Sunday, November 11, 2007

Japanese Yen, Swiss Franc Winners of the Week

From Doug Noland's always interesting weekly creditbubble bulletin on Prudent Bear, we can read that the two strongest currencies of the week was the Japanese yen, up 3.4% against the U.S. dollar, and the Swiss franc, up 2.8%. A well-deserved increase as these two currencies had been unfairly pounded by the carry trade due to their low nominal interest rates. Yet if you take into account the fact that price inflation and expectations of price inflation is much lower there than elsewhere, then real interest rates there are much higher than in the U.S. and the Euro area, particularly with regards to long term bond yields.

The Japanese yen and the Swiss franc were two of the currencies I a week ago pointed to as particularly undervalues, the two other being the Swedish krona and the Chinese yuan -they too rose on the week although less than the yen and the Swiss franc. What makes the yen and the Swiss franc so particularly interesting is the fact that money supply growth is so particularly low in these countries.

Broad money supply growth in Japan was just 1.9%, and the narrow M1 measure had in fact 0.0% growth.
Broad money supply growth in Switzerland was even lower, at 0.9%, and M1 actually shrinking.

Compare this to the double digit money supply growth in the U.S. and Euro area and most other economies, and it is clear why the yen and the Swiss franc should be considered relatively sound currencies.


Anonymous pinus said...

Actually, the Czech koruna went up by 3.9% against the dollar during last week.

1:56 AM  
Anonymous Johan Nilsson said...


A question about the forex market and money supply:
When I pay 100 SEK to my Belgian friend's bank account, do I contract the Swedish money stock and expand the Euro money stock? Or do I just put a little bit of upward pressure on the EURSEK exchange rate?

DI journalist Gunnar Örn once wrote in a mail to me that governments can affect the money supply by taking/paying foreign loans. The only way I can see that happen is that domestic banks are allowed to use foreign money as cover for creating new domestic money. Was he really right?

7:43 PM  

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