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.