Major Currency Review Feb 2009


We can get a great feel of potential long term currency strength  from the Economist Magazine statistics section.

The first data I review is the Trade, exchange rates, budget balance and interest rates.

The example below shows  the January 29, 2009 update. Timing is not urgent when viewing this data as this type of information  does not change quickly.

I am looking for long term value… not immediate trends on where the currency will move today or in the near future.

Let’s use this example to review major currency values that could affect upcoming trends.

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First I look at the interest rate. This is the fundamental factor that has the most immediate impact on currency strength.

Here we see that the Danish kroner for example has a very high interest rate compared to most of the major currencies…especially the euro.  Denmark’s short term interest is 4.50% versus 0.27% for the US dollar and 2.12% for the euro.

The next factor for review is the government’s budget balance. When a government has a budget deficit it has to borrow money. Borrowed money costs interest.  Interest reduces the amount a country invests in infrastructure and positive benefits. This creates a tendency for the country to increase the supply of currency without a matching productivity…  more money without more goods.  This  increases the chance of inflation which in turn will reduce the value of the currency versus currencies with less inflation.

The fact that Denmark  has a budget surpluses is positive.

Next the trade and current account balances show how much demand there might be to buy or sell the currency. Positive account balances strengthen a currency’s future.  Deficit balances weaken.  We can see in this example that the huge US deficit is likely to drag the dollar down versus China’s currency  since china has a huge positive balance.

Denmark has a positive balance.

Finally currency parity versus the dollar shows us the recent parity trend. We can see for example that the Danish kroner has dropped a lot versus the dollar, this last year.

January 28, 2008 a dollar bought 5.05 kroner. Now the greenback is worth 5.63 kroner.

The kroner thus looks like good value.  The Danish kroner has higher interest…  a balanced budget…  and positive trade and current account balances… plus it has been falling versus the dollar.

This is what I look for…  value… a currency that is down when all its fundamentals are up.

Value investigations like this give a background… show us the long term likely direction.  Technical analysis and trading are totally different. Technical trading is based only on the trend… where the currency is headed right now… right or wrong.

Value analysis shows where a currency is headed long term.  If the kroner is still headed down versus the dollar, this could be a good time to add a bit of Danish kroner.

Always your decisions on what currencies to hold should be subject to your  current portfolio currency balance and unique financial needs.

There are plenty of other stats we need to review as well. We’ll look at more of them in upcoming lessons.

Until next message, good global investing.

Gary

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