Global Currency Wars Reveal the World's Best Money Plays

[Editor's Note: Part I of two installments. Look for Part II tomorrow.]

When rumors of the Swiss central bank again intervening to drive down the value of the Swiss franc hit the world's currency trading desks late last week, it underscored just how hard global governments are fighting against the strong currencies that can derail exports while also blunting consumer demand at home.

In fact, in the face of a stagnant world economy unrivaled since the Great Depression, we're now looking at an era of competitive currency devaluations - where every country tries to keep its own currency from rising too much.

Far too many investors are either unaware of these efforts, or dismiss these currency strategies as bureaucratic wrangling. But I've been watching this unfold for the past eight years, and have made a significant amount of money from this insight.

And there's still a substantial profit to be made - for those who understand just what's happening.

When Strength Leads to Weakness

Since about 2001, whenever any currency rises too much, the local manufacturers or farmers - or anyone who lives by exporting - start to scream about it. Their local governments respond by doing all they can to lower the value of that currency, having it fall in value and thus making exports cheaper - all this in the hope that the domestic economy will become better.

Pick any period so far in this young century and you'll see that this is true. For instance, right now you see it in those countries whose currencies have soared the most in the last few months.

Let's focus on the recent highest-flying currencies. The New Zealand dollar soared 23.6% against the U.S. dollar from mid-March through mid-June. That's the best three-month performance for the Kiwi dollar since way back in 1971, when currencies began floating against each other.

And over 2009, as a whole so far, the strongest currency has been the South African rand, which has soared 18.3% against the dollar since Jan.1, the best performer of all the 16 major currencies. Other currencies that have been strong have been the Norwegian krone and the Canadian dollar (both
up 13% since 2009 began) and the Australian dollar (up 14.6%).

It should be no surprise that all these countries have been making noises and taking action to try to reverse that trend. Take New Zealand. This is a country that depends on exports, especially agricultural exports. Total export prices have plunged 8.2% from 2008's last quarter to 2009's first quarter. This is not an annualized rate, either, but a quarter-to-quarter drop. If continued at that rate, it would mean a 33% fall in export income over the year. According to Fonterra Co-operative Group Ltd., the world's largest dairy exporter, New Zealand farmers have suffered a 12% drop in milk prices over the last few weeks. The dairy industry accounts for 20% of New Zealand's export earnings.

As The New Zealand Herald stated in an article on June 16: "That (the plunge in income for New Zealand dairy producers) explains why Reserve Bank Governor Alan Bollard (New Zealand's counterpart to U.S. Federal Reserve Chairman Ben S. Bernanke) last week called the exchange rate rise against the U.S. dollar 'unhelpful' and a 'real risk to us' as the country endures the deepest recession in three decades."

The same article goes on to quote the head of the New Zealand Manufacturers and Exporters Association, John Walley: "We don't see any green shoots in our markets both at home and abroad. And the high exchange rate is strangling any 'shoots' that are poking their heads up."

The New Zealand monetary authorities are doing all they can do cheapen their dollar. That includes slashing interest rates to just 2.5%, which is a shock to those of us who remember Kiwi interest rates as being the highest in the world. They are printing money and talking about actively intervening in the currency markets to sell their dollar short. New Zealand's finance minister, Bill English, just came right out and said that his government would prefer a weaker currency.

I could go on and on. The Australian treasury secretary, Ken Henry, just announced, in language as radical as finance ministers usually get: "If today's high exchange rates continue, that would imply downside risk to the economy."

However, I don't sense as grave concern at the rise of the Aussie dollar as I do with the people of New Zealand about their currency. Thus, it would not surprise me to see the Kiwi fall versus the Aussie, or, put another way, the Aussie falling less than the Kiwi.

Additional Global Currency Concerns

Moving on to Canada, we see that its central bank just announced that the  "unprecedentedly rapid rise" of the Canadian dollar may "fully offset" any hope for economic recovery.

South Africa's central bank has just announced that it has a policy of buying U.S. dollars in order to cheapen the rand. That country's version of Bernanke, Tito Mboweni, said that although he used to be against intervention in the currency markets, the soaring South African rand has caused him to change his mind.

You can see why. Exports and domestic retail sales are plunging due to the high value of the rand. South Africa's unemployment rate is now 23.5%, the highest of all 61 countries tracked by Bloomberg. Interest rates have been slashed this year from 7.5% to the current 4.5%, but this is not enough for the Union of Metalworkers, which has threatened to strike if interest rates are not cut more.

Finally, let's look at Norway. Here is a European country, yet it does not use the euro, preferring instead to keep its own currency. This currency has risen by 13% so far this year against both the euro and the U.S. dollar. So are they happy about it in Oslo? Not very.

The strong currency has hit demand for Norway's exports hard. In response to this, companies have cut staff, which in turn cuts domestic demand. Also, big companies laying people off is a very un-Norwegian thing to do. The world's second-largest newsprint maker, Norske Skogindistrier ASA just announced job cutbacks. This has been something of a shock, even though the decline of newspapers should have been a warning. Newspapers just don't want to pay higher prices for newsprint when the currency these products are denominated in has risen so much this year.

Norwegian Prime Minister Jens Stoltenberg, up for re-election this September, has said that supporting the labor market through this crisis - Norway's first recession in more than 20 years (the last one coming when oil prices plunged back in the 1980s) - is his very top priority. He has pledged whatever money it takes to try to stimulate spending. And though, as far as I know, no one has publicly said that they want a lower krone, the central bank has cut interest rates fully seven times in the last eight months. It is now down to 1.25%, and stands ready to go lower.

One thing that's important to remember: This is just a snapshot of those currencies that find themselves the strongest risers so far this year. At any given time in the last few years, whichever currencies have been strongest have screamed about their plight.

A year ago, for instance, with a euro at $1.60, Germany - a huge exporting country - basically said it wanted a cheaper euro. It got what it was seeking: The euro fell to $1.23 within months, but is now drifting back up. The United Kingdom wanted its high-flying pound - then at $2.10 - to fall to boost domestic and foreign demand for its goods. It got its wish: Within months the pound had plunged to $1.45. And on it has gone for a few years now.

A few years ago, Americans were angry that the Chinese had such a cheap currency and forced it to float. In the four years since that happened, China's yuan has risen about 24% against the dollar and you don't hear so many American threats. (Of course, this could also be because China owns so much U.S debt and America does not want to antagonize its largest lender).

[Editor's NoteChris Weber has been investing since 1971, when he was 16 years old. He's never been forced to hold down a "regular" job. Instead, he's made a lifelong study of the world's financial markets, and has developed a global investing strategy that for decades has consistently enabled him to ferret out the world's best profit plays.

In the 1970s, Weber rode the wave of the precious metals and foreign currency markets, switching into U.S. Treasury bonds in the early 1980s in time for that huge bull market. In the 1990s, he profited from plays both in the emerging markets and from the biotech sector. So far in this decade, Weber has made the correct calls in precious metals (he got in back in 2001) and in global currency shifts. Finally, after getting his readers out of stocks back in November 2007, Weber in March made some specific stock recommendations - at the front of the recent near-record-setting rebound. To find out more about Weber's strategy, and his newsletter, please click here.

And be sure to check out Money Morning tomorrow (Wednesday) for Part II of Weber's analysis, when he details the catalysts that cause high-flying currencies to decline.]

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