Sunday, April 8, 2018

Comparison of some Global Deposit Rates

At our main web site of, the theme of our site is mitigating currency risk. Let's take a quick look at some examples of deposit interest rates.

United States  USD zero to 1.05% range

Canada   CAD   0.15 to 2.3%

United Kingdom GBP  up to 2.5%

Turkey   lira  10%

India  rupee  4.5 to 7% (7 days to 10 year term)

Singapore  SGD 0.1 to 1.45% (12 month deposit)

Hong Kong  HK  0 to 0.2%
                     Yuan deposit  3.8% for 12 month term

Switzerland  CHF zero
                      EUR deposit zero

In Switzerland, a handful of private banks charge negative interest rates. That is, the customer pays the bank to hold their monies unlike positive interest rate framework whereby the customer would earn deposit interest. Negative rates are usually found on large deposits such as 100,000 CHF or
1 million CHF for example. Negative rates vary from - 0.125% to - 1%. The thinking here is that negative rates will force the customer to move monies over to the private banks wealth asset management services where the bank earns management fees and can help promote some of their own financial products. Negative interest rates have helped to fuel large demand for safety boxes and personal safes for individuals to store cash and avoid paying interest to a financial institution.

The above examples of deposit rates clearly show the importance of selecting the correct currencies to help mitigate currency risk as interest earned on deposit is very minimal in many industrialized first world economies.

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Sunday, March 26, 2017

Financialization of Economies in New Zealand, Australia, Canada

Three currencies on our radar screen include the Kiwi (New Zealand dollar), the Australian & Canadian dollar  that may be vulnerable to a sharp price valuation correction if some of their real estate markets such as Sydney, Auckland, Vancouver & Toronto stall or commence a significant price correction. Some reports already have Vancouver declining in Canadian dollar prices. In Auckland, 55 percent of the homes are now valued at or over 1 million NZD. Within the city of Vancouver at peak pricing, almost every detached house was valued at or over 1 million CAD.

Their respective Central Bankers leaders over the last few years have implemented close to zero rate interest rate monetary policies in these three amigo countries coupled with a big FOR SALE sign open door policy to foreign investors targeting both their residential & commercial estate. Massive global capital inflows ensued, a large amount from Mainland China have boosted primarily residential real estate values in all these markets mentioned thus decoupling the market valuation from traditional income earned from the local economy.

In due course, real estate has become of the largest components of their respective economies employing many in construction, sales, finance, legal, architects, etc. History has shown several times that massive mortgage financing stimulus creating unsustainable false wealth for a short period of time does not end well most of the time. These economies have become 'Financialized' whereby taxes and artificial short term income and capital gain wealth has kept several governments budgets flushed with cash flows derived primarily from surplus domestic real estate taxation revenues.

The United States in years 2008-09 provides a clear example of the damage that can be done when a gas bag real estate market deflates. Spain during this time entered a depression with 20 percent PLUS unemployment. It has now taken Spain 10 years to recover economically from their experiment with a huge bubbly domestic real estate market..

China has recently implemented further capital controls to try and restrict capital outflows from its citizens in order to help protect and stabilize their national foreign exchange reserve position. Once the flow of foreign capital recedes or completely fades, it is impossible for Canada, New Zealand and Australia to rely on the local economy wealth production in income earned from the local economy to support the current inflated price level.

The most likely scenario is for their respective governments is to keep interest rates low, try and increase their domestic inflation rates while further depreciating their currencies to help mitigate the 'Financialization' damage that is likely to arise.

We remain cautious on these three amigo currencies.

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Thursday, June 30, 2016

Pros / Cons of Swiss Bank Accounts in Currency Terms

The historical attraction of Swiss bank accounts has been the idea of safety and tax mitigation for a large international clientele.

In our view, potential tax savings is not the key issue but rather currency safeness. Depending upon which country you call home, a Swiss based account domiciled in the local Swiss franc currency (CHF) may be a great investment or mediocre at best.

Switzerland with large foreign exchange reserves currently has an overvalued CHF currency as measured by purchasing power parity and also verbally expressed by officials form the Swiss National Bank - their central banking authority.

Let's say one wishes to open and invest monies into a well respected Swiss banking institution. The ultimate success of your investment will depend in a large part based on currency valuation and timing of your initial purchase.

With interest rates on Swiss bank accounts ranging from 0 to 1%, there is minimal return based on interest income.

However, if your home country for example is Nigeria, a CHF based account at today's valuation would have been a smart move since the Nigerian naira has declined by 20% in value over the last year.

If you were a European national say from Germany prior to January 2015 when the then Swiss franc was pegged to the euro (EUR). After de-pegging in January 2015, the Swiss franc soared by 30% in value from the 1.20 CHF to EUR to the 0.805 level. Today, the Swiss franc floats in the market with a current valuation of 1.08 CHF to buy one EUR and/or 0.98 CHF to buy one US-dollar (USD). Even with modest depreciation of the CHF from the 0.805 trading range after de-pegging, the German investor is still well ahead based on currency capital gains.

A Swiss franc bank account from a Venezuelan national a couple of years ago would have been a terrific investment as the Venezuelan bolivar has since collapsed in value. The Swiss franc provided the necessary currency stability as this is one of the key important traits worldwide investors seek.

An American investor who opened a CHF based account shortly after removal of the Swiss franc peg from the Euro back in January 2015 would be underwater on currency valuation by 15% in capital losses. Although invested monies would receive minimal interest depending on deposit size, the overall position is still in loss. Plus, US citizens must report these accounts along with the necessary paperwork to the IRS for offshore reporting and tax obligations.

Timing is everything, the U.S. investor over the last year and a half would have most likely been better off holding their monies with American banks back on the continental USA.

Every investment time frame window is different. One needs to look at currency valuations, interest rates paid on accounts and tax reporting requirements to see if an offshore investment makes sense.

A Venezuelan citizen holding bolivars for the long term is not too thrilled at this current time.

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Monday, June 22, 2015

Mexico - peso to rebound in value?

The Mexican peso (MXN) has been quietly but steadily depreciating in value in relation to the
 US-dollar (USD) for the last several years. In May 2011, the peso traded at 11.65 MXN to the USD. By June 2014, it further declined to 13 MXN. Over the last 12 months, a further 15 percent drop in value for the peso to the 15.3 MXN range reflecting a recent trading day quote on June 22, 2015.

Why the drop? In our view, this has more to do with a very strong USD over the last year year coupled with  a dramatic decline in the world oil price. As Mexico is a large oil producer, it is implementing policies to modernize and allow for foreign investment into the industry to help foster increased hydrocarbon production going forward.

Mexico today is doing quite well on many macro economic measures including low inflation at 3%, low Central Bank interest rates at 3%, growing exports and diversification of the economy. In fact, Mexico today is one of the world's largest exporters of electronic goods - primarily to the United States. Other major industries include auto production, now the largest producer in North America. The national oil industry is spearheaded by state owned Pemex. Tourism, telecommunications, transportation, mining and agriculture also are large contributors to overall GDP.

Some analysts have Mexico pegged to be one of the world's largest economies by year 2050 in a club with China, United States, India, Brazil, Germany, United Kingdom, Russia, Nigeria, Indonesia and France. How so? Mexico has had significant and steady population growth for over 50 years now. Recent estimates have the national population of Mexico at 120 million. The other country of significance similar to Mexico with skyrocketing population growth is Nigeria.

As measured by purchasing power parity, the MXN is currently 50% undervalued to the USD. The MXN is one currency to keep your eye on for a potential rebound in currency price valuation. Although historical risks remain such as episodes of high inflation's. political instability and currency devaluations, it is likely Mexico has now entered a new era of relative currency stability.

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Monday, March 23, 2015

Hong Kong USD peg and China Crawling USD peg

In time, most currency pegs and currency board arrangements for well advanced developed economies ultimately dissolve. For China, they are now the second largest economy in the world only behind the United States. Of interest, is that the Chinese yuan follows a managed crawling peg to the US-dollar (USD) with a current trading value of 6.2 CNY to the USD. Five years ago, this trading value was at 6.82 CNY, so the Chinese yuan has modestly appreciated to the USD during this time.

Conversely, Hong Kong dollar (HKD) has a thin trading band currency peg to the USD in a trading range of 7.75 to 7.85 HKD to the USD. The implications for a currency board arrangement for Hong Kong is that it has imported America's low interest rate structure thus resulting in sky high real estate valuations in Hong Kong.

Currency policy can have significant impact on a great number of people in the world today. Only have to look at Greece and Venezuela, case in point.

Misguided currency policy can contribute immensely to Hong Kong's very expensive real estate which which has priced a great number of citizens out of the market. The social implications are tremendous as it has resulted in protests as the world has noticed over the last couple of years with thousands of Hong Kong residents participating in the 'umbrella' sit it.

What's next for both Hong Kong and China's currency?

Purchasing power parity suggests the Chinese currency is approximately 40 percent undervalued to the USD whilst the Hong Kong dollar is 50 percent undervalued. A revaluation of the currencies is imminent but when?

Our best educated guess is likely somewhere in the year 2017 time frame when the Chinese yuan / renminbi currency becomes fully convertible - projected time line. At this time, Hong Kong would be more inclined to give up its USD peg and either re-peg to CNY or perhaps freely float the HKD.

With significant increased capital flows and trade between Hong Kong and China, it is inevitable the USD peg is near the near the end of its story, particularly for Hong Kong with its 32 year love affair with American money.

Saturday, January 17, 2015

Swiss Short-Term Currency Traders Offside

The recent removal of the Swiss franc (CHF) currency peg to euro by the Swiss National Bank caught many short term currency traders by surprise. Long term, our view remains unchanged as we believe the CHF will ultimate decline in value relative to the USD. Today, the CHF is currently 64% overvalued to the USD as measured by purchasing power parity.

Lesson learned in major currencies like the Swiss franc and currency pegs. Surprise currency interventions and policy changes can work against your trade in the very short term with extreme currency valuations as traders cover their shorts (those betting on a short term decline of the franc to the USD and the EUR). If you are a long term trader, purchasing power parity is a good measure to determine a currency value.

In the unique case of Switzerland, their is an inherent premium built into the  CHF value due to its historical lure as a safe haven currency. Further, currencies can remain in an overshoot or undershoot position much longer then most traders can stay solvent. If we assume a built in 25% purchasing power parity premium to the price of the CHF, then over the long term, their is a high probability that the CHF will ultimately decline relative to the USD back towards a 80 to 85 cent US fair value. If the currency undershoots, then 65 US to 70 US cents is possible. This could take years to achieve.

In the world of currencies, irrational market behaviour and illogical valuation can last for a very long time as perception / emotion and safe haven status premiums can artificially support an expensive currency valuation.

We prefer to take medium to long term positions rather then roll the dice in short-term currency moves thus mitigating risk from unforeseen policy decisions that can move a currency into a further illogical trading value.

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Wednesday, October 29, 2014

Expensive & Cheap Currencies - Update

In the world of currencies, one thing is a given is that 'value' is constantly shifting. Over the last three months, we have seen a significant appreciation in the US-dollar (USD) with massive capital inflows into the US banking system & economy.

Of interest, the USD price of gold bullion has actually held steady during this dramatic USD currency price increase staying close to the 1250 USD level. As measured in other currencies, gold has slightly risen in value. For example, as priced in Canadian dollars, gold is in the $1360 to $1400 CAD level per ounce of gold.

Of short term immediate consequence for gold bullion is the scheduled vote on November 30, 2014 by Swiss voters in a referendum to either approve or disapprove a ballot measure to increase the Swiss central bank reserves from its current 7.7% gold bullion holdings of $550 billion total reserves to a 20% ceiling. If a YES vote takes place, there is a greater chance that Switzerland may ultimately go ahead and purchase over the next 5 years upwards of 1500 tonnes of gold bullion to satisfy the 20% threshold. The Swiss franc will indeed truly be one of the world's only gold back safe haven currencies. The price of gold bullion will also get a price boost from this demand shock.

For those planning holiday schedules.
CHEAP CURRENCIES - that is, great value for your money remain Russia, Turkey and South Africa. All three currency zones have their domestic currencies at around 50% undervalued to the USD. Other attractive currency zones include Mexico, Hungary, Poland and South Korea.

EXPENSIVE CURRENCIES: our list still have Switzerland as the most expensive and the world's most expensive industrialized currency zone as measured by purchasing power parity. Other big money expensive currency zones include Norway, Denmark and surprisingly Australia as the AUD remains at 10% overvalued even after commodity price correction.

Final comment, the dramatic drop in oil price has knocked the value of the Canadian dollar down along with the Russian ruble, etc.. The CAD still remains even with this large price correction in commodities still overvalued at today's level by 10%, risk remains for the CAD to drop to the low 80 US cent level in year 2015 from the current 89 to 90 US cent level.