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Global Currency Indicator

01/23/2013

The greatest challenge to investors right now is to remain committed to a portfolio strategy that is working well year to date. Unfortunately, much of the media’s presentation on the markets is anticipating when the “top” will be traced out for the market. Each day, dire warnings are offered and historical comparisons to previous market peaks are drawn. However, the evidential truth does not support those bearish views.

It is a calm, quiet, almost boring market, which is aligned with the historical norm for market sentiment and contrary to the tumultuous environment of the past few years.  In such an environment it is prudent to create a list of indicators that would telegraph a market correction rather than fixating on its occurrence. That exercise will help investors remain committed to the current strategy as well as craft an evidential road map for a market shift, not relying on sheer speculation.

I suggest that utilizing a “global currency indicator’ should be near the top of the list.

Evidential truth…

1.      Over the past few years precious metals have been referred to as fiat currencies.  Allocations to precious metals have increased concurrent with global liquidity. Gold is generally viewed as the ultimate liquidity investment. However the year-to-date performance of silver (+7%) and platinum (+10%) is confirmation of the perfect blend of ample liquidity and modest growth. As long as the Industrial metals, silver and platinum, continue to outperform the pure liquidity metal, gold (+1% year to date), investors should view that as favorable for further risk asset appreciation.  

2.      Investors should watch closely the performance of traditional “BRIC” member currencies. As long as their domestic consumers continue to enjoy currency appreciation, view that as favorable for further risk asset appreciation. Year to date: Indian rupee +1.8%, Russian ruble +1.27%, and Brazilian real +1%.

3.      The presence of a funding currency for the global carry trade is imperative. Since late 2012, the Japanese yen has assumed the role of that funding currency. Over the past six months, the yen has weakened 11%. Year to date, it has depreciated another 2%. Continued yen weakness is favorable for further risk asset appreciation.

4.      The year-to-date performance for commodity currencies is strong. The New Zealand dollar is +1.8%, Australian dollar +1.5%, and Canadian dollar +0.2%. Continued commodity currency strength is favorable for further risk asset appreciation.

 

 

Silver Year To Date

 

Source: Bloomberg

 

Platinum Year To Date

 

Source: Bloomberg

 

Gold Year to Date

 

Source: Bloomberg

 

Japanese Yen 2007-2013

 

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.