Popular Currencies: What Benchmark are You Using?

Roughly 7 years ago I moved to NZ. The local currency was one of the cheapest on the planet and possibly the cheapest currency of any first world country in terms of purchasing power parity. It traded around 40 cents to the greenback. Real estate had not gone anywhere in about 14 years and yields on average middle-class homes ran as high as 15%. It was a wonderful time for an investor like me.

None of those things exists today. The currency trades at 80 cents to the greenback and yields on those same properties are in the 3-5% range.

Is it cheap or is it expensive?

Before answering that question I’d like to point something out.

When USD was the Benchmark

For the last 90 odd years the world has used the USD as its benchmark of value. Everything from oil to copper and even foreign real estate has been priced in dollars. As the Federal Reserve has aggressively and repeatedly plunged a sword into the side of the dollar so foreign currencies have risen and the assets denominated in the same currencies have moved in tandem.

The currencies that have not risen as much in this period have largely been currencies which for political reasons have been manipulated lower. The Renminbi comes to mind. As a result China is experiencing higher rates of inflation in goods than countries such as NZ, Australia and Canada to name a few. This may sound complicated but it is really simple. If the currency cannot be allowed to reset values in an open market then the goods purchased by that currency automatically get reset. Governments sometimes institute price controls as well as the aforementioned currency manipulations in an attempt to forestall the inevitable rise in either currency or goods. In Thailand the central bank is presently attempting this on the Thai Baht.

Rising Currencies Against The USD

It’s instructive to note however that this trend although well past the early stages, is gathering momentum.

The difficulty lies not in the fact that certain currencies are appreciating but rather that the USD is no longer a suitable yardstick to be used to measure such things.

Will the New Zealand, Australian and Asian currencies continue to rise against the USD?

With chairman Bernanke standing over the victim with a bloodied knife I think it is all but certain that after QE2 will come QE3 which will be Bernanke’s version of monetary “shock and awe”. He will attack the currency with repeated stabbing and the result will be a bloodbath.

Making Suitable Choices

OK, back to the first question then. Is NZ cheap or is it expensive?

Relative to what I say? Relative to its previous pricing vs the USD it would appear not, however considering the abuse that the dollar has taken and will continue to take and the hands of central bankers I believe that New Zealand and the NZD is still relatively cheap.

Frankly the time to make some hard decisions was yesterday. There exist many countries with exciting opportunities that will fare well while others experience the inevitable turmoil as the social and political fallout from the myriad problems that are now unraveling continues gathering momentum. Some will suit better than others and it’s up to each of us to make the ultimate decision which if any will be suitable.

Next week we will be profiling our standout favorite emerging market which we believe will make early investors fortunes.
Chris

“The U.S. dollar will eventually reach its intrinsic value.” – Doug Casey

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Vik
Vik
10 years ago

A part of me wants to believe the Canadian government/Bank of Canada has been trying to hold back the ascent of the Loonie for the past few years…but what do I know when I’m from a city that rioted over a hockey game a few days back!

Vik
Vik
10 years ago

I looked through Treasury International Capital data again and evidence for my belief is in print…whether it’s mostly government/central bank buying and how much is uncertain…

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfhhis01.txt