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.

For further insight into global currencies, please visit BankIntro.com

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.

Please visit BankIntroductions.com for the latest on currency rates and research.

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.

Tuesday, June 10, 2014

Gold & Silver USD price Break Out is Imminent

Gold has stagnated trading in a flat line now for the last few months in the 1250 to 1325 USD / ounce
price range - more recently trading in the 1250 USD / oz price. 

In early June 2014, a modest earthquake hit the markets with the European Central Bank (ECB) deciding to  lower two key interest rates. The ECB refinancing rate goes to plus 0.15% down from 0.25%. However, it is the ECB's decision to move the interest rate for banks depositing monies with the ECB to negative 0.1 percent, this policy move is the initial fuel to start a major fire within the global gold market.

That is, banks now pay the ECB to hold their money instead of receiving interest. The central bank is implementing this negative rate to try and encourage European banks to lend the money to help foster economic growth within the currency union.

With current inflation in the Eurozone at 0.5%, well below the 2% target, the central bank is now pulling several levers to stimulate the velocity of money and encourage domestic inflation within the common currency zone.

Also, keep your eye on the U.S. Federal reserve to perhaps surprise the markets in July 2014 with a pause on tapering. This too would add much bullish sentiment to USD gold price going forward with silver following the trajectory of gold but likely at a faster velocity of USD price rise then gold.

In our view, we believe that gold is now very close to a major turn back north in price towards 1400 to 1500 USD / oz by year-end 2014. By year 2016 - 2017, inflation will return to modest levels within the United States and Europe, thus we expect gold prices to be over 1700 USD.

Finally, gold priced in other currencies such as Canadian will account for CAD dollar depreciation, expect much higher CAD dollar gold prices going forward. Over the last year for example, CAD gold is only down 3.4% whilst USD price gold is down 9.73%. Our research suggests a medium term floor price for the CAD further depreciating to the 83 US cent level. If the oil market makes a major turn south in price, this forecast could be further revised downward with a new floor in the mid 70 USD cent range for each CAD.

A quick general snapshot on currency valuations shows heightened risk for the Swiss franc (CHF) with the CHF maintaining upwards of a 55% purchasing power overvaluation to USD. A good time to buy gold in CHF is right now. Conversely, the Turkish lira is upwards of 50% undervalued to the USD, a good time to accumulate and hold lira currency in our view.

For further research on currencies, please visit us at: http://www.bankintroductions.com

Friday, December 20, 2013

Cheap and Expensive Currencies

The Turkish Lira is currently hitting a record low to the US dollar at 2.095 TL whilst as measured by purchasing power parity, the lira remains at just over 50% undervalued to the US dollar (USD). If one earns USD as income, then Turkey remains a favorable spot for inexpensive travel.

The Russian ruble is also tremendously undervalued to the USD at approximately 45%. Tourist travel to Russia is affordable in most places as restaurant meals, souvenirs - gifts etc will provide for a bonus purchasing power for those with US dollars. A good restaurant meal with wine will likely set two diners back around $60 to $70 USD in many parts of Russia while the same equivalent type meal in the United States will be just over $100 USD.

South Africa is another country that provides for a sale on its currency for tourists.

Venezuela's currency is in free fall - hard currency is in significant demand as the local currency bolivar is now at threat to very high inflation.

Expensive currencies have Switzerland at the top of the list as the Swiss franc (CHF) is upwards of 60% overvalued to the USD as measured by purchasing power parity. A good restaurant meal with wine in Switzerland would be closer to $200 USD for two.

Norway is another expensive country to visit as is Australia. The Australian dollar is about 30% overvalued to the USD.

It should be noted that currencies can remain offside with purchasing power parity for several years but eventually they do ultimately correct in value.

For now, Turkey remains again for another year as one of the most affordable places to visit as measured by purchasing power parity currency valuations.