Enzio's Clock

Background

1. Why should the yen, Australian dollar and Euro keep strengthening against the dollar?

Sadly, superpower currencies always fizzle out. That is because the Empire runs out of money, prints more and down goes the price. Don't forget that the yen started at 360 to the USD back in 1971! We say this with a little sadness, as the U.S. economy - sub-prime warts and all - is the most terrific in the world: it has rejected the arteriosclerosis of Japan, the cozy deals of Europe, and the "face" issues to woven into Asia.

O K. Departing the big picture, here is what I think.

• Yen. It will keep rising because of rising risk aversion: greed is morphing into fear - and this means that carry trades will keep getting unwound. Conceptually, there must be an inverse relationship between the VIX and the FXY - between the fear gauge and the yen/dollar rate.
• Australian dollar. It will keep for two reasons. First, The Economic Time™ is characterized by an excess supply of money and an excess demand for goods. That excess demand for goods is driving demand-pull inflation, so up go interest rates and thus the yield differential to the US dollar. Also, as everyone knows, Australia's resources are in demand, particularly by China; indeed, China is driving Australia's growth! The closer that we get to the August Olympics, and the more heated that tragic demonstrations get in Tibet, the more that Beijing will want to nurture its ace in the pack - economic growth. All of which suggests that Australia's resources remain in demand - until after the August Olympics - when the post-Olympics hangover will ensconce itself. Tibet and pollution will make these Olympics less august than Beijing wanted: please excuse the cute pun.
• Euro. Inflation remains firm, and Trichet's inflation-hawkish ego remains robust. So expect rates to stay firm, meaning that the yield differential to the dollar widens: even if the Euro's rates stay where they are, the probable reduction of Fed Funds to 2% on 18th March widen this gap. The Economist of last week noted that the French voters are against such a strong Euro. Long may Trichet's ego stay in place: at the Frankfurt Bundesbank, the Money Machine illustrates the disastrous consequences of what an excess supply of money does to inflation. World War II. But the French population wants a weaker Euro, so French politicians are seeking to garner cheap votes by playing to their audience. Thank God, as stated in The Economist of 8th March, p. 62: "Such attacks are meaningless in practical terms: the treaties guaranteeing the ECB's (European Central Bank's: your author) independence can be changed only with the unanimous (italicized by your author) agreement of all 27 EU members(which many, starting with Germany, will never give)."

 

 

2. How to Make Money Off This Idea

1. Consult your financial adviser first.
2. We are long the Australian dollar and the Euro.
3. Keep buying these three currencies. For your convenience, here is how they have been doing since we published our currency missive on 7th March.

Rate	7th March	14th March	end June
Yen/US$	101.98	99.1	90
US$/A$	.934	.937	1.00
US$/Euro	1.542	1.567	1.750

4. Of course, go for call options or trade futures on these currencies. I know that I am a disaster with derivatives, so I don't touch them. But, if God, Buddah, Allah or whoever gave you this talent, make money off it!