# Most undervalued currency?



## rock3r (20 Jun 2007)

Well, the Icelandic Krona's going the way I expected.

And the Columbian peso's flown ahead.

What other currencies do you think will jump in value vs the Yoyo this year?


----------



## tiger (21 Jun 2007)

You could try some "burger-nomics" with the economist's big mac index


----------



## rock3r (21 Jun 2007)

Did that index predict the Colombian peso's rise?


----------



## tiger (21 Jun 2007)

You'll have to digest the figures for yourself   It suggests that the COP is undervalued relative to the Euro, and it has risen about 10% since the begining of the year.  However it also predicts the JPY is even more undervalued, but that has dropped further.  (source)


----------



## room305 (21 Jun 2007)

It also suggests the Icelandic Krona is massively overvalued. (Feb 1st article)



> The most overvalued currency is the Icelandic krona: the exchange rate that would equalise the price of an Icelandic Big Mac with an American one is 158 kronur to the dollar; the actual rate is 68.4, making the krona 131% too dear. The most undervalued currency is the Chinese yuan, at 56% below its PPP rate; several other Asian currencies also appear to be 40-50% undervalued.


----------



## joe sod (23 Jun 2007)

I read recently that warren buffet has a new bet on the foreign currency markets, of course he didn't reveal what currency this was, but many commentators believe it is the japanese yen, it is going to rise, the reason it has stayed low for so long is that the japanese central bank wants to make sure that the devastating deflationary recession of the nineties and early 2000s has been well and truly killed.


----------



## room305 (23 Jun 2007)

joe sod said:


> I read recently that warren buffet has a new bet on the foreign currency markets, of course he didn't reveal what currency this was, but many commentators believe it is the japanese yen, it is going to rise, the reason it has stayed low for so long is that the japanese central bank wants to make sure that the devastating deflationary recession of the nineties and early 2000s has been well and truly killed.



We certainly could be near an inflection point for the Yen. These trends tend to end when everybody is onboard so when I read that ordinary Joe Soaps are taking out Yen mortgages in Poland or that housewives are playing the Yen carry-trade with the New Zealand dollar, it tells me this may be over soon.

The catalyst may be the ongoing mess with Bear Sterns. Rumours abound that they have asked creditors to give them time to unwind carry-trade positions to provide sufficient liquidity to meet margin calls on their CDOs. They may also be dumping profitable stocks, with again a rumoured, $2 billion sell hitting the tape late in the session Wednesday evening.

All unsubstantiated rumour of course but I am watching with interest.


----------



## z108 (23 Jun 2007)

joe sod said:


> I read recently that warren buffet has a new bet on the foreign currency markets, of course he didn't reveal what currency this was, but many commentators believe it is the japanese yen, it is going to rise, the reason it has stayed low for so long is that the japanese central bank wants to make sure that the devastating deflationary recession of the nineties and early 2000s has been well and truly killed.



Buffet also seems to have invested in utilities/railways etc in the US producing strong dollar cashflow.



room305 said:


> .... housewives are playing the Yen carry-trade with the New Zealand dollar,..... ... Bear Sterns. Rumours abound that they have asked creditors to give them time to unwind carry-trade positions.
> All in substantiated rumour of course but I am watching with interest.




Would somebody mind explaining to me what carry trade means and how it works ? What were the housewives doing ?


----------



## room305 (23 Jun 2007)

sign said:


> Would somebody mind explaining to me what carry trade means and how it works ? What were the housewives doing ?



The carry-trade is simple. You borrow in a low yielding currency (Yen, Swiss Franc etc.) and then you converted your borrowed money into a higher yielding currency (NZD, USD, GBP, EUR etc.) and buy assets denominated in that currency (or even leave it on cash deposit with a bank). You then repay the loan and pocket the interest differential, or "spread".

The risk you are exposed to is currency risk - if the currency you have borrowed in appreciates greatly against the currency you have bought assets with, then the loan repayments become relatively larger and you may lose money overall.


----------



## MrKeane (25 Jun 2007)

A simple example of a carry trade would be to walk into a bank in Ireland, deposit €1000, borrow €10000 (suppose you pay 4.5% interest) and then fly over to Turkey and deposit the money in a bank account there where they pay about 17% interest. You are "making" €1700 in Turkey and servicing a loan here for €450 in interest repayments. As long as the exchange rate stays the same you are quids in by about €1250, if it goes in your favour you get extra lolly and if it goes against you then you lose.

The above is a simple example and of course with the wonders of modern technology you can do all this without ever leaving your home using the internet etc.


----------



## z108 (25 Jun 2007)

Thanks for the info . I was aware of it  as a sophisticated strategy if you dont mind the risk. I read a while ago that Polish people were doing this to get cheap mortgages but I had no idea housewives were doing it.


----------



## room305 (25 Jun 2007)

sign said:


> Thanks for the info . I was aware of it  as a sophisticated strategy if you dont mind the risk. I read a while ago that Polish people were doing this to get cheap mortgages but I had no idea housewives were doing it.



I consider a thirty year bet on a major world currency remaining weak to be the height of stupidity even if you can lock in a thirty year Yen mortgage at a rate of less than 3%.

Everybody in the world is short the Yen, eventually there will be a panic to buy back their short positions (i.e. repay the loans) and the Yen will rise sharply - possibly as much as 40% in a few months. Some people will get badly, badly burnt by this.

Here's the housewives article


----------



## MrKeane (25 Jun 2007)

If you look at the charts GBP/ JPY was at ~450 around 1983, so it can go anywhere from here.


----------



## rock3r (25 Jun 2007)

So... you're saying if I buy yen and hold, at some point in the next 12 months, it'll have gone up 40%?

What do you reckon are the chances of this NOT happening in the specified time frame? 1 in 10, 1 in 50?


----------



## z108 (25 Jun 2007)

I'm starting to feel tempted to invest in Yen/Japan and have a lot of cash available to do so right now.

What are the risks ?


----------



## MrKeane (25 Jun 2007)

rock3r said:


> So... you're saying if I buy yen and hold, at some point in the next 12 months, it'll have gone up 40%?
> 
> What do you reckon are the chances of this NOT happening in the specified time frame? 1 in 10, 1 in 50?


 
I am not sure if it is me you are asking this question to but all I am saying is that it can go up or down from here.


----------



## room305 (26 Jun 2007)

rock3r said:


> So... you're saying if I buy yen and hold, at some point in the next 12 months, it'll have gone up 40%?



The problem with currencies is you're dealing with a very rigged market - the presence of central banks with political rather than economic objectives can force the market (at least temporarily) to behave in unexpected ways. I read before that more traders go bankrupt trading currencies than any other asset.

So no, I have no idea when it will happen or how long the Yen will remain weak for. Furthermore, I've no idea how much it will rally when it does. 40% is just a guess.

However, the unwinding of the subprime mess in the US is as good a catalyst for a sharp appreciation in the Yen as any. Given the recent influx of inexperienced speculators, the potential is there for a rush of panicked buyers trying to get back into the Yen. It happened before in 1998, following the Russian default and subsequent unwinding of the carry-trade by nervous hedge funds. That saw a 20% rise in the value of the Yen over two months. Given the increased size of the carry trade and participation by just about everyone from Eastern European property investors to Japanese housewives, there is scope is for even greater gain this time round.


----------



## rock3r (26 Jun 2007)

room305 said:


> It happened before in 1998, following the Russian default and subsequent unwinding of the carry-trade by nervous hedge funds. That saw a 20% rise in the value of the Yen over two months. Given the increased size of the carry trade and participation by just about everyone from Eastern European property investors to Japanese housewives, there is scope is for even greater gain this time round.


 
That said, it strikes me that maybe the yen is overvalued already.

Japan, as an economic entity, has a nasty century out before it: the mother of all demographic crises, no growth to build on, the ascent of an ultra-powerful historic cultural rival on its western shore.

Maybe a decline in the yen is justified given the big picture


----------



## z108 (26 Jun 2007)

Like all of us, how well Japan does depends on how well they innovate when faced with the challenges ahead . Its complex as I expected. Nationalism is resurfacing in japan. People want to ditch the pacifist constitution. The threat of China might act as a social catalyst for change. The newer generations are less like the old ones but only slightly. Change comes slowly there . One of their strengths is their cohesiveness as a society but it also is a cause of inflexibility.

But whats the definition of an appropriate value for any currency including the Yen ?


----------



## MrKeane (26 Jun 2007)

Its worth remembering that Japan has no oil reserves of its own.


----------



## joe sod (27 Jun 2007)

rock3r said:


> That said, it strikes me that maybe the yen is overvalued already.
> 
> Japan, as an economic entity, has a nasty century out before it: the mother of all demographic crises, no growth to build on, the ascent of an ultra-powerful historic cultural rival on its western shore.
> 
> Maybe a decline in the yen is justified given the big picture


 
It sounds like a paragraph you pulled from somewhere else. The yen is the most undervalued of all western currencies, it also along with other asian countries has a huge trade surplus, even china imports alot from japan. Its car manufacturers are the world leaders, it is also a world leader in heavy plant, look around an irish construction site almost all the heavy plant is japanese. Japan still excels in technical knowhow which is unique for a modern western country ( other westwern countries have outsourced this). Why has japan a nasty century before it, if it has a demographic crisis its nothing compared to crisis facing china and india. Japan may not have its own oil source but alot of the world burns oil in japanese engines.


----------



## z108 (27 Jun 2007)

I have never studied economics. Can anybody explain to me what the fundamentals of a currency value is based upon ? Is it merely supply versus demand (like a commodity) ? e.g the better the Japanese assets do then the more demand there is for exposure hence people buy the currency and assets denominated in that currency to gain the upside and sell when theres a downside ? Does this depend on how well the Japanese economy is doing ?
And it seems to  me that it must be very complicated to actually figure out how much of a Japanese company is affected by the Yen as most of their companies seem to be heavy exporters such as Sony and Nisssan and therefore earn a lot of revenue in Dollars and Euro for example. Then there is also their overseas plants which would create products using local currency and then ship them.

If the Yen increases in value will this not have a serious effect on Japanese exports  and hence on their economy ? And how would this affect their deflationary problem ?


----------



## rock3r (27 Jun 2007)

China and India have a pool of 500 million ultra-cheap labourers to call upon. Each. You don't have to be a devotee of Marx's Labour Theory of Value to understand that this cheap access to a vital factor of production spells massive riches. Riches which Japan must work harder for. 

Chinese car manufacturers are rivalling Japan for quality, and they have them massively beaten on cost.

According to some estimates, Chindia's economic advantage based on cheap abundant labour is greater than the slavery-based cotton plantations of the South, or the sugar plantations of Barbados.

Room305, what are the odds of Japan simply devaluing the yen to make Japanese exports stronger again.


----------



## Nermal (27 Jun 2007)

MrKeane said:


> Its worth remembering that Japan has no oil reserves of its own.


 
It's got a great deal of nuclear expertise and isn't hamstrung by a backwards population opposed to building new plants, it's actually quite well-placed to cope with oil supply problems.


----------



## room305 (27 Jun 2007)

rock3r said:


> According to some estimates, Chindia's economic advantage based on cheap abundant labour is greater than the slavery-based cotton plantations of the South, or the sugar plantations of Barbados.



Do these estimates make allowances for the massive advances in productivity the west has made since these times?



rock3r said:


> Room305, what are the odds of Japan simply devaluing the yen to make Japanese exports stronger again.



It's not as easy as people think to devalue a currency (unless you have a peg to another currency in place and simply drop the peg). The BoJ tried in vain to stop an uptrend in the Yen in the late nineties, whereupon it funnily enough dropped like a stone when they stopped intervening in 2000.

Given the political earbashing the Japanese are receiving over the export advantage they currently enjoy from a weak Yen, I doubt they will move to make it any weaker. However, if the Yen starts to rise significantly they may well move to prevent it but I doubt they'll enjoy much success (at least temporarily).


----------



## conor_mc (28 Jun 2007)

sign said:


> I have never studied economics. Can anybody explain to me what the fundamentals of a currency value is based upon ? Is it merely supply versus demand (like a commodity) ? e.g the better the Japanese assets do then the more demand there is for exposure hence people buy the currency and assets denominated in that currency to gain the upside and sell when theres a downside ?


 
An amateurs perspective on it.....

At present, alot of it is related to interest-rates.

Japanese savers/investors are taking advantage of higher interest rates in other countries by selling Yen to buy NZD for example, even borrowing to do so. Since they're borrowing at a BoJ rate of 0.25% and earning interest at 7/8% (whatever it is in New Zealand), they're turning a profit by doing this, as long as the exchange rate remains in their favour.

Institutional investors aren't interested in Japanese govt. bonds, preferring to buy US treasuries instead.

This is causing an outflow of capital from Japan, lowering their exchange rate.

My own personal opinion is that the BoJ paradoxically need to raise rates to boost their economy. At the moment, they're humming and hawing their way to nowhere, whereas a rise in interest rates might actually signal a bit of official confidence in the economy, breaking the negative cycle. It would also help stem the flow of capital out of Japan, and get them saving/investing in their own country again.


----------



## room305 (28 Jun 2007)

conor_mc said:


> My own personal opinion is that the BoJ paradoxically need to raise rates to boost their economy. At the moment, they're humming and hawing their way to nowhere, whereas a rise in interest rates might actually signal a bit of official confidence in the economy, breaking the negative cycle. It would also help stem the flow of capital out of Japan, and get them saving/investing in their own country again.



I agree that a unexpected rate rise by BoJ would signify confidence in the economy and may kickstart it into gear. What is an interesting but perhaps not often enough considered issue is investors shunning of Japanese bonds (the Japanese 10yr bond looks like it is about to breakdown) will raise rates irregardless of the BoJ's actions.


----------



## tippergore (30 Jun 2007)

Is the canadian dollar undervalued, due to the huge amounts of oil in the Alberta oil sands?


----------



## room305 (30 Jun 2007)

tippergore said:


> Is the canadian dollar undervalued, due to the huge amounts of oil in the Alberta oil sands?



No, it's enjoyed huge appreciation of late. It may fall back a bit but it will eventually trade on par with the USD.


----------



## JumpShot (6 Jul 2007)

Here is my tuppence worth.

I resently visited Japan and found it cheaper then Ireland.
All of the cities apart from Toyko and Osaka are significantly cheaper for accomadation and dining.
There are still many resaonable priced options in these two cities but like large world cities everywhere you can pay the both reasonable and high prices if you wish to do so.
The minimum wage in Toyko is 719 yen, approx €4.35 per hour.
Administartion and Clerical workers for some of the foreign (US) investment bank companies earn about 1,800 yen and hour, approx €11 ph.
The japanese govt sets their economy up with the fundamental principal that it most compete globally. If the workers/consumers have to make sacrifices for a strong economy, so be it. The most important thing is as a economy, Japan is competive.
Not too sure what this means for the future path of their currency.
But at their low wage levels and low inflation they have less to fear from global economy than maybe we do in Ireland.


----------



## rock3r (6 Jul 2007)

So what's a month's rent like?


----------



## z108 (6 Jul 2007)

JumpShot said:


> Here is my tuppence worth.
> 
> I resently visited Japan and found it cheaper then Ireland.
> All of the cities apart from Toyko and Osaka are significantly cheaper for accomadation and dining.
> ...




This contrasts with a story from a distant relative of mine who lives in the USA and whos travelled a lot who was charged 20 dollars for a cup of coffee in Tokyo.
Thanks for that piece of 
information . Now my perception of Japan is more balanced than before.


----------



## shanegl (7 Jul 2007)

rock3r said:


> So what's a month's rent like?



And rent per square metre!


----------



## JumpShot (7 Jul 2007)

Rent:
I have a Japanese friend who returned from Ireland to Japan. They stayed with their folks in Yokahama when they got back and I have has just rented a one bed apt in Toyko for 120,000 yen pm. I do not know location but it is on metro line. So €750 pm approx. Admittely most one beds may be only about 300 sq ft, but if that is the living space people are used to, they are happy.

In respect of $20 cup of coffee, you can also pay very high prices at Irish bars for beer, but in a lot of places you can get one for 500/600 yen


----------



## rock3r (9 Jul 2007)

So a 1 bed apt in the capital of the world's 2nd richest country, close to public transport, is EUR750???

While here, A 1 bed on the Dart line would set you back almost double that.


----------



## Nermal (16 Aug 2007)

So, who picked the ¥?

Doing nicely at the moment. Should have bought it with $ though.


----------



## joe sod (16 Aug 2007)

not good for many japanese housewives who were borrowing in yen to buy foreign currencies, it was a one way bet for so so long


----------

