Why Investors Should Pay Attention to the Yen/Euro Cross

The strength of the Yen and US dollar have been quite remarkable especially since the US started this economic spiral. The theory behind the US currencies strength is that if they are in trouble, everyone else will go down first leaving the US as the last standing economy in the world.

Japan is not far behind the US, however, their currency is going up for a different reason. You may have heard the business media talk about “The Carry Trade”. Interest rates in Japan are close to zero while significantly in higher in Europe. Over the last several years, investors have been borrowing yen at low interest rates, converting the currency to Euros, and buying equities and fixed income investments that were yielding considerably higher rates than the interest rate they were required to pay in Japan.

This worked extremely well for many years. However, as markets have come off and the balance sheet of many investors have become somewhat shaky, Japanese banks have been calling in their loans. Borrowers are required to sell their investments at lower prices and convert their Euros back into Yen.

A chart showing the exchange rate of the Yen vs Euro would mirror the markets as every new low in the exchange rate has led to a new low in the equity markets. Hopefully, there won’t be further lows on the cross as there will be further lows to equity markets.

Your thoughts or comments are welcome.

A Lower Dollar is Good For Canada

The Global markets be it equities, commodities, or currencies turn on a dime with no one knowing who has to unwind heavily leveraged positions at a given moment creating spikes to the upside or downside. I had been saving my thoughts about our dollar for a few days and thought it would be appropriate to comment on it as the intraday high was more than 5% higher than yesterdays close. 

The strength in commodity prices along with the Fed lowering interest rates in the US combined to provide the massive uplift to our dollar which has trading at close to 95 cents at the beginning of the month to a low of 77.68 before reversing trend.

Commentators were exuberant today about the dollars rise coupled with the first two day rally on the TSX in recent memory.  A higher dollar is great for snowbirds and those wanting to buy a second property in the US as well as imports from the US as goods coming in will be cheaper.

However, I would argue that I would rather see our dollar at 78 – 80 cents vs. par over the longer term. Our exports will be more competitive ensuring a lower unemployment rate which means a lower tax burden on everyone. Ontario is currently in a recession and needs any break it can get to maintain jobs. GM and Chrysler are discussing a merger that will eliminate 35,000 jobs. A lower dollar would mean that Canadian workers would have a better shot of keeping their jobs although the US government may put some conditions on who gets laid off in order to qualify for some bailout funds.

In Alberta, our oil and gas companies would be finding things more difficult with oil at $65 a barrel and natural gas at $6. However, a 78 cent dollar creates $84 oil and $7.80 natural gas if you bring our dollar back to par. 

If you are diversified in your invesment holdings and have US equity and international holdings, you have also seen a decline in value due to todays rise in the Canadian dollar. All this to say, we should be pleased to have our dollar where it is. We should be happy to have more jobs and taxpayers rather than saving a few bucks on our next trip down south.

Your thoughts and comments are always welcome.