International investments have growing value concerns in international investment currencies and international investment equity markets as well. Recent messages about international investments have outlined the shift (from equities to bonds) in my multi currency diversification.
Jyske Bank wrote about growing international investments value concerns and said:
“Time for reflection – time to hedge. The financial markets set out in 2007 where they left off in 2006. Especially investment in high interest currencies and funding in low-interest currencies – mainly CHF and JPY – have increased to such an extent that it should give rise to reflection.
This development clearly reflects the low risk aversion among the financial market players and so do the historically low volatilities on both foreign exchange rates and not least equities. The disinclination over the past six months to hedge against unexpected events in the financial markets is thus still at play.
Notably the latest price development of EUR/CHF and EUR/JPY should give rise to reflection. Technically, both currency pairs are highly overbought for the short, medium and long term, which is why both CHF and JPY are heavily undervalued at the moment.”
This means that the Swiss franc and Japanese franc that are used to leverage international investments may be valued too low. This means great forex profits for our many readers who have borrowed these currencies to enhance their international investments. However it means that these currencies are more likely to rise versus the value of the international investments held now, so it may be time to take profits. Where does one go? This is always the question regarding international investments.
Many recent messages on international investments have been looking at ways to replace Swiss franc and Japanese yen loans with Czech koruna. The koruna is in almost the exact opposite position of the franc. It’s at an all time high versus the euro whereas the franc is at a record low. One usually wants to buy international investments with borrowed currencies when the borrowed currecnies are peaking rather than reaching a bottom.
Jyske further explains its international investments warning:
“Such patterns indicate that both EUR/CHF and EUR/JPY are about to make an exhaustion rally where we will see the last throes before the current trend comes to an end. If the trends for both CHF and JPY should turn, it will have large consequences for the financial markets. These two currencies have to a high degree been used as funding currencies for speculation in other assets, including high-interest currencies such as AUD and NZD.
“Such action could be to buy AUD and sell NZD. In the event of risk aversion, the crowded but illiquid NZD will have severe difficulties maintaining its attraction in the form of a rather high interest rate. Developments in the first months of 2006 should be a warning about the trouble NZD may run into when investors turn risk adverse. In the first six months of 2006, NZD/USD fell from the 70 level down to a preliminary low around 59.20. A fall of no less than 15%.”
Our Borrow Low educational readers learned a number of ways to gain better value in your international investments and avoid risks such as those building now. Last year we watched a market panic that drove many currencies suddenly down including the NZD, the Turkey TRY, the Hungarian forint and Icelandic dollar. So currency diversification away from the highly bought, high interest currencies and out of equities into bonds makes some sense now.
Jyske wraps up its warning saying:
“Nothing lasts for ever. Especially not trends which are uncritically projected into the future. Though it would make life easier if that were so. With the current risk scenario in mind, it is important to remember the wise words of the American economist Hyman Minsky: ‘The longer the period of stability, the higher the potential risk for even greater instability, when market participants must change their behavior.’”
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We just sent the most recent portfolio update to our Borrow Low subscribers. Here is the three month performance of the five portfolios we track now. These show very clearly that markets are still very strong but this last week the Borrow Low readers noted that the more highly diversified “Dollar Neutral” bond portfolio outperformed the equity portfolios.
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Or until next message may your value always be good.
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