Tuesday, August 9, 2011

Currencies


If a Company's share price moves up 20%, it has strengthened 20% relative to the currency it is trading in. This 'pairing' is something that many investors overlook. For example, if it moves up 20% in rupee terms, it may move more or less than 20% in USD terms because the USD/ INR has changed.

Going ahead, for a currency to strengthen, another currency has to weaken. In today's world many of us are of the opinion that the USD ought to weaken in conjunction with the EUR. Add to that the CHF being artificially weakened and the Yen also being artificially weakened through different mechanisms. Add to this an already very strong AUD and a strong CAD. Add to this the illiquidity and unavailability of RMB, and add to this a relatively strenghtening INR and a Norwegian Kroner (NOK), one has to wonder how these currencies are going to move in the near future. It seems to me that currencies like the INR, AUD, CAD, NOK, CHF will strengthen further primarily based on the countries' inherent resilience, but wait.. AUD, CAD and NOK are primarily resource based economies... will a global downturn ruin these currencies' strength? That leaves us with the CHF and the INR.

I include the INR perhaps because of my bias to India. 
I do not believe in the China story and the JPY, I believe is heading for a critical depreciation when investors, who are now flocking to the JPY, realise that the Japanese economy has sustained itself on the back of its technical and export oriented competitiveness.

I foresee that the massive liquidity that global economies have amassed will move to physical real assets such as  agricultural land and commodities which are more dependent on supply shortages than demand downfalls. 
I don't know where gold is headed but I see that October should allow us to see $2000 + on gold. It is $1750 right now. 

We are moving towards the dissolution of the USD as a reserve currency. Bring on the gold system. 

The Bretton Woods failed because it was a very strict peg with Gold prices in USD. What is we come up with a monthly review of gold prices based on global liquidity which in turn is based on liquidity provided by the major currencies?

This also brings me to the EUR. The EUR cannot survive. Period. Austerity measures will soon be adopted by Italy and France and Spain; austerity measures will surely cause consumption to decrease in these 'developed' economies. A highly productive Germany and Austria will not prop up other countries just because they (the former) rely on export competitiveness through the weak EUR.

We live in interesting times my friends. The second decade of the second millennium will mark the end of the 'US only' era.

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