Wednesday, December 29, 2010

Swiss franc (CHF) overvaluation

As of today's entry, it now takes a $1.05 USD to buy one Swiss franc, an amazing trajectory skyward for the Swiss franc where it was only back in year 2005 where it traded as low as 77 US cents for one CHF. If one looks at purchasing power parity, the charts show the Swiss franc as the world's most overvalued currency in the industrialized world now at 70 percent overvaluation to the US-dollar (USD). Beautiful Swiss scenery, the lure of Swiss chocolates, clocks and private banking may not be enough to prevent the CHF experience a modest currency correction in 2011.
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Tuesday, October 19, 2010

Currency Valuations as Suggested by Purchasing Power Parity

The concept of purchasing power parity (PPP) suggests that a country's exchange rate in relation to other countries' currency exchange valuations are in equilibrium when their actual purchasing power are the same in each of the two compared countries. Hence, the exchange rate between two countries in theory should equal the ratio of the two countries' price level for a fixed basket of products / goods & services.The Economist magazine (UK based) publishes a well known Burger Index comparing the price of a McDonald's Big Mac in various countries using the price of a United States made Big Mac as the base value. Recently, purchasing power parity has made some candid observations about currency valuations:

Switzerland's franc (CHF) is heavily overvalued in relation to the US dollar

The Chinese yuan renminbi is undervalued. If you happen to find yourself in China and hungry, a Chinese made Big Mac will be very affordable especially if you are traveling from Europe.

Currencies that appear to be significantly overvalued to the USD are Denmark, Norway, Sweden, Canada by upwards of 15 to 20% and Japan.

Undervalued currencies include Russia, many Asian countries such as the Philippines, South Korea, Hong Kong / China, Malaysia, etc. Surprisingly, countries like Poland, Mexico, Hungry and Turkey are other countries that PPP suggests that their currencies undervalued.

Commodity currencies such as Brazil, Australia, New Zealand, Canada appear to be headed for a correction. Our forecasts at calls for a short term reversal in valuation for the USD as it has had a difficult three months with expected QE2 on the horizon this November 2010. In our view, it seems the market has already priced this in the USD currency valuation and the market may rally the USD on the actual day of event of quantitative easing round number two. It is the reverse to what logic suggests.

Sort of like buy on mystery, sell on the news!

The Euroland euro (EUR) at this time also looks a little frothy as they have significant economic challenges of their own including member countries Greece, Portugal and Spain experiencing economic headwinds. France is in the midst of labor revolt. This euro overvaluation is confirmed by PPP with a 20% overvaluation rating for EUR in relation to the USD.

Interesting times in the world of currencies. Our short term bet is to hold USD; gold bullion may have a correction of upwards of $200 USD an ounce over the next few months.

Happy speculating this Halloween season!

Saturday, May 8, 2010

Euro Currency Zone to Downsize?

The Euroland euro common currency zone is experiencing growing pains. The value of the Euro currency (EUR) has declined from the 1.50 USD to 1 EUR level one year ago to hitting the 1.27 USD level last week. Why the decline?

Greece and its weak country sisters of Spain and Portugal are in the midst of a debt economic crisis. Spain itself remains in a depression with 20 percent unemployment.

And of course, the natural level of purchasing power parity suggesting a 1.20 USD to 1 EUR is the current natural trading level.

The idea of Germany bailing out and subsidizing the Greeks does not sit to well with many Germans. Many in Greece particularly in the public sector have generous benifits and lofty wages. A bail out is a short term band aid solution but it will not solve the problem. Greece's total debt load is exploding as its fiscal shortfall estimated at 14 percent of GDP. If a proposed bailout from Germany takes hold, Greece's total debt to GDP will rise upwards to 150 percent of GDP which is unsustainable.

The concept of the euro and a common currency makes sense if trade between one or more countries is extensive and if they have similar living standards and GDP per captia output. With Greece, they should never have been permitted entry into the euro zone in the first place. At least not now, perhaps in 20 years? Their economy is inefficient and not productive.

The choice for Greece is simple. Either roll back wages for public servants as they did in Latvia. That is, devalue the cost structure if they wish to remain in euro wage purchasing power parity while promoting tax and trade policies to boost foreign direct investment. The goal would be to increase national wealth via private sector investment. Or, the other option is to leave the euro zone and return the Greek drachma as national currency. The drachma will accordingly devalue in relation to the euro and public servants can be paid in local currency without a nominal pay cut.

Tough choices are ahead for Greece, Spain and Portugal. In our view, the euro will survive but not before growing pains are addressed. The EUR currency zone grew to quickly, too many countries too fast. The zone should downsize, stabilize and then gradually propel forward in the years ahead as new prospective member countries be in a stronger economic position for potential membership from the outset.

Monday, April 5, 2010


The market is finally catching up to reality with all this new US debt to be financed. As the Obama administration runs massive deficits in excess of 1.4 trillion USD, this shortfall has to be financed. During this 2nd week of April, the US Treasury has $168 billion of notes at auction, the bidders are likely going to wish for higher yields to compensate with the excess supply. As of April 5, 2010, the 10 year US Treasury note breached 4 percent, a first in 18 months. Yields on the 10 year are likely to hit 4.5 percent in the next few months.

How will this impact USD valuation? Rising yields even with excess money creation via debt (inflationary pressures) may see a repeat of the late 1970's where high inflation and high interest rates actually resulted in a USD bull market. Our currency consulting firm has forecasted a higher USD over the last few months and this has played out correctly. Our view is for continuing USD appreciation in the months ahead as US interest rates rise.

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Thursday, February 4, 2010

Turbulent Times in the world of currencies

From South America to Asia to Europe, these are indeed turbulent times in the world of currencies. Venezuelan authorities revalued their currency to reflect the depreciating value of the bolivar. High inflation, lower oil prices, increased centralized state control of the economy along with continued high spending is maintaining downard pressure on Venezuela's currency.

In Asia, Vietnam recently devalued reflecting high domestic inflation.

During December 2009, North Korea crushes its citizens with a 100 to 1 revaluation of the brown won.

In Europe, yields for Greece sovereign bonds are rising. The collapsing bond market is now spreading to Spain and Portugal.

Will the bond market contagion spread globally?

Rising yields on America's massive fiscal shortfall are inevitable. But will happen to the USD?
Currencies at times trade illogical and this may happen again with the USD. Similar to the late 1970's at a time of high inflation and high interest rates, the USD was trading during a phase of a strong USD.

Moving ahead during 2010 - 2012, the USD may surpise many and enter a bull market with rising bond yields.

One must remember that the USD value must be compared to another asset for valuation. If other currencies find themselves in trouble in the next year or so such as pound sterling and the euro, the USD maybe the least ugly currency of the bunch.

Our call is for a stonger USD going forward even with gigantic fiscal shortfalls. The market will correct the deficits with higher interest rates and force the politicians to balance. It seems perfectly logical that if a government body can borrow at just under 4% for 30 year Treasury notes. It is like giving candy to a kid, of course the politicians will rack up massive deficits.

Expect higher interest rates, lower fiscal US shortfalls and a stronger USD going forward.