Download Nov - Penrich Capital

Penrich Capital’s Favoured Currency Ideas
Currencies to short
CAD
Currencies to buy
JPY
USD
United States Dollar
(Real Trade Weighted Index)
120
110
100
The US dollar has been one of our favoured long
currencies for some time due to its low level. The broad
trade-weighted basket compiled by the Federal Reserve
show the USD to be close to the low point reached in the
mid 1990s (see top chart). The USD’s decline during the
past month has allowed us to increase our position size.
Against the major currencies, the dollar is even lower than
the broad trade-weighted basket suggests. Indeed, the
USD is at the lowest point since the current system of
floating currencies was introduced in the early 1970s. The
USD is more than 20% below its long-term average
against all major currencies except the JPY (see table).
Developments in the external sector are important factor
in our analysis that the USD could be approaching a
cyclical low. US firms have gained competitiveness as the
currency has fallen. During the past year, net exports have
been becoming increasingly positive for US growth and
the current account deficit has declined towards 5% of
GDP (further information can be found on
www.penrich.com).
During recent months, a factor that has probably been
placing some downwards pressure on the USD is the
decline in interest rates compared to global interest rates.
The Federal Reserve has been one of the only central
banks that has been reducing official short-term interest
rates. This has contributed to a decline in the spread
between US bond yields and global bond yields (see
bottom chart). If US domestic demand remains weak, it is
possible that this spread will narrow further. This does not
preclude a rise in the USD (the dollar was rising through
2000-2001 when the spread was narrowing) but does
reduce the attractiveness of US fixed income assets.
90
80
Jan-90
Jan-95
Jan-00
Jan-05
USD; Now vs History
Now Average Difference
EUR
1.47
1.15
-27%
YEN
113
117
-4%
STG
2.11
1.63
-29%
CHF
1.13
1.42
-26%
SEK
6.30
7.69
-22%
NOK
5.27
7.15
-36%
CA D
0.93
1.36
-46%
AUD
0.93
0.69
-34%
NZ D
0.78
0.58
-35%
(average refers to 1990-2005)
US-Global 10 Year Bond Yields
(%)
3.00
2.00
1.00
0.00
-1.00
Jan-92
Jan-95
Jan-98
Jan-01
Jan-04
Jan-07