What do currencies tell us?
For retail investors it is incredibly difficult to invest in individual currencies, or to speculate on potential currency appreciation or depreciation. Rather, I like to use the currency markets to gain confidence in my expectations for the capital markets and, in some circumstances, a particular asset class.
So let's briefly review what I believe the currency markets are currently suggesting:
- For those precious metals aficionados, I will acknowledge that silver, +17% year to date, is the top performing "currency." Silver usage is both industrial and monetary. Industrial supplies are very tight, driven by the recovering developed economy industrial demand. On the monetary side, the continued decline in the world's reserve currency, the U.S. dollar, has created store of wealth paper asset demand for silver.
- The Russian ruble is the top performing emerging market currency year to date, +7%, and second only to silver for all global currencies. I see that strength as validation that overweight exposure to energy investments is warranted. Russia and Canada, Canadian dollar +2.9%, remain geographically favorable sources of oil reserves, quite a distance from the MENA unrest.
- The euro is up over 4%, defying the forecasts heading into 2011 for a precipitous decline below last June's 1.1877 four year low. The resiliency in the euro is confirmation that the German economic recovery is the strongest of the developed economies by far.
- The Chinese renminbi over the past six months has appreciated 3.25%. Year to date it has risen, 0.30%. Investors should be encouraged that Chinese policy makers have not resumed a strategy to continually weaken the renminbi. Exporting China growth via an appreciating currency can only help advance the U.S. recovery, potentially even the U.S. labor market.
- The Japanese yen, down 1.89% year to date, and U.S. dollar down 2.89%, signal risk appetites are still healthy, despite a slowdown in market appreciation this month. These two developed economy currencies are acting as "funding" currencies for the global "risk on" carry trade.
*Year to Date currency performance as of March 9, 2011