Wednesday, October 27, 2010

Dollar delerium?

Last week the Chinese announced that they were going to raise interest rates.  Recently the Fed has been making a case for more quantitative easing (and therefore no rise in interest rates in the US), and the ECB hasn't been making a case for any more quantitative easing there, but guess what, the dollar decides to go up!  This, of course, goes completely against what you'd expect from economics, where higher interest rates usually cause money flows out of other currencies into the higher return currency.   Below we have how many dollars the euro has bought since it was launched in 1999. 

But what is interesting in the recent dollar movements is the fact that the dollar has seemed to be the focus of the markets, particularly because of its impact on monetary policy and commodity prices.  Higher US$ commodity prices are supported by a falling dollar as when converted into foreign currency the price is roughly constant, so the recent fall in commodity prices now implies a higher dollar.  But are commodity prices really headed lower when demand is becoming extremely buoyant in the rest of the world outside of the US?  

My own view is that the current US$ strengthening is only temporary - what with QE2, however you cut it, it implies a weaker, not a stronger US$.  The only caveat I would make though is that if I am wrong on US growth and we see stronger exports as US manufacturers take advantage of the lower US$ to boost their market presence in emerging economies, plus the emergence of another crisis in Europe (perhaps surrounding the Portuguese who cannot seem to agree on their budget - see then this might put a floor under the US$, and might even promote some appreciation.

Thursday, October 7, 2010

IMF World Outlook Growth Rates

Interesting that the IMF sees things pretty much the same way as I do for the world outside of Europe.  This is from their World Economic Outlook which was published yesterday!  It suggests that the best opportunities for stock market or mutual fund appreciation as we start the growth phase of the business cycle lie in South America, Africa, Eastern Europe and South East Asia. 

Tuesday, October 5, 2010

The Developing World and the Recovery Phase

As we enter the recovery phase of the business cycle, it is becoming increasingly apparent that there are big differences from a macroeconomic perspective between what is going on in the developed world and the developing world. The economist highlighted this in a recent issue which talks about the economic advances made in South America (cover on left).

It seems obvious to me that although there is a lot of hand-wringing about what is going on in the US (QE2, November elections, corporate stockpiling of cash), the fact remains that the US housing market has been the source of the global economic downturn, so that means that until that is sorted out and confidence fully returns, US economic growth will remain skittish. 

Of course that is not the case elsewhere.  As the Economist makes clear for South America, things have changed there in the last decade, and the outlook for growth and prosperity is much brighter than it was even 10 years ago.  Lula is now the hero of Brazil, having brought stability and prosperity to a once hyperinflation-plagued country, and despite the media focus on Hugo Chavez of Venezuela, there are other success stories (such as Chile, Belize and Costa Rica) south of the Rio Grande. 

And while I've been enjoying the great 9.4% return on my Latin American mutual fund, I am not unaware of the fact that in other parts of the world growth has been much more spectacular.  India must be the standout here, with even The Economist (once again) highlighting this fact on its most recent cover ( - "How India's growth will outpace China's").  To me, China has always been problematic as a trading partner, not only because it is still officially a communist state, but also because it manipulates its currency and it's virtually impossible to hold any Chinese stocks ( - all the China mutual funds you see are really Hong Kong mutual funds).  So yes, India will likely be the place to be over the next expansion phase of the business cycle.

In all this Africa is a bit of a "dark sheep".  Although South Africa is a great place to invest, and the Zuma government hasn't turned out to be as nasty as it might have been - partly because of people like Helen Zille in the wings, making sure that the government doesn't get away with too much - it's future is more uncertain.  Mandela's influence is clearly waning, and what happens after his moderating influence is absent is anyone's guess.  Hopefully Zimbabwe will not be the example to follow!  Elsewhere in Africa, long-term stability is still not assured.

But what about Europe?  More about this next time.

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