|
2010 was an exciting year for currencies. The dollar,
euro, the yen, and the yuan all went under the spotlight. Except for the
yuan, each experienced drastic swings wrought about by internal or external
factors. But overall, these events underwhelmed confidence in paper money.
The main reason is because of the sovereign debt crisis that swept the world.
Most
of the developed nations including the United States, Japan, and a number of
European countries have unsustainable debt. The US and Japan, for example,
are heading towards insolvency. Meanwhile, the only reason why several
countries in the EU haven’t defaulted is the bail-out by stronger EU
members.
This
year presents more challenges for the world’s major currencies. While
the markets are not as nervous at this point, problems remain just beneath
the surface. The truth is that the world has not seen a sovereign debt crisis
of the magnitude seen last year. With much of the developed world on the red,
this has brought the market at the brink of disaster. We’ll analyze
some of the major currencies in this article including the yen, the euro, and
the dollar. Developments in China regarding the yuan will also be discussed.
The Euro
It was
all over the news in the later part of 2010. Several weaker members of the
Eurozone would have defaulted already if they weren’t helped out by
stronger members. As it stands right now, Greece, Portugal, Spain, Italy,
Ireland, and Belgium are on shaky grounds. A number of countries have had
their credit rating slashed, resulting to soaring bond yields that are
unsustainable. Taking on new debt has become very expensive.
Greece,
the country who was most at risk of default at one point in 2010, saw their
yields go up from 6 percent to 13 percent in a single month. Even countries
that are not in danger are feeling the effects of the crisis. For instance, the
French debt hit a record high on December 20.
Right
now, there are rumblings that more European countries may need bailouts to
stay afloat. According to Professor Willem Buiter, a chief economist at
Citibank, a few EU countries can face financial collapse in the next few
months. “The market is not going to wait until March for the EU
authorities to get their act together…they are being far too
casual.”
Where
did the bailout money come from? A lot of it comes from Germany but most
people don’t realize that a significant portion actually came from the
United States. But the real question is, are these countries willing to pour
in more money to nations on the verge of default? For the German public, they
want bailout to weaker neighbors to stop. There are other reasons why
continuous bailouts will not work.
Right
now, some politicians in Europe are asking for the European “bailout
fund” to be doubled to $2 trillion. There are analysts who think that
it will require $4 to 5 trillion to help all European nations that need it.
Even a country as wealthy as Germany cannot give away billions of euros to
its neighbors indefinitely. When the bailout to financial black holes stop,
the defaults are likely to begin.
Let’s
look at the short-term chart (courtesy of http://stockcharts.com)
for euro:
 
In the
Euro Index chart this week, there are a number of bearish signals which can
lead to bullish sentiment for the USD index. We have observed that the right
shoulder of the bearish formation was invalidated by the buying that occurred
at the beginning of this week. However, the price then moved to the rising
dashed ling, invalidating the breakout. As a result, the head-and-shoulder
formation is still underway, which has bearish implications for the following
weeks.
Still,
that formation alone doesn’t mean that euro will be the first major
currency to crash. There are also other candidates…
Japanese Yen
Although
Japan has the third largest economy, they are swamped with debt. The Japanese
government has the highest debt to GDP ratio at 200% of all major
industrialized countries. It is estimated that with this amount of debt,
every person living in Japan right now owes around 7.5 million yen. Any other
country would have defaulted. The main reason why Japan hasn’t yet is
the high amount of personal savings rate of its citizens. The Japanese
citizens are buying massive amounts of government debt at very low interest
rates.
Despite
this, the debt level is worrying. Standard & Poor has said they will
slash the country’s credit rating if the debt gets any bigger. If
confidence starts to falter, Japan has to pay significantly higher interest
rates. At some point, Japan will have to face the threat of a meltdown unless
drastic actions are taken.
The US Dollar
No one
can argue that the United States is indeed in trouble. It has the largest
national debt of all. With its national debt at $14 trillion, it is just $300
billion away from the $14.294 debt ceiling. If Congress fails to raise the debt
ceiling, the US government will begin to default. While everyone fully
expects this to be increased, the US cannot continue raising this threshold
forever.
The US
national debt is now 14 times higher than 30 years ago. Everyone is realizing
that this level of debt is not sustainable. The Federal Reserve has already
stepped in and “bought” more debt for the US government. Treasury
yields have been moving up, potentially starting a massive problem in the
future. This is mainly because the United States is increasingly relying on
short-term debt.
Average
maturity for US government bonds is now 4.4 years. As a comparison, the
maturity of UK government debt is around 13 years. The situation can be dire
if interest rates continue to climb. But there is one thing going for the
United States: The Federal Reserve. It can keep on printing money and because
the dollar is a global reserve currency, there is demand for it. But this can
change quickly – and the consequences will be seen all around the Globe.
The Chinese Yuan
China
is increasing its gold and silver reserves in line with its plan to globalize
the yuan. The report published by the Economic Information Daily, the
People’s Bank of China – the country’s central bank –
is chalking up plans to buy gold and silver reserves when the prices are
down.
A
number of analysts predict that the Chinese yuan might overtake the US dollar
as the global currency in a few years; one of them is global commodities
expert Jim Rogers. He believes that the Chinese yuan will eventually dominate
the currency market. China is already the largest producer of gold.
Last
year, officials have announced that they will increase reserves to the tune
of 10,000 tons over the next decade; the country’s reserves currently
stands at 1,200 tons. Chinese central bank adviser Xia Bin has confirmed that
China must increase its gold and silver reserves. According to the report,
“increasing gold reserve at the time of prices dip is the strategy of
internationalizing the yuan.”
There
were rumors that the People’s Bank of China will bid for IMF gold
reserves but this did not happen in 2010. The main reason may be that bullion
prices climbed by 30% last year aided by the depreciation of the US dollar
against other major currencies, the European debt crisis, and strong demand
from India due to festivals and other occasions. The investment appeal of
precious metals also surged as investors sought to protect their wealth in an
uncertain environment.
In
essence, what China wants to happen is to stabilize its currency. By making
the yuan internationally tradable, its dependence on the dollar will be
dramatically reduced. Hwang Il Doo of the Korean Exchange Bank Futures Co.
said that while “the report is a positive factor for gold prices in the
mid-and-long term”, it won’t have an “immediate impact on
prices as gold’s gain has more to do with the unrest in Egypt at the
moment.”
Can this be the Start of a Global
Currency?
Concerns
about the stability of currencies have improved the appeal of a united global
currency. The same groups and individuals who thought up the WTO, IMF, OECD,
and World Bank believe that the uncertainty produced by shaky world economy
presents the perfect “opportunity” to introduce a world currency.
Chinese President Hu Jintao has said that the “current international
system is the product of the past.”
Whether
this comes to fruition or not remains to be seen. The United States has the
most to lose if this happens. Certainly, American policymakers will certainly
try to find a remedy. However, the problem is, the country might eventually
be too deep in debt to do something about it.
If you are interested in knowing more
on the market signals we analyze, we encourage you to subscribe to our
Premium Updates to read the latest trading suggestions. We also have a free
mailing list - if you sign up today, you'll get 7 days of full access (+unique Charts and
Interactive Investment Tools) to our website absolutely free. In other words,
there's no risk, and you can unsubscribe anytime.
Thank
you for reading.
Rosanne Lim
Interested
in increasing your profits in the PM sector? Want to know which stocks to
buy? Would you like to improve your risk/reward ratio?
Sunshine
Profits provides professional support for Precious Metals Investors and
Traders.
Apart
from weekly Premium Updates and quick Market Alerts, members of the Sunshine
Profits' Premium Service gain access to Charts, Tools and Key Principles
sections. Click the following link to find out how these benefits might facilitate your gains.
Naturally, you may browse the sample version and easily sign-up for a free
weekly trial to see if you like our accuracy - we insist that you check
our previous updates for details.
|
