The big, scary surprise the global economy has for us this Halloween is the announcement of a peg in the exchange rate between the US dollar and Japanese yen. The Bank of Japan seeks to peg its currency to the US dollar in an attempt to prevent the yen from rising in value relative to other currencies, under the belief that a stronger currency will mire the country deeper in a deflationary spiral with persistently low employment.
This event reinforces a number of key trends traders and investors may wish to note. Particularly:
- Major economies, like Japan and the US, are mired in sovereign debt; the longer the debt crisis remains unresolved, the closer we get to a currency crisis.
- As we get closer to a currency crisis, the more central banks of countries mired in debt will respond with currency pegs, under the belief that doing so will prevent a larger catastrophe.
- Pegs are sure to have unintended consequences, and are antithetical to the healthy, successful operation of a free market. I do not expect most pegs to be successful over the long-term. With regards to the Swiss franc pegging to the euro, I don't think that will succeed, nor do I think the Japanese yen pegging to the US dollar will succeed.
Ultimately, though, I don't think the real opportunity is in fading the move and buying the yen; rather, it is in seeing that all of these central bank antics push us closer to a new international monetary agreement and the remonetization of gold. Gold is down slightly Monday; that is the real dip worth buying.
For those who want to diversify out of gold, though, another option to consider is the renminbi and Hong Kong dollar, two currencies currently pegged to the US dollar. As the Chinese economy grows and becomes formidable enough to displace the US dollar as the primary nation-state economy, the Renminbi and Asian currencies pegged to it will adopt more free-market like policies with regards to their currencies. As we see more currency pegs from Western economies and Japan, we simultaneous move closer to a world in which the renminbi and its satellite currencies increasingly become free-market opportunities and appreciate accordingly.