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Features and Interviews
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Written by HardAssetsInvestor.com
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Tuesday, 25 November 2008 14:41 |
Mike Norman, HardAssetsInvestor.com (Norman): Hello everybody, and welcome once again to HardAssetsInvestor.com's interview series. I'm Mike Norman, your host. Well, currency crises erupting around the world, emerging markets hit hard, even the vaunted euro has been hurt while the dollar is soaring; what does it all mean? Here to talk about it today is Win Thin, senior currency strategist at Brown Brothers Harriman.
Win, thanks a lot for coming on the show; I appreciate it.
Win Thin, senior currency strategist, Brown Brothers Harriman (Thin): Thanks so much for having me. | |
Norman: Well, it's been an unprecedented time. We've seen tremendous, tremendous volatility, extraordinary moves in foreign exchange markets, and some of it in emerging markets ― which up until now have been thought to be pretty much impervious or decoupled from what is happening in the U.S. and some of the larger economies.
Talk about what's happening now in the big picture. We've seen some of these currencies drop dramatically against the dollar and some against the euro, while the yen is also very, very strong. What's going on?
Thin: Well Mike, you mentioned decoupling, which I think everyone agrees is pretty much a dead thesis. There's no such thing as decoupling in this whole globalized world. But the fact of the matter is that the strong emerging market's fundamentals really did allow them to withstand this crisis for quite a few months. It's only in the last couple months that they've really gotten swamped.
But I think it's a testament to how strong the emerging markets were, going into this crisis, and for once the crisis started in the developed world ― it really wasn't from Brazil or Russia defaulting or something like that; it was really coming from the U.S. and the euro zone swamping the emerging markets.
What's interesting is the FX markets have really been sort of a sideline. All the problems, the turmoil has been in the credit markets, equity markets, only recently are they starting to get the currencies, especially the emerging market ones. It definitely has raised the risk as the emerging markets get drawn into it more, because a lot of the emerging markets are so weak.
Norman: But not just emerging markets. You look at, for example, British pounds, now down to the lowest level I think since currencies started to float back in 1971. The Australian dollar has also had an enormous move.
Up until now, in the last five or six years, Win, the story has been the weak dollar. All of sudden what has emerged from here is a dollar that is almost in short supply. We see investors around the world, I guess, with dollar liability, not having access to the dollars and pushing up the value of the U.S. dollar.
Thin: That's right; we've really seen almost a classic short squeeze. Really for the last ― like you said ― several years, it's been short the dollar, be long euro, be long emerging markets, be long commodities, and almost in a sense, a bubble in that market grew, a short dollar bubble. We're seeing a violent, violent take-back of that.
I don't think we're out of the woods yet. I do like a stronger dollar, but boy, it's been an incredible, violent move.
Norman: Let's talk about that, because throughout the last few years when the dollar was going down and commodity prices were going up, oil, gold ―for example ― wheat, corn … a lot of people were saying that because the dollar is weak, commodity prices are trending higher.
We're seeing commodity prices come down, but as you said, the dollar is strong and probably has room to go on the upside. What does that portend? What does it mean for commodity prices? Are we looking for a continued period of weakness as a result of the dollar's exchange rate?
Thin: I do think so, and there's other factors also. I think not only is this the de-leveraging squeeze for the short dollar positions, we are really facing heightened global recession risks; there's no doubt about it.
We're seeing growth in India and China slow dramatically, so the whole fundamentals story that has been pumping up commodities is really deflating; we're looking at slow global growth. That's definitely going to weigh on commodities.
Norman: Right. We've seen also unprecedented action taken by our Fed, our central bank, in extending these dollar swaps. They're lending dollars in exchange for euros; in fact, they've been doing it with Poland, they've been doing it with Brazil … ordinarily countries that they really didn't have these relationships with.
Talk about that. Why do think the Fed has done this? The amount has been extraordinary in a very short period of time. What would have happened if they didn't do this?
Thin: Well, I think you touched on it before: There's just a global shortage of dollars. There are global liabilities that need to be funded and there's just not enough to go around.
As you pointed out, the Fed is throwing these lifelines … at first the G7, but really, it was a big statement. It was, I think, Brazil, Singapore, Korea and Mexico, and I think the thing that they said was that it went to the stronger emerging market countries that just have a short-term funding problem, not a solvency problem.
Norman: So these are simply swaps ― they're swapping a dollar position for whatever the opposing local currency is ― that will reverse themselves.
Thin: Eventually, right; but they're helping to help take the stress out of those local markets there.
Norman: All right. That's it for this part of my interview with Win Thin. Stick around because we're going to be back with the second half of this interview soon; don't go away.
Be sure to check Part II of our interview with Win Thin. | |
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