Best Currency Positions For January 2017

| About: ProShares UltraShort (CROC)

Summary

Here is a new list of currencies valued based on changes in purchasing power.

Last month, most currencies experienced a lower five-year inflation. Furthermore, the USD got weaker against most currencies. Currencies got less undervalued against the USD.

Many currencies moved up or down one or more places in the list. The Polish zloty got much less undervalued against the USD, causing it to move four places up.

This is an update of my article from last month. See also the first article in this sequence. In that article, I value currencies based on changes in purchasing power relative to changes in purchasing power of other currencies. There I also explain this concept further.

This month most currencies became more expensive in terms of the greenback. New inflation data shows decreasing five-year inflation in most countries. This results in a new ranking of the currencies discussed in my previous article. See the table below:

Rank (change)

Currency

Price

(per USD)

Dec 22, 2016

Last month's

result

Price

(per USD)

Jan 23, 2017

Current

result

1

HKD

7.763

-0.129

7.757

-0.093

2

KRW

1204

0.071

1168

0.040

3 (-1)

NZD

1.448

0.165

1.391

0.142

4 (+1)

SGD

1.448

0.135

1.420

0.146

5

CHF

1.025

0.187

1.000

0.155

6 (-1)

EUR

0.9570

0.311

0.9315

0.250

7 (+1)

GBP

0.8133

0.276

0.8031

0.261

8

DKK

7.114

0.315

6.930

0.262

9 (-4)

PLN

4.227

0.422

4.075

0.306

10 (-1)

HUF

297.3

0.408

288.5

0.319

11 (+2)

CAD

1.347

0.346

1.330

0.324

12 (+2)

AUD

1.386

0.378

1.328

0.340

13 (+1)

SEK

9.194

0.418

8.848

0.347

14

NOK

8.702

0.474

8.393

0.405

15 (-2)

ZAR

14.06

0.643

13.52

0.489

16 (+1)

JPY

117.5

0.528

113.6

0.500

17 (+1)

MXN

20.73

0.531

21.4

0.517

The higher the rank number, the more undervalued a currency is against the USD, at least on a statistical basis. For example, the Korean won with ticker KRW at place 2 is almost fairly valued compared to the USD. The Mexican peso with ticker MXN at place 17 is the most undervalued currency on a statistical basis. A negative value (e.g. the Hong Kong dollar or HKD at 1) in the column "Result" means the currency is overvalued compared to the USD.

Discussion

Most currencies went up against the US dollar in the absence of major news and the Trump effect fading away. Relative to the USD both over- and undervaluation became less pronounced as the third and the last column show. The exception is the Singapore dollar that became slightly more overvalued against the USD, causing it to move down one place in the list. The most pronounced change is the Polish zloty moving up 4 places. The zloty also got more expensive in terms of the USD. Despite this momentum, it seems there is strong fundamental pressure on the Zloty arising from investor unfriendly measures from Polish politicians. See also this great article.

The South African rand moved 2 places up. Last month it was right at the bottom of the list and indeed it got more expensive in terms of the USD. I think it has more upside if commodities go up. See for example this article on the platinum price. A favorable event could also be when president Zuma is forced to step down. He is under fire for corruption allegations.

The JPY is moving down one place despite getting more expensive in terms of the USD. The JPY continues to defy the monetary equivalent of gravity: a low interest rate and lots of monetary easing result in inflation. It has not happened, but from the high rank number, we can conclude the market still expects it. According to this recent article, there is a high risk on more inflation in Japan.

The only currency that got much cheaper in terms of the USD is the Mexican peso. This is again the Trump effect. Traders have been panicking and think Trump will harm Mexico's exports to the US. It seems the peso is moving up again: last week it bottomed at 22 MXN for a USD. Despite getting slightly less overvalued in terms of the USD, it moved down one spot.

Then the EUR and the GBP changed places. I think the GBP is great for placing bets on anticipated Brexit news. The EUR is great for bets on elections and new debt problems in South Europe, in particular in Italy and Greece. I think a populist victory in France and Germany is unlikely. However, if that happens, it won't be good for the euro. In July and August 2017, Greece has to refinance quite a lot of debt, see here. Expect these two currencies to leapfrog. Major negative news for the euro could also cause the JPY to move up.

Also for the future much depends on actual US policies. The market expects extra infrastructure spending, and possibly a tax reform or a tax holiday for companies repatriating profits from abroad. The market also expects further rate increases. But will the Trump government and the Fed deliver? And when and by how much? I suppose the tax reform will take at least two years, but the tax holiday could be decided much sooner. The second Bush did it for example in 2004. Much extra infrastructure spending is unlikely since this is a common promise that usually is not kept.

If Trump and the Fed do not deliver, the US dollar will quickly get cheaper. And will Trump really stop trade with Mexico and build that wall? I think that is priced in into the Mexican peso, but it has not happened yet. Yes, he might renegotiate NAFTA. But that will take years and then it is still the question whether the end result is less favorable for Mexico.

Relevant ETFs and ETNs:

  1. PowerShares DB US Dollar Index Bullish Fund (NYSEARCA:UUP),
  2. UltraShort Euro ETF (NYSEARCA:EUO),
  3. Guggenheim CurrencyShares British Pound Sterling Trust ETF (NYSEARCA:FXB),
  4. UltraShort Yen ETF (NYSEARCA:YCS),
  5. Guggenheim CurrencyShares Euro Trust ETF (NYSEARCA:FXE),
  6. WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA:USDU),
  7. Guggenheim CurrencyShares Canadian Dollar Trust ETF (NYSEARCA:FXC),
  8. Guggenheim CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA),
  9. Guggenheim CurrencyShares Swiss Franc Trust ETF (NYSEARCA:FXF),
  10. PowerShares DB G10 Currency Harvest Fund (NYSEARCA:DBV),
  11. Guggenheim CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY),
  12. Double Short Euro Index ETF (NYSEARCA:DRR),
  13. PowerShares DB US Dollar Index Bearish Fund (NYSEARCA:UDN),
  14. Guggenheim CurrencyShares Swedish Krona Trust ETF (NYSEARCA:FXS),
  15. UltraShort Australian Dollar ETF (NYSEARCA:CROC),
  16. Short Euro ETF (NYSEARCA:EUFX),
  17. Ultra Euro ETF (NYSEARCA:ULE),
  18. Ultra Yen ETF (NYSEARCA:YCL),
  19. iPath GBP/USD Exchange Rate ETN (NYSEARCA:GBB),
  20. Guggenheim CurrencyShares Singapore Dollar Trust ETF (NYSEARCA:FXSG),
  21. iPath EUR/USD Exchange Rate ETN (NYSEARCA:ERO),
  22. iPath Optimized Currency Carry ETN (NYSEARCA:ICI),
  23. Double Long Euro ETN (NYSEARCA:URR), and
  24. iPath JPY/USD Exchange Rate ETN (NYSEARCA:JYN).

I do not recommend these products. I only include them such that this article can be syndicated along with their ticker symbols.

Disclosure: I/we 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.

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