Global Macro Investing, Part IV

In part 3, I explained why the dollar story is the single most important thing to watch out for in 2015. In part 4, we will take a brief look at other currencies.

The British Pound (GBP)

The British Pound was the world’s strongest currency at a time when the sun never set on the British Empire. As Jim Rogers says, the peak of the Empire was in 1918, and since then it has been an Empire in decline. The Empire in decline went from being a net creditor nation to a net debtor nation, and its currency suffered as a result. From 1931 to 1971, the pound suffered periodic crises, and was devalued on several occasions. With the end of the Bretton Woods system in 1971, the pound was freely floated and went through several more crises, the most well-known one being “Black Wednesday” (16-Sep-1992) when speculator George Soros broke the Bank of England. It wasn’t until Thatcher’s government broke the backs of the labour unions and made British industry competitive again that the currency started to recover. Or perhaps it was the North Sea oil that did the trick – oil production peaked in the mid ‘80s, the British industry started to recover, and a pro-capitalism government was in power all at around the same time. It’s hard to draw an inference on cause-effect.

The Commodity Currencies (CAD, AUD, NZD, BRL)

Canada is rich in natural resources (oil, natural gas, metals, coal, timber and uranium) and agricultural produce. Its largest trading partner is the US. While its fortunes are tied to the US economy, its currency behaves as a commodity currency, rising as commodities boom and declining as commodity prices decline.

The Australian Dollar and New Zealand Dollar (the kissing cousins) are also commodity currencies, but with a difference. New Zealand exports primarily agricultural and dairy produce, while Australia is home to mining (gold and iron ore), energy (coal and natural gas) and agriculture (wheat and wool). The fate of the AUD is closely tied to growth in China.

Brazil is the largest economy within Latin America and an exporter of soybeans, coffee, ethanol, iron ore and steel. The country rose on the back of the global commodity bull market which started in 2000 and will suffer a decline as the bull market ends. The Brazilian Real has long been a currency in crisis, prone to devaluations. The Brazilians have a saying, “Brazil is the next great country in the world. It always has been and it always will be”.

The Oil Currencies

The fate of the Russian Rouble depends on the price of oil. There is another little known currency whose fate also depends on the price of oil: the Norwegian Krone. Norway is home to a large offshore oil deposit, which it has been exploiting since the 1980s. The country has created a Sovereign Wealth Fund (SWF) to invest its surplus, and in what can only be considered bizarre in the current world, has a fully funded state pension plan.

The Emerging Market Currencies

These include the Mexican peso, the Indian Rupee, the South African rand and the Chinese Renminbi. The currencies derive their value from the strength of the underlying economy. Much of the Latin American and Eastern European currencies would also fall under this classification.

The Swiss Franc (CHF)

Switzerland has always been the country Europe escapes to in times of internal strife. It protected the savings of Germans when they went through hyperinflation in 1921-23. It harboured Jews and fugitives from the Nazi regime during WW II. It stayed neutral and shot down both Allied and Axis planes that violated their airspace.

The first Swiss banks were said to have been set-up by bankers who actually carried their gold over the mountains to Switzerland. The Swiss are the bankers to the entire world, and have the strong currency that goes with that strong reputation. The CHF is viewed as a safe haven currency.

The Japanese Yen (JPY)

In the 1960s, the Japanese Yen was a big nothing. It took 360 yen to buy a dollar. The country was devastated, and the currency reflected it. Then, the Japanese went to work. Made in Japan went from being a joke to a representation of quality. In the 1980s, the Americans actually feared that the Japanese would drive them out of business. It took only 180 yen to buy a dollar. The currency had strengthened along with the economy. It strengthened all the way to 75 in 2011, and then Shinzo Abe happened. Abe wanted to give the savers and retirees of Japan a healthy dose of inflation, to make them spend more and thus revive the economy. He ended up driving the exchange rate to 120, a 60% devaluation of the Yen, with more to come.

What’s missing? The newest kid on the block, the offset currency to the dollar: the Euro. I’ll cover the Euro in the next part.

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