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It’s All Connected

Everyone it appears is aware how central banks manipulate their currencies in order to try & stimulate their economies. While central banks can influence the currency markets, often more with talk than action, global currency markets are massive, & the market will always have the final say.

According to the Bank for International Settlements (BIS), in 2014 the Foreign Exchange or Forex market traded an average of $5.3 trillion per day.This dwarfs the global equity market trading volume of approximately $90 billion per day.

So while central banks do manipulate their local currency to some degree, it is the markets that dictate the value of each currency, & the market determines each currency’s value based on a number of factors

1. Risk
2. Yield on bonds denominated in that currency
3. Supply of that currency in the global markets
4. Capital flows in & out of that currency
5. Assets of the domestic country

Wealthy investors assess what the perceived risk is of a given currency. For example, when Putin invaded Ukraine, over $60 billion worth of Rubles quickly moved into the US dollar in the form of bonds, stocks & cash.

In the past 18 months we have seen a great deal of big European investors move their capital out of the Euro & into the US dollar to avoid losing wealth holding a declining currency.

With energy prices at multi-year lows, countries such as Russia, Venezuela, Saudi Arabia, Libya, Nigeria & even Canada, all saw deep declines in the value of their currency. It all adds up, if your main source of revenue is oil, & the price of oil declines 50%, you can be pretty sure the value of your currency will decline.

Is it any wonder that countries that rely heavily on commodity exports to drive their economy are seeing their currency decline with commodity prices trading at multi-year lows? Below is a chart of the Reuters CRB Commodity Index, & as we can clearly see today’s price is at the lowest level since 2002, & is down 60% from its 2008 high.

US dollar denominated debt

The US was the front runner in the Quantitative Easing (QE) game, & as they were heavily pumping out their various QE programs, the interest rates in the US dropped to near 0%. Many Emerging Market companies & governments decided to take advantage of those low US rates & issued debt denominated in $US.

But now as the US rises in value, these companies & countries must pay out yields & principle on maturing bonds in $US. For many of these countries, their local currency is now 20%-30% lower than the $US than it was when they issued the debt.

Basically, these foreign entities that issued $US denominated debt were shorting the $US. Now that the dollar has been on a tear means Emerging Market companies & countries must pay a much higher cost to cover their debt obligations.
Since our BUY signal to subscribers in early 2014, the $US has appreciated almost 25%, which is a huge move for a major currency.

When big money (wealthy & institutional investors) begins to foresee a risk of holding a depreciating currency, they do not hesitate to move their capital out of these perceived riskier currencies (bonds). Once the big money moves, it often turns in to panic sell.

Emerging Markets in big trouble

For Emerging Markets, as their currencies شركات تداول العملات في السعودية decline, the cost to service their $US denominated debt rises. But because their revenues are so dependent on commodity prices, as commodity prices hover near multi-year lows, their revenue streams also decline. The market participants see this lose-lose scenario, & capital flees the country & its currency, pushing the value of the currency down even further. It is a viscous cycle

Today there is an estimated $9 trillion in emerging market debt denominated in the $US. No central bank can stop this bubble.

We continue to advise our subscribers to stay long the $US, & short the Euro & Yen. If you are a non-US resident, then look to use any correction (decline) in the $US & exchange your domestic currency for $US.

Note that in time, the $US will come under similar scrutiny, as the US debt situation is about as ugly as it gets.. But Europe is collapsing before our eyes, & so is the Euro. Japan is the next ticking time-bomb, & the Yen will see serious devaluation over the next 1-1.5 years. It is all about timing, first Europe & Japan, then the US.

We are on the verge of global Sovereign Debt Default… it will be the biggest financial crisis in history. It will affect everyone, no matter where you live.

 

 

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