With the world drowning in debt, there is rarely a dull year in finance. 2012 will go down in history as the year when a politician, Shinzo Abe, campaigned specifically on the platform of weakening his voters' currency. I’m not sure if that has ever happened before.
Think about this for a second. You own yen. You can use your yen to buy all sorts of products from overseas—everything from imports to foreign investments. Your yen make up your savings. Then you suddenly decide that you will vote to lose over 10% of your currency’s buying power. That’s just unheard of. Who would rationally want to agree to such a thing? Who would vote for a candidate who would endorse such a thing?
Of course, big Japanese corporates may want this. Thinking outsiders would say that this is Japan’s only hope of competing with China and Korea. Economically focused Japanese probably realize that this is practical. However, when you go to the voting booths, do you want to have 10% less (and counting) of net worth? 2012 is the year that a country of educated people decided that they would sacrifice their net worth in exchange for a weaker currency. Even more importantly, the Japanese allowed this to become a decisive election issue. If Japan can do it, everyone can. The race to the bottom is on—it won’t be pretty.
This brings up a very strange question—which countries benefit from a strong currency? In the past, you could say that resource economies would want strong currencies. If you export oil or some other commodity, you would want your currency to be strong so that you can use your export earnings to buy finished goods. At least that used to be the logic—not anymore. Everyone is scared of Dutch Disease. Just look at the Middle Eastern kingdoms that are stoking inflation by pegging their currencies to the US dollar. Look at Chile and Peru accumulating foreign reserves to stop their currencies from appreciating. Most resource countries are now scared about strong currencies harming domestic industries.
What about countries that have strong banking center industries? In the past, Switzerland would always want a strong franc. The fanc used to be thought of as being as "good as gold"—not any more. Switzerland has done more in terms of money printing than any other country. They’re scared that a strong currency will harm exporters. The Swiss are in the process of surrendering the dominance of their traditional banking industry for the benefit of some chocolatiers.
What about trade facilitators? Hong Kong is defending a U.S. dollar peg that is creating the mother of all property bubbles. Singapore’s practice of using a basket of currencies has practical uses in terms of balancing the currency in terms of trading partners, but in a race to the bottom, Singapore will sink with everyone else.
So what sort of country would ever want a strong currency? I guess you should invert the question: What does a strong currency get you? It gets you political power. It lets you dictate the terms of trade and the terms of foreign aid that you dispense. You can subsidize your allies with a strong currency and you can bring enemies into your circle of influence with it. A strong currency is the ultimate tool of the country with expansionary political goals.
Who has political goals? China is an obvious choice, and I can see the yuan continue to appreciate. That said, they cannot allow the currency to appreciate too much—China is still a country dependent on export trade.
Who imports lots of finished goods, doesn’t export much except raw commodities and has expansionary geopolitical aims? How about Russia?
Russia is generating huge foreign currency reserves. Russia exports mostly raw commodities and isn’t that concerned with Dutch Disease. Finally, we all know that Putin likes to throw his weight around. Putin has played energy politics for the past decade and held parts of Europe under his power. He is intent on being more forceful in certain former Soviet possessions. With Europe on the ropes, it may be a perfect time to use a strong currency for selective politicking.
As I scan the globe, the Russian ruble is the lone currency that I can see appreciating. It doesn’t particularly hurt Russia to have a strong currency and it can play into the hands of the leaders. Will it play out that way? I’m still exploring the possibilities, but I’ve taken an initial long position while I learn more. Besides, it pays a nice carry while I work to figure it all out.
Gold is the largest component of my currency basket—which is made up of an ever-changing list of paper currency longs and shorts. While this isn’t the first time that I have added the ruble, I have a hunch that this is the start of something bigger for me. The Russians are increasingly getting their act together and in a race to the bottom, they may be the only ones who decide not to get involved in that race.
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