we agree with - long the YEN. Why on the same blog you would be long the real estate market there, at the same time long the Yen, is beyond me. Increasing value usually means tightening for the currency and bad for real estate.
Anyhow, as I said on your post recommending Japanese REITs, Parabollic peaks always pop… what are we, 30% lower?
See this post:
http://www.wealthbuildinglessons.com/2007/03/13/the-safest-investment-in-town/
Also, my call for a recession in 1st qt 08 looks like it is on track as the market trades ahead of news.
Hi Jason,
I think you saying that as the currency becomes stronger, the Japanese government will raise the interest rates making real estate more expensive and leading to decreasing prices.
Firstly, in California, interest rates have not determined the direction of the real estate market, only the magnitude.
We saw this example when the Fed raised the interest rates 6 times between June 1999 and May 2000 (please correct me if the dates of wrong) - property prices kept appreciating during this time.
Another example is the recent pause in interest rate hikes. Prices are still dropping here - they haven’t stopped dropping because rates have stopped going up.
Also, in Japan, real estate values were stagnant for over a decade as the interest rate dropped to almost zero and inspite of the fact that they were printing Yen like crazy.
There maybe short term swings but eventually I believe that the Japanese housing market will recover.