Are Investors Afraid of Foreign Currencies?

Are investors afraid of foreign currencies? According to Bloomberg Business a scared investing world is taking its money and running back home or to the US dollar as a safe haven. What is causing this and how should you react?

A tide of money went out to emerging markets for more than a decade, pushed by accommodative monetary policy in the U.S. and pulled by the promise of robust growth.

Now that tide is coming back in as investors seek to repatriate funds or flock to U.S.-dollar denominated assets as a safe haven amid sluggish economic growth and global market turmoil.

“There are around 47 trillion dollars in private and official investment abroad and far too many that wish to retreat home or to the U.S.,” writes Deutsche Bank Macro Strategist Sebastien Galy in a report titled “The Retreat of Global Balance Sheets.” “These flows are triggered in good part by a recognition that emerging markets’ potential growth is slowing down structurally without enough compensating growth in developed economies.”

As this trend continues we can expect to see sufficient financial liquidity in advanced economies like North America, Europe and Japan and insufficient liquidity in developing markets. And the answer is, yes, investors are afraid of foreign currencies and will continue to be until the rout in commodities turns around.

Until the Commodity Super Cycle Bottoms Out

Much of the developing world prospers when commodity prices are high and suffers when prices are low as they are now. Australian Mining looks at what will happen when commodity prices stay low.

It looks likely that the recent fall in commodity prices may be one of the biggest ever on record. The fall may even match the 66% implosion experienced between 1917 and 1931.

One fact in every supper commodity cycle is that every rise in commodity prices is followed by oversupply. This oversupply continues for years as companies battle it out in a dangerous game of survival to cut production and costs.

One fact in every supper commodity cycle is that every rise in commodity prices is followed by oversupply. This oversupply continues for years as companies battle it out in a dangerous game of survival to cut production and costs.

To the extent that prices of oil, metal and food stay low for years so will the value of the currencies of nations like Brazil, Australia, Argentina, Nigeria, Venezuela, Colombia, etc. Prospect of low commodity prices for years on end has investors and traders afraid of many foreign currencies. But, which currencies will win as this situation draws out?

Follow the Money to a Safe Haven

The long term winners when investors are afraid of foreign currencies of developing nations will be nations with safe haven currencies. Channel New Asia reports that the Yen hits a one year high as investors seek a safe haven.

The yen hit a one-year high versus the dollar on Wednesday (Jan 20) as investors sought the haven currency amid a rout in equity markets and worries about the faltering world economy.

The dollar fell to 115.98 yen, its lowest level in a year, before recovering somewhat around 2200 GMT to 116.92 yen, down 0.6 per cent from the same time on Tuesday.

“America’s dollar tumbled nearly a percent to one-year lows against the yen, a popular refuge when global risks rise,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.

“Coupled with a weakening Chinese economy, the big fear is that sliding oil prices could do the same to inflation, raising the risk of economy-choking deflation taking hold around the world.”

Safe haven currencies are the yen, euro, US dollar and Swiss franc.