With markets focused on risk aversion, it won’t be long before low-yielding favorites like the dollar, yen, and the franc become overvalued. Here are three exotic currencies you should consider buying when your favorite safe havens start to lose steam…
Singaporean Dollar (SGD)
The Singaporean dollar has been flying in the charts for the past couple of months, and no, it’s not because the country just opened a Universal Studios theme park. Since the crash of Lehman Brothers in 2008, the Singapore dollar has risen by 11% against the Greenback, 14% against the euro, and 25% against the pound. Boo yeah!
As good as its recent gains are, I believe that the currency still has a lot of room to rise. For one, Singapore’s Finance Minister Tharman Shanmugaratnam (I just call him “The Thar-man”) sounded hawkish when he talked about inflationary pressures a couple of days ago.
The Thar-man believes that letting the Singaporean dollar appreciate will help battle rising prices, especially when Singapore’s inflation rate already rose at a faster-than-expected pace and even hit a two-year high in January.
Of course, you can’t talk about inflation without talking about growth. The Thar-man also revealed that exports, Singapore’s primary sources of economic growth last year, were far better than what the government and the markets had expected.
This implies that their strong currency hasn’t negatively affected economic growth, giving the Monetary Authority of Singapore (MAS) no reason to launch currency interventions anytime soon.
Indian Rupee (IDR)
Another Asian currency that you should consider buying is the Indian rupee. Although India is only ranked eleventh among the global economies with high nominal GDP, its industrial output figures could give China, the current second largest economy, a run for its money.
During the start of the year alone, India’s industrial output surged by a whopping 3.7% year-over-year, on top of the 2.5% jump in December 2010. Oh, and did I mention that their economy expanded by 8.2% during the third quarter of that year? Major economies can only dream of growing by that much.
Let me share with you a little secret… Now might be the best time to buy the rupee against the U.S. dollar. Since it has moved a bit lower lately, it’s a bit cheaper than the Singapore dollar and it could be a really nice bargain for y’all!
If you’re worried that it might keep dropping in value, I’ll give you one good reason why it probably wouldn’t – a possible interest rate hike. You see, rising inflation could prompt India’s central bank to increase interest rates by 0.25% during their monetary policy meeting this week. If they do, that’d mark their eighth interest rate hike for the past 12 months. And you know how rate hikes could be yummy as curry for the country’s currency!
Brazilian Real (BRL)
Brazil has implemented an already impressive array of interventions to prevent the real from appreciation: direct dollar purchases on the forex spot market, a tax on foreign investments, and increasing the reserve requirements on banks’ forex positions (similar to what China has done).
But even with all that, the Brazilian real managed to break through the significant 1.65 level against the dollar last week and reached its highest level since August 2008. In percentage terms, the Brazilian real has surged 38% versus the U.S. dollar.
Now, the government is trying to find even more new ways to fight the real’s appreciation… but really, what can they do? After all, if big economies like Switzerland and Japan have already failed to curb their currencies’ gains on their own, what chance does Brazil have?
Another reason why the real is attractive is its high interest rate expectations. Inflation in Brazil has risen to more than 6% in February, indicating that further rate hikes from the central bank is possible. After five rate hikes since April last year, the benchmark interest rate now stands at 11.75%.
In contrast, interest rates in U.S., U.K, Japan and euro zone are no more than 1%. The government can attempt to weaken the real all they want, but the high interest rates are just so attractive to investors. The real will fall one day… but only for it to rise on the next two!