Those who have followed my views over the past two years will know that I have not been a fan of the Great British pound (GBP), especially under the last government's policies.
However, while the GBP is still in intensive care, I am starting to see some stability in the UK economy and in turn the value of the pound. While the GBP is far from having the status of the Swiss franc or Norwegian krone, it's starting to hold up better against many currencies including the US dollar (USD and the Japanese yen (JPY).
While gold recently hit a new high priced in US dollars, it has not hit a new high priced in GBP, which means the pound is holding up better. Also, while the sun seems to be shining in the Eurozone, any setbacks will see some money flow back to the pound.
As stated in previous updates, all paper (fiat) currencies are ugly and history shows that governments around the world will always debase their currencies, hence the appeal of hard assets such as gold and silver. What we could be seeing is that after the big sell-offs seen in the pound over the past few years, some sort of value is emerging and it's a case of the pound looking a bit less ugly against other pairs.
With currency trading we are always buying one currency and selling another so I am ‘selectively' going bullish GBP against what looks like the most overvalued currencies.
The GBP/JPY looks appealing to me and is one of my larger currency trades right now. Even before the recent earthquake, Japan was suffering from an overvalued currency and we are now starting to finally see some weakness in the yen. The GBP has lost over 45 per cent of its value against the yen since 2007. That's a fairly horrific collapse, and while I do not see any chance of a return to 2007 levels, I do see a good bounce back towards 160, which we were last at in August 2009.
Other pairs I like are Australian dollar (AUD)/JPY, Canadian dollar (CAD)/JPY and euro/JPY. While the USD/JPY can also move up, I think you will do better in CAD/JPY, which is also a good play on higher oil prices. The AUD also has a positive carry interest of around 4 per cent a year so you're being paid to hold this trade.
The best ways to back currencies are with spread bets or via an FX broker. While many see currency trading as a very short-term business, I can hold currency trades for months and years. In the case of my yen trades, I am looking to be short yen at least until the end of 2011.
I am looking for the GBP/JPY to get back to the 160 level over the next 12 months. The CAD/JPY and AUD/JPY can get back to the 90 to 95 levels.
Staying with currencies, the USD looks like a disaster. The only bullish thing I can say on the USD is that the chart looks so bad and sentiment is so negative that it may be a good contra indicator, but my overall view is that the US Federal Reserve has no interest in a stronger dollar and will just let its currency keep devaluing. The easy money policy, near zero interest rates and weaker dollar has a lot to do with higher commodities prices. While the Dollar Index may get a short-term bounce in the coming months, the downtrend continues.
The GBP/USD is also looking better and we could see this push back up to $1.70 in the next 12 months, but I think the GBP/JPY will be more profitable.
A not so well followed currency is the Russian ruble, which has been very strong over the past few months thanks to robust oil prices and a fairly good Russian economy. CurrencyShares offers an ETF that allows you to go long ruble/USD (NYSE:XRU). On the subject of Russia, I still see Russian stocks offering good value, and in my view it is the best of the BRICs (Brazil, Russia, India, China) for the rest of 2011. So far Russia is up around 14 per cent for the year. You can look at SPDR S&P Russia (NYSE:RBL) or Market Vectors Russia (NYSE:RSX).
