Playing the foreign currency markets is a zero-sum game. Currencies rise or fall relative to one another.
And right now, for anyone who wants to trade the market, it’s very much a case of picking which currency is the least ugly-looking. That’s not easy.
The eurozone is still in denial, even after two major crises in less than a year. The dollar is threatened with more bouts of money-printing. The yen is expensive. The pound has its merits, but it’s walking a fine line between inflation and economic relapse.
So no wonder gold and silver are rocketing.
Europe’s leaders seem oblivious to investors’ moods
Europe’s leaders really know how to keep the markets on edge. They seem to be utterly tone deaf to the investment mood.
European Central Bank (ECB) president Jean-Claude Trichet managed to buy a bit of time for them all at the end of last week. He sat and calmly nattered away to journalists about how the ECB wasn’t planning to make any big moves. And behind the scenes his minions were snapping up Portuguese and Irish debt, just to prevent any major immediate fallout.
That soothed the markets for a short while. After all, investors presumably reasoned, the politicians surely must know that the future of the eurozone is at stake. They’ll pull a rabbit out of the hat, won’t they?
But they haven’t. Germany doesn’t like the idea of topping up the European bail-out fund. And it doesn’t like the idea of issuing Europe-wide government bonds either. No wonder. As the FT notes, Germany realises that this would both “push up its borrowing costs and remove incentives for those countries trying to pay down large deficits to maintain fiscal discipline”.
In short, we’re no nearer to agreement on closer fiscal union for the eurozone. And if we’re not getting closer to that, then the alternative rears its ugly head – the disintegration of the eurozone. We’ve written about this regularly in recent weeks.
But to keep this short, as Jan Straatman of ING says in the FT, “the only thing that is certain is that as long as European policymakers fail to agree a clear course, volatility in the bond markets will continue”.
And the same goes for the euro. Having rebounded sharply against the dollar at the end of last week, it slipped back again yesterday. We’ve also got the Irish budget vote later today which could provide some scary moments, although it looks likely to pass.
With the euro in trouble, you might expect the dollar to return to playing its traditional role as the ‘safe haven’ currency. It’s the global reserve currency, and it’s what people ran to when the financial crisis sent markets into a tailspin back in 2008. And it did tick up against most of the majors yesterday.
The dollar isn’t an attractive bet
However, there’s a cloud hanging over the dollar. And that’s the fact that Federal Reserve chief Ben Bernanke seems hell-bent on destroying it. He’s already cheerily talking about quantitative easing part three (QE3), as my colleague David Stevenson noted yesterday: More US money printing could be disastrous for investors.
The US and the Chinese authorities seem to be engaged in this monetary battle. On the one side, the Chinese are fearful of inflation, and keep trying to tweak rates higher. But they’re scared of a slump too, so they’re not yet clamping down as hard as they might need to.
On the other, the US central bank seems determined to print as much money as possible for reasons that are frankly, a little vague. Any pretence that QE makes banks lend more money has been dropped. It’s now being sold as a sort of confidence trick. If QE can prop up stock prices, this will somehow generate a ‘wealth effect’. It’s a nice idea, but the average US consumer is far more attuned to the tumbling price of their home than to what’s going on in their portfolio.
This confusion over the Fed’s motives is one reason why holding dollars is also not terribly appealing. If you don’t know why someone is doing something, it becomes much harder to predict what their next move will be.
Of course, none of this necessarily matters to currency traders. As our spread betting writer John C. Burford notes in his blog, while understanding the fundamentals provides a useful intellectual framework for traders, making money from trading is more about getting your timing right than anything else.
We’ll be looking more closely at how to trade the currency markets in the next issue of MoneyWeek, out on FridayIf you’re not already a subscriber, subscribe to MoneyWeek magazine.
Gold remains a buy
But what if you’re looking for more of a long-term punt on currencies? Not everyone is temperamentally suited to trading, or has the time to devote to monitoring trades. In that case, the easiest bet is to buy gold. Silver has also performed spectacularly recently, though as my colleague Dominic Frisby always points out, it’s a much more volatile metal.
As long as currency debasement remains the goal of most major central banks, gold should do well. Simon Caufield, writer of the True Value newsletter, recently gave us his take on how you’ll know when the time has come to sell gold – you can read the piece here: Gold: keep buying or start selling?
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