A World Of Currencies And Risk

The most overvalued major currency in the world is the Swiss franc, the safe haven currency that attracted offshore funds on an epic scale during successive euro crises in 2010–11. The Swiss National Bank (SNB) responded to the capital flows with a ceiling for the Swiss franc versus the euro at 1.20.

However, the dramatic fall in Spanish, Italian, Irish and even Greek government bond yields now demonstrate that the ECB under Mario Draghi has restored investor confidence in the euro and the single currency no longer faces existential risks.

Meanwhile, Switzerland faces deflation since its overvalued currency hits both its industrial exports and tourism. This is all the more true since US pressure on Swiss banking secrecy had devalued the status of the world’s leading offshore banking hub at a time when megabanks UBS and Credit Suisse are both in clear downsizing mode.

This means, sooner or later, the SNB will be forced to devalue the Swiss franc against the euro by changing its policy ceiling to 1.25 or even 1.30. This policy change will not be pre-announced since the SNB does not want to give a risk free profit to the world’s currency speculators.

However, I believe buying euros against the Swiss franc at 1.21 positions investors to benefit from a highly probable shift in the Swiss central bank’s policy, a scenario with obvious asymmetric risk potential. George Soros made a billion dollars betting against the Bank of England during the sterling – ERM crisis on Black Wednesday, September 1992. This was the mother of all asymmetrical trades.

I believe the Canadian dollar could well rise another four per cent against the US dollar in 2013, after its stellar performance in 2012. The Canadian economy is leveraged to the US shale oil revolution, housing recovery and auto rebound, thanks to Canadian exports of oil and gas, timber and auto components.

A dovish Bernanke Fed, a hawkish Bank of Canada and fiscal discipline in Ottawa (a balanced budget target that is unthinkable in the US) and capital flows into the Western world’s most stable banking system makes the Canadian dollar an attractive currency for savers and investors in the Gulf. At a time when the United States could well lose its sovereign credit rating, Canadian government debt is rated AAA. The US dollar could well depreciate to 94 cents by the end of 2013.

I am stunned by the strength in the South Korean won, Thai baht, Chinese yuan and Philippines peso against the US dollar. As Chinese GDP growth and trade flows in the Pacific Rim rise, Southeast Asian currencies face natural appreciation pressure.

The only major Asian currency that has not appreciated strongly against the US dollar is the Indian rupee as it is burdened by a huge current account deficit, seven per cent wholesale inflation and volatile politics. However, as the Reserve Bank of India (RBI) cuts its repo rate as inflation peaks, and Dr. Manmohan Singh’s Congress attracts FDI via its reform momentum, the rupee could well rise from its current 55 to 52 against the dollar.

I am skeptical about commodities currencies in 2013. The South African rand could well fall to nine against the dollar due to labour unrest in the gold/ platinum mines, protracted inflation and succession rivalries in the ANC. The Russian rouble at 30 is no longer undervalued and vulnerable to a fall in Gazprom gas export prices and anti- Kremlin protests in Moscow.

The Norwegian kroner’s strength against the dollar and the Euro has now been publicly criticised by the governor of the Oslo central bank. The Norges Bank could well do a policy U-turn to jawbone the Norwegian kroner lower, particularly if core Europe slips into recession. The weakness in the labour market, mining capex and iron ore exports could well convince the RBA to cut interest rates and be the kiss of death for the overvalued Australian dollar.