However, everything is as rosy as what many of the governments proclaimed or there are more than meets the eye?
One of the key things I look out for while assessing the investment climate is to identify abnormalities in the Global Macro arena and one recent abnormality took me a couple of days to research and analysis before I came to a calculated conclusion.
The abnormality is the divergence of YEN and USD.
In the world of investing, YEN and USD are considered as safe haven currencies, meaning that global investors will tend to move their funds to purchase Japanese Bonds or the US Treasuries before or during times of crisis and they tend to move in tandem whenever a crisis is about to strike. In the last 2 months, there has been a divergence between the two currencies that left me scratching my head. The USD has been trending downwards, meaning that global investors are selling USD and investing their monies in higher risk regions. Meanwhile, the YEN has been shooting higher, despite attempts of negative interest rates and QE by the Japanese central bank indicating a flight of safety which could mean bad news for equities.
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| Brown Line is Yen. Blue Line is USD |
Gold, the other safe haven currency which I have temporarily forgotten has rallied strongly in the past quarter and with this, the final jig-saw of the puzzle has been clicked into place.
In essential, this is my conclusion:
- The Big Boys are parking their money in safe haven money despite a rally from a 20% market correction, meaning that the worst is not over yet.
- The Big Boys are parking their money in Gold and not USD as per usual as they believe that the global crisis will be strong enough to reverse the US Central Bank decision to stop raising interest rates, or even initiate a new bout of QE.
- The Big Boys prefer to earn negative interest rates from Japanese Bonds, meaning paying banks a fee to safe keep their money, than to risk their money in any higher risk assets shows their extreme adverseness to risk assets at this point of time.
- High gold prices typically points to a potential currency war as government around the world expand their monetary policies (print more money) to boost their exports and economies. China's RMB in the current economic climate will be the potential spark point for a new currency war.
This may be nothing but pure speculation on my part but it seems like the currency markets or the Big Boys are pointing out that the current China and commodity crash is not over yet and there is something big brewing such that they are unwilling to participate in the recent stock market rally.
Invest with caution.
Portfolio Strategy
Our strategy or not cutting loss and ride through the January correct bore fruits at last as the recovery during March clawed back some of the losses. However, the portfolio is hit badly by the sharp depreciation of USD against SGD and the best performing stock market, America, did the worst when translated to SGD terms coming in at 0% return for the month. The relatively strength of the EUR and modest recovery of the European markets gave a decent 4% for the month while the worst performing region for this correction, Asia Pacific gave the best returns at 5%.
At this moment in time, I believe that the USD is extremely undervalued given the relative strength of the US economy at this point of time and it is a good time to accumulate USD again. The trend of falling USD is an over reaction to the dovish comment by Janet Yellen, the Chairman of US Federal Reserves and I believe that the trend will reverse itself sooner or later. Despite being a potential winner, I am not feeling all too comfortable with Gold prices at this moment in time. I will however, continue to keep a look out at commodity prices as it has moved to a relative sweet spot to invest in.
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