Tuesday, June 12, 2007

High-Yield Currencies

A regular commentator (Price chart), with good opinions, have highlighted the other high-yielding currencies since I have highlighted the NZD. They make for some interesting conclusions.

Price chart: "Since NZD is being single out, we can also look at others JPY crosses in order of yield differential. (central bank rates)
NZD/JPY 8-0.5=7.5
AUD/JPY 6.25-0.5=5.75

GBP/JPY 5.5-0.5=5

USD/JPY 5.25-0.5=4.75

CAD/JPY 3.75 (NET)


Now if you look at the monthly price chart of the above: NZ is all time high level. OZ is all time high. GPB is 8 years high (on the verge of breaking out a big base.) USD is at 5 years high. What can keep the motion going? As long as the big gap of yield dirrential exists. How can the tide turn?and When? Narrowing of yield differentials. Yesterday, the AUD/JPY went back up to high point and NZD recovered from the sell down. CAD/JPY is going strong while USD, GBP and EUR maintain strength against JPY.

BTW, some other countries that have equal or higher rates than NZD:

Brazil 12.5

Turkey 17.5

Iceland 14.25
Hungary 8.0

South Africa 9.0

Egypt 8.75"

A study by the World Bank on imploding emerging markets currency a few years back noted that there are a few leading indicators: current account deficit, budget deficit and a contraction in GDP growth. Right now, the above emerging markets currencies are riding on strong surpluses and a firm economic growth model, with the exception of Turkey, South Africa and Hungary in particular as their deficits are large. Let's just highlight the most vulnerable emerging markets currency according to the 3 cited leading indicators and their respective high interest rates:
Highly Vulnerable To Imploding
: Icelandic krona, Turkish lira, NZ dollar, Hungarian forint

Vulnerable To Imploding
: South African rand, Brazilian real, Polish zloty

Somewhat Risky
: Phillippine peso, Indonesian rupiah

Owing to the previous financial implosions of the past, many emerging markets have been over-exuberant in trying to accumulate foreign exchange reserves to serve as a buffer in the event of any similar crises. These reserves can be used as an intervention tool. More importantly, it gives a good image on "good balance sheet management" to the world. Let's look at the current top 10 reserve holders (USD billions):
1) Japan 834
2) China 822
3) Taiwan 257
4) S. Korea 210
5) Russia 176
6) India 132
7) HK 124
8) S'pore 116
9) Mexico 74
10) M'sia 70

Absolute reserves is not as useful an indicator. It has to be as a percentage of something meaningful. If we were to make it a percentage of Short-Term Debt, China will be at #1 with more than 11x coverage, followed by Taiwan 6x, Russia 4.2x, India 4.1x, Malaysia 3x, Mexico 2.7x and South Korea 2.6x. The rule of thumb is that 1x is adequate already. Other indicators that could be used are reserves as a percentage of M2, reserves as a percentage of months of import coverage. On all these measures, the countries that come out tops are: China, Taiwan, Russia, Malaysia and India - in that order. Hence for these countries, the risk for an emerging markets currency implosion scenario is very minimal, almost non-existent.


Anonymous said...

View about NZD from FXCM:


To reverse, the Jap has to up rates.

BTW, Every one million (USD) long on NZD/JPY can fetch about USD1325 of interest rate differential with capital appreciation potential if one can monitor position closely, just in case it collapse.

Those who bought in yesterday at 91.00, already gain about 50pips, with one day overnight interest. :)

This is not a recommendation to buy or sell.

cin said...

Hi Dali,
How's the Aussie Reserve relative to its short term debt and its import?

Hi Price chart,
What's your opinion on the strength of AUD vis-a-vis the Ringgit?

Anonymous said...


You can do a AUD/RM carry trade too. :)

Borrow RM buy OZ!

Jokes aside.

a few months ago, RM and AUD has been moving in tandem with USD. So we see RM and AUD at 2.80 level.

Since FED has hike rates, and KIWI at 8%, we see a little breaking away for AUD/RM at 2.88 level.

The gap has to narrow to break the carry!

Anonymous said...

The USD1325 mentioned is the daily interest earned in USD if one go long on NZD/JPY.


Anonymous said...

"Westpac, one of New Zealand’s largest banks estimates that the central bank sold approximately NZD$120 million last night. The exact amount however will not be disclosed by the RBNZ until the end of July. To put this into perspective, when the Bank of Japan intervenes, they typically spend billions of US dollars. If the New Zealand dollar rebounds, further intervention is not out of the question, but it could be limited by the fact that New Zealand does not have much money to spend. Their intervention war chest is small. The special fund that they have set up for intervention only has approximately NZD7 billion or USD5.3 billion. The New Zealand dollar is not as liquid as the Japanese Yen so it takes less to move it, but at the same time, the RBNZ is new at intervening and they may find it extremely frustrating that the amount of money they have to intervene with is limited." Kathy FXCM

KIWI against the world!

Who wins? wanna bet?

zentrader said...

Dear Pricechart,

Any chance for US/Yen to hit 150 level?



Anonymous said...

Dear Zen,

Long time no see.

I learn a lot from your Lao Tze and Zen philosophy. Not so aggressive now...hehe

I would prefer the wu wei approach and not to predict. Just go with the flow.

If i look at the monthly chart, and have to predict.


I would say it has to go to 130 first.

Anonymous said...

Another piece for you to digest:

Gold, Oil, Currencies & Interest Rates


Anonymous said...

Solly Dali..

Kacau your blog a bit...

Tech rebound seems to be over for Footsie and Dow.....

Anonymous said...

Another piece:


Salvatore_Dali said...

No worries Pricechart, thanks for the links.

As for the AUD, it has been moving in tandem wit MYR, but we have to remember the ringgit is moving up on moderate rates which indicates inherent stronger fundamentals. High yielding currencies move up on the bait alone, high rates. Even though AUD and MYR moved in tandem, there is a 200 basis points gap in interest rates, which in all likelihood would translate to MYR reaching 2.5-2.6 vs the AUD before year end. As for AUD reserves, what reserves. in the 80s and early 90s, the AUD was very high yielding and did suffer depreciation vs USD but like it or not, Howard has done very well for the economy, the deficit has been reduced significantly and the productivity has increased very well over the last 10 years. The OZ economy has also been boosted substantively by the surge in commodities prices over the last 10 years (just go to Perth and see the impact). The OZ economy is in much better shape than 15 years ago and a whole 180 degree better than the 80s. However accumulating reserves is never an OZ strong point.

Not all countries need to accumulate reserves, they use interest rates as a lever. Emerging countries have a bigger need to accumulate reserves.

Anonymous said...

USD/JPY is attempting a break out today!

Anonymous said...

Another new high for AUD/JPY, let's see how the KIWI govt is going to intervene with thier war chest.

Anonymous said...

Tomolo the JAP's rate decision!

If they maintain status Quo, the carry going gaga!

Salvatore_Dali said...


chance of yen/usd hitting 150, quite impossible... yes yen is weak and most of it is due to differentials ... but look at the way japanese companies are competing, most are mildly profitable at 110-115, you push to 125, they would be quite profitable... 130 -135 they would be making supernormal profits, which would put the zing back into the economy .. at the current 119-123 level, its allowing a lot of japanese companies to make good money from forex on overseas sales ... the rate has a better chance of going to 115 than 130 as global rates rise

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