You can only gain from a good foreign currency strategy

Against the back drop of Governments desperately trying to decrease the value of their currencies as compared to those of their major trading partners, how do investors capture foreign exchange profits? Here are some thoughts.

Debasing the currency assists governments in paying down debt, boosts exports, penalises imports and reduces trade deficits. These strategies are sometimes not expressed verbally and may be a trap for currency speculators. Politicians often say they are in favour of say a strong dollar while the printing presses are running 24 seven. As Jim Rogers says: “if you listen to Governments you are going to go bankrupt very quickly.” Ask any Cypriot or Greek investor.

The gold price fell more than 12% this week which is nearly unprecedented and this just confirms the deflationary spiral. I have said before in this column that it really is a race to the bottom.

Some market operators regard gold as a pseudo currency and some regard it as the ultimate currency. Well, it certainly is not one you want to be invested in at the moment.

The search for yield is paramount (see other columns for comments on growth shares). The South African rand also took a battering as did gold and commodity stocks. As at the time of writing this column the rand had fallen sharply to 9.18 to the US dollar.

Here are some currencies for consideration:

The US dollar is usually characterised by its safe haven status.
As fear and uncertainty increases the US dollar tends to strengthen. Now as economic conditions have started to improve the US dollar has declined. It is still the benchmark currency and the most tradable and as such has a place in almost every portfolio.
The dramatic fall in commodity prices this week will underpin the US dollar while very low interest rates are a negative.
As the Federal Reserve eventually reduces its stimulus and interest rates begin to rise the US dollar will start to be a more exciting proposition.

The Japanese Government has mutated from a paragon of thrift to the most virulent of expansionists. Prime Minister Shinzo Abe wants a lower Yen. He has appointed a new Bank of Japan Governor who is spear heading “Bold Monetary Policy.” The Japanese want inflation of 2% and a complete reversal of prior strategies.

The Euro has been under pressure as a result of the various sovereign debt issues in Europe. Eventually the situation should improve as the bad news is digested by the market and the zone is politically and economically more integrated.

Sadly the news from the UK is all bad and the pound is not a favoured investor destination. The UK is experiencing a double dip recession, inflation is rising and the current account and budget are in deficit.

Interest rates will be cut further this year as economic activity cools further especially now that commodity prices have fallen so dramatically. The official cash rate could end the year at a very low 2%.

The dollar, known on the currency markets as the Kiwi, has risen against all of its 16 most traded counterparts after positive housing reports and retail spending. It is particularly strong against the US dollar and this trend remains intact.
An exchange rate can basically be considered as the share price of the relevant country. So in deciding on what currency to invest in one can rely on first principles. Are fundamental economic conditions for the country improving? Does the country have strong economic prospects, with benign inflation and high interest rates? Is there no sovereign risk? Is the currency in a bull trend as opposed to the currencies of its major trading partners?

Happy Hunting!