Friday, November 29, 2013

Currency wars? | The global context

Today is the last trading day of the month and there is a holiday feeling about as yesterday was Thanksgiving in the USA.

So it is appropriate to attempt to place some context on where Foreign Exchange sits at present.

While we attempt to garner some of the benefits from a level of diversification, the fact remains that the fate of the US dollar and, to a lesser extent, the Euro will have ramifications for other currency units. Gold is a commodity, strictly speaking, but it sits well alongside currencies as it has been the refuge of those who felt that the US dollar, the world’s reserve currency, was under threat of severe inflation. That has not taken place, and now the ostensible driver of that those inflation fears, Quantitative Easing in the US, has been signalled to come to an end. The only real question is when this will happen.

Yesterday the ECB came out with a warning that the US decision to scale back stimulus, in other words to taper QE, is a potential threat to the Euro economy. Does this mean that the Euro zone will take measures of its own to counter this perceived threat? Time will tell.

Separately, there are other economies that have seen the attraction of a weaker currency. Up front and centre here is Japan, and the USDJPY exchange rate is showing the effects. The government of Australia has let it be known that it, too, would prefer a cheaper Aussie. On the other hand the ECB seems content to have a stronger Euro. The story here is complicated by the very strong German economy, which sits astride the Euro zone and maintains a balance of trade that, some economists believe, is not in the best interests of its co-members of the Single currency unit.

There will no doubt be interesting times ahead. Our objective is, as always, to profit from all of this.


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