Macro Trades In Currency Wars: U.S., Japan, Europe, Hungary, Korea

Includes: FXE, FXY, UDN, UUP
by: Cagdas Ozgenc

Very interesting things are happening all around the globe these days. Currency wars are starting to flare up. US, Europe, and Japan have been easing for quite some time already. Recently Japan's new prime minister Abe openly put forward his intentions to get even more aggressive. These countries have been accusing China for currency manipulation to boost Chinese exports (which worked like a charm), but now they are also in the game.

Recently, German officials worded their criticism towards Japanese actions. What a hypocrisy... The entire Euro-zone single currency setup was devised to boost German exports by ensuring that people in Spain, Greece, Italy have their salaries paid in euros so that they can afford German exports. Of course, as a result, these countries lost their competitive edge, and without the ability to devalue their currencies, they have been succumbed to importing everything by borrowing. Consequence was over indebtedness and modern time slavery.

But now the tide is changing. Having the single currency has the downside that you don't have absolute monetary control. How is Europe going to defend itself when outside of single-currency-zone a serious currency war is flaming? The consequence is that we will see significant valuation of euro against easing countries. This will mean less German exports outside of single-currency zone. That's why Germans started grunting. George Soros recently pointed out that this may push Germany into a recession.

Hungary is the recent addition to the scene. Hungarian Prime Minister Orban is going to have a new head for Central Bank because the current one is not doing what he wants (hey, they are independent, right?). The country's economy has contracted the last three quarters. They have 5% inflation. Even though they have been cutting the interest rates down (5.75% at the moment), they are still high compare to rest of Europe. So far high interest rates helped Forint to stay strong against USD and EUR. Mr. Orban wants to take out the bazooka and lower the interest rates despite relatively high inflation. But we love such dramatic policy actions as they give opportunities to make easy money. Forint is going to go down. How much that will depend on how strong the bazooka will be.

In the meantime, Korea, the new shining star of Asia, was also caught in cross fire. As yen and USD are going down against Won, Korean exports are becoming expensive. They will be selling less Hyundai cars, Samsung phones, LG TVs. They are still at pondering stage, but we may see a policy action from them soon as well. I would follow them carefully.

My bets in the currency war will be the following basket:


Long USDJPY or AUDJPY (you may read on this in my other article)


One last word about gold. The currency wars should help gold in the long run. But how long that long run is, that is the problematic part. Many people are expecting an interest rate spike in US bonds. Traders have been closely monitoring the US bond yields to determine when to go short. I personally don't know when this will happen. This brings a tail risk into the picture. Every time there will be good news, gold will take a dive and then slowly go up due to infinite money printing all over the world. It will be a very choppy ride. I believe in a long horizon, gold will be profitable. But that is not a good enough reason to go long on gold now where you have better opportunities I listed above. At the end everybody wants quick returns.

Don't forget to check the technical levels before opening positions, as there is high volatility in the markets. It is always good to buy after pullbacks to start on the right side of the wave.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.