Most undervalued currency?
- Thread starter rock3r
- Start date
You could try some "burger-nomics" with the economist's big mac index
It suggests that the COP is undervalued relative to the Euro, and it has risen about 10% since the begining of the year. However it also predicts the JPY is even more undervalued, but that has dropped further. (I read recently that warren buffet has a new bet on the foreign currency markets, of course he didn't reveal what currency this was, but many commentators believe it is the japanese yen, it is going to rise, the reason it has stayed low for so long is that the japanese central bank wants to make sure that the devastating deflationary recession of the nineties and early 2000s has been well and truly killed.
We certainly could be near an inflection point for the Yen. These trends tend to end when everybody is onboard so when I read that ordinary Joe Soaps are taking out Yen mortgages in Poland or that housewives are playing the Yen carry-trade with the New Zealand dollar, it tells me this may be over soon.
The catalyst may be the ongoing mess with Bear Sterns. Rumours abound that they have asked creditors to give them time to unwind carry-trade positions to provide sufficient liquidity to meet margin calls on their CDOs. They may also be dumping profitable stocks, with again a rumoured, $2 billion sell hitting the tape late in the session Wednesday evening.
All unsubstantiated rumour of course but I am watching with interest.
Z
z108
Guest
Buffet also seems to have invested in utilities/railways etc in the US producing strong dollar cashflow.
Would somebody mind explaining to me what carry trade means and how it works ? What were the housewives doing ?
The carry-trade is simple. You borrow in a low yielding currency (Yen, Swiss Franc etc.) and then you converted your borrowed money into a higher yielding currency (NZD, USD, GBP, EUR etc.) and buy assets denominated in that currency (or even leave it on cash deposit with a bank). You then repay the loan and pocket the interest differential, or "spread".
The risk you are exposed to is currency risk - if the currency you have borrowed in appreciates greatly against the currency you have bought assets with, then the loan repayments become relatively larger and you may lose money overall.
A simple example of a carry trade would be to walk into a bank in Ireland, deposit €1000, borrow €10000 (suppose you pay 4.5% interest) and then fly over to Turkey and deposit the money in a bank account there where they pay about 17% interest. You are "making" €1700 in Turkey and servicing a loan here for €450 in interest repayments. As long as the exchange rate stays the same you are quids in by about €1250, if it goes in your favour you get extra lolly and if it goes against you then you lose.
The above is a simple example and of course with the wonders of modern technology you can do all this without ever leaving your home using the internet etc.
The above is a simple example and of course with the wonders of modern technology you can do all this without ever leaving your home using the internet etc.
Z
z108
Guest
Thanks for the info . I was aware of it as a sophisticated strategy if you dont mind the risk. I read a while ago that Polish people were doing this to get cheap mortgages but I had no idea housewives were doing it.
I consider a thirty year bet on a major world currency remaining weak to be the height of stupidity even if you can lock in a thirty year Yen mortgage at a rate of less than 3%.
Everybody in the world is short the Yen, eventually there will be a panic to buy back their short positions (i.e. repay the loans) and the Yen will rise sharply - possibly as much as 40% in a few months. Some people will get badly, badly burnt by this.
Here's the housewives article
Z
z108
Guest
I'm starting to feel tempted to invest in Yen/Japan and have a lot of cash available to do so right now.
What are the risks ?
What are the risks ?
I am not sure if it is me you are asking this question to but all I am saying is that it can go up or down from here.
The problem with currencies is you're dealing with a very rigged market - the presence of central banks with political rather than economic objectives can force the market (at least temporarily) to behave in unexpected ways. I read before that more traders go bankrupt trading currencies than any other asset.
So no, I have no idea when it will happen or how long the Yen will remain weak for. Furthermore, I've no idea how much it will rally when it does. 40% is just a guess.
However, the unwinding of the subprime mess in the US is as good a catalyst for a sharp appreciation in the Yen as any. Given the recent influx of inexperienced speculators, the potential is there for a rush of panicked buyers trying to get back into the Yen. It happened before in 1998, following the Russian default and subsequent unwinding of the carry-trade by nervous hedge funds. That saw a 20% rise in the value of the Yen over two months. Given the increased size of the carry trade and participation by just about everyone from Eastern European property investors to Japanese housewives, there is scope is for even greater gain this time round.
That said, it strikes me that maybe the yen is overvalued already.
Japan, as an economic entity, has a nasty century out before it: the mother of all demographic crises, no growth to build on, the ascent of an ultra-powerful historic cultural rival on its western shore.
Maybe a decline in the yen is justified given the big picture
Z
z108
Guest
Like all of us, how well Japan does depends on how well they innovate when faced with the challenges ahead . Its complex as I expected. Nationalism is resurfacing in japan. People want to ditch the pacifist constitution. The threat of China might act as a social catalyst for change. The newer generations are less like the old ones but only slightly. Change comes slowly there . One of their strengths is their cohesiveness as a society but it also is a cause of inflexibility.
But whats the definition of an appropriate value for any currency including the Yen ?
But whats the definition of an appropriate value for any currency including the Yen ?