Weekly Review 10.30.2012

 

This was a record setting week! Literally 

Europe
Eurozone hit a record high debt of 90% from all 17 countries that use the single euro currency.  This is the highest level since 1999 when the EU currency was first implemented.
"The euro area economy remains stuck in a rut" said James Ashley, Sr. European economicst at RBC Capital Markets.
According to the Eurostat, five countries are in recession Greece, Spain, Italy, Portugal and Cyprus.  Many analyst expect the Eurozone to slip back into a recession next month when the official numbers are released. (recession is defined as two downward quarters of negative growth in a row)
Furthermore, PMI remains lowest in three years at 45.8  We can see this with BMW and VW, their exports have taken a hit on YoY basis. 


China
PMI- HSBC report showed Wednesday rising new orders.  3 month upward trend shows that the economy is slowly picking up.  However, this is not sustainable given US potentially falling off the cliff and the meltdown in Europe.  Nonetheless, PMI was 47.9(August)  49.2(September) and 49.8 in October.  This is still below 50 but indicates slow improvement and a moderate rebound of the worlds second largest economy.  Weak external demand and a slack job market are key factors, therefore one should expect more easing policies to secure recovery.

China's yuan reached a 19 year high against the US dollar.  Currency hit 6.2417 yuan per dollar, it has been appreciating since QE3 and the ECB bond buying plan.   HK monetary authority has injected more than $14B to stabilize Curreny.  Could this be the start of a currency war? Last weeks review we talked about Brazil's finance minister publicly scolding the US selfish actions at the IMF conference in Tokyo.   Chinese exports are sure to take a beating. 

Japan
Japan adds $9.4B to stimulus program to bump up growth as bond investors told government they were worried about delays and more spending.  Finance minister said this was necessary because Japan would run out of money if the bill was not passed.  This is only estimated to boost GDP by .1%.  Japan has the highest debt level among developed nations and has experienced 2 lost decades.  According to world renowned economists Rogoff and Reinhart  a Country with debt-to-gdp in excess of 90% is unsustainable.  Japan is at over 200%. (see book "This time is Different")

United States
Fiscal Cliff can be much worst than it is.  Many economist think every dollar of deficit reduction will subtract nearly the same amount from economic growth.  The IMF suggest 1$ could drain as much as $1.70.  With interest rates at near zero the pain will be much worse. Bernanke has acknowledged he would not be able to fully offset the pain if the economy runs into the fiscal cliff.  


The “fiscal cliff” and long-term government deficit issues are weighing heavily on the minds of finance professionals, and they do not expect business conditions to improve regardless of the results of the Nov. 6 presidential election.
Three-fourths of 949 executives who responded to a survey at the annual conference of the Association for Financial Professionals (AFP) this month reported that they believe overall economic conditions will weaken if various tax law provisions expire and mandated government spending cuts go into effect as scheduled in January 2013.
Respondents rated implementing changes to avoid the fiscal cliff as the second-most important issue for federal elected representatives to focus on after the election. The most important issue to respondents was resolving long-term government fiscal and deficit issues, identified by 63% of finance professionals in the survey.

Herman Venegas
 

Is Now a Good Time to Invest in Currencies?

If you are looking to invest your money somewhere, currencies like the Euro or the U.S. dollar may not be the best option for you right now. Although currencies have always been a significant component of pension funds in countries like the U.K. and the U.S., since the market crash of 2008 currencies have had a less than stellar performance as an investment instrument. Up until the crash, a successful investment strategy was to borrow in a currency that had a low yield and use that money to invest in a currency that had a high yield. That story changed after 2008. In terms of performance, last year was perhaps as bleak as it would get for top currency indices.  Considering the debacle in which the European Union is right now, it might not come as a surprise that the Euro has been getting weaker and weaker every month for the past twelve months. Here is a chart highlighting the Euro’s performance against the Canadian dollar for the past five years:

 

 

For those Europeans who saw this coming, even as late as six months ago, a good investment strategy would have been to get into a currency future. A currency future is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. 

Economics 101 tells us that the above graphical trend makes European imports cheaper for Canadians and Canadian exports more expensive for Europeans. Luckily for Canada, exports make up only 29 percent of the country’s GDP. That somewhat explains why Canada’s GDP continues to grow despite the adverse global conditions. Moreover, the USD-CAD exchange rate has been hovering at around parity for almost a year now (see below). Despite Canadian exports becoming more expensive for Americans, the United States continues to be Canada’s biggest trading partner. With the Canadian dollar being as strong as it is, it would be to Canada’s advantage to form ties and trading agreements with emerging markets as opportunities for trade are aplenty across the Pacific and Atlantic oceans. 

 

Individuals looking to invest in currencies can also use the same proposed strategy on a micro level.  Analysts say pension funds are nowadays “investing in emerging market currencies, though this is currently more popular among UK funds than those in the US”.

The Bottom Line:

If you are thinking of investing in currency these days, it is much better to expand your horizons and invest in emerging market currencies rather than one of the top currency indices. In the long term this is a much better investment strategy, as returns on these sorts of currency investments are expected to be considerably high according to experts and trends. 

Ali Kazerani