Wednesday, March 23, 2011

Confused about currencies

There is absolutely no shortage of articles expressing views on whether currencies are over-valued or under-valued. Without being too scientific about it, a random sampling of articles seen on the Internet showed far more articles suggesting that (i) the Yen (ii) the Euro (iii) the USD and (iv) the GBP are all over-valued or at least expected to depreciate than articles which are bullish on any of these currencies. A number of the articles which expressed bullish views, were focused on the short term technical outlook - and were sometimes caveat ed with the view that in the longer term the expectation was the the currency in question would continue to depreciate.

They can't all be right.

Currencies are priced relative to each other. In a two currency world, if one currency goes up, the other must go down. In the real world where there are many currencies, trading is dominated by the USD, the EUR, the JPY and the GBP which, according to Wikipedia collectively account for about 78% of turnover in the international FX markets. (While turnover is not the same as the amount of currency in issue, they were much easier numbers to find and, I guess, are possibly a better indicator of the relative importance of each currency in setting exchange rates.)

The simple reality is that in order for all four of the most traded currencies to depreciate, you need a very unrealistic amount of appreciation in a basket of lesser currencies. While it is reasonable to expect appreciation of some of the other tradeable currencies (the RMB and SGD being widely viewed as under-valued), it should also be remembered that there are plenty of currencies that I wouldn't touch with a very long barge pole.

So, of the four major trading currencies, if they can't all go down, at least one of them has to appreciate relative to the others. I have no idea which - quite frankly, I am concerned about macro issues with respect to all four economic zones.

Given the material impact of currencies on my investment portfolio over the last several years, it would be nice to correctly guess which will be the "winner(s)" (winner(s) in "" because many countries prefer their currency to be weaker compared to their trading partners). In particular the future direction of the USD against the AUD, NZD and RMB will be important to me. Given the absence of a functional crystal ball, my current thinking is to continue my strategy of having most of my investments denominated in the currencies in which I expect to spend money once I retire - HKD, NZD/AUD - and view anything else as a speculative positions which should be kept small. The impact of FX movements on my investments (and spending) is obviously more complex than that, but no better approach to dealing with the FX issue has occurred to me.


Andy said...

I'm wondering if you have any thoughts on AUPU's latest results (and price). I recall that was one of the small caps you invested in.

traineeinvestor said...

Hi Andy

AUPU's result was obviously disappointing - and the share price has taken a bit of a beating as a result. I'll allocate some time this week to consider it in more detail before drawing any conclusions.


J-D said...

Hi (again),

Could you please kindly share your opinion on Allan, a share which I also own?

Whats the story with the acquisition of that 150 million$ property in Wan Chai?

I mean: (1)Is the timing really right? (2) It has nothing to do with their core business (3)the yield is very uninspiring. They could have obtained a much better yield but say putting all that money into the Link REIT for example (4) Doesn't this mean they have no idea what to do with the cash?

In summary: what's the story with buying that property? -and how did this affect your view on Allan?

Also, why is one of their INED a professor of hepatobiliary surgery!?