Currency and stock traders have been hoping to see tangible signs of a global economic recovery. When the largest heavy equipment manufacturer in the world, Caterpillar, reported better than expected earnings it also predicted growth in the three percent range through the end of 2012. Stock markets reacted positively and currency traders are looking to see which currencies will profit the most. A lot of the construction spending coming this next year has to do with the ongoing reconstruction efforts in Japan following the worst earthquake and tsunami in the history of the island nation. Construction in Japan as well as in the USA are expected to help lead global economic recovery this next year. Does that mean that the YEN and USD will rise as well? Investing in the US dollar was a good bet recently as the dollar rose against most currencies and falling interest rates on T bills made assets held in dollars and T bills doubly valuable.
Traders recognize, however, that the Japan and Switzerland have been selling their currencies recently to avoid high priced Yen and francs. Traders also recognize that for a global economic recovery to really gain steam the European Union needs to follow through with promises and its more prosperous members need to ante up somewhere in the neighborhood of €2 Trillion in order to resolve the continuing debt dilemma. If this happens most traders expect to see a rally of the Euro which could lead to a falling dollar. Although many see the dollar as a safe haven currency a rising Euro could compete as a secure currency to park assets in time of economic distress. Likewise, if the Swiss and Japanese stop dumping their currencies they could rise as well. Smart traders are using options to hedge currency risk.
A positive factor pointing to a continued global economic recovery, as opposed to a second dip of the worst recession in three quarters of a century, is the fact that many US companies are flush with cash. Many, in fact, have substantial sums offshore. If legislation meant to encourage a repatriation of these assets goes through it could bring a lot of dollars back to the USD and also drive the dollar higher. This would be a situation similar to the Yen repatriation scenario earlier this year when Japanese investors divested themselves of investments denominated in dollars and other currencies and converted these currencies back into Yen. These investors had been engaged in the so called Yen carry trade. They were able to move assets out of Japan with its low interest rates and convert to currencies where interest rates were higher. When the earthquake and tsunami wreaked havoc on the nation many needed assets back home in Japan to finance reconstruction efforts. The resulting wave of purchases of YEN drove the currency up very rapidly and only a threat of unified intervention by the combined financial ministers of the G7 served to stabilize exchange rates. As a continuing global economic recovery seems more likely there will very likely be substantial cash flows for investment and well as asset repatriation. Currency traders are well advised to follow fundamentals and technical aspects of their currency pair of choice in the coming months.