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Investing In The Year Of The Tiger? Keep Your Eyes On The Forex Rates!
Advertorial | 05 February 2010

By CMC Markets

The stock market blows hot and cold in a way no one can predict. Since end November, the stock market had struggled to break free of the resistance levels, rising strongly for eight consecutive weeks only to see the euphoria dashed and gains evaporated in a matter of 3 heart-stopping weeks. Investors may still be scrambling for clues as to what prompted this reversal to happen so suddenly.

Actually, the observant investor would have spotted some omens from simply taking note of the recent fluctuations in currency exchange rates. All the major Asia-Pacific currencies (including the Singapore dollar, Hong Kong dollar, Thai baht, Malaysian ringgit, and the Indian rupee) appreciated significantly around Christmas, following which they have begun to show signs of weakness. This did not raise any red flags in many quarters, for they explained it off as foreigners moving currencies around during the Christmas season. However, after the New Year these currencies did not consolidate, but instead retreated drastically. The Hong Kong dollar has always been regarded by foreign investors as the best alternative to the Chinese yuan. The currency was traded at the government-regulated peak price of 7.75 for more than 14 months, during which there were infrequent variations. Then the People’s Bank of China issued the directive to tighten credit, and the exchange rate responded with an immediate plunge; the exchange rate of the U.S. dollar against Singapore dollar on Christmas Eve hit a high that exceeded the previous peak registered around end October, with the baht, ringgit and rupiah rates going on a bull run.

With all these signs coming to a head, this writer could not help but to worry. One should take note that this round of rebound in the stock market came about thanks to the economy stimulus package, and the point of time when the afore-mentioned currencies started to appreciate in ’09 coincides with the starting point of the current round of market rally. The huge amount of liquidity which the major monetary authorities injected into the market via various channels during end ’08 had already been absorbed into the global capital market; of especial interest are new emerging markets which, though faced with an uncertain economic outlook and enterprises turning in dismal profits, managed to pull off the latest economic miracle. All these hot money also triggered a hike in capital prices. Be it stocks or property, this false sense of euphoria is like a lavish feast fueled by excessive liquidity.

Following the Australian central bank’s move to raise interest rates, the Chinese government signaled its intention to tighten credit, while the Obama administration announced, ahead of a key election, measures to rein in the investment banks by limiting their self-managed businesses; all these signs are warning us that the injection of liquidity is slowing down, and currencies are taking the cue from the US dollar in quickening their pace in the flow reversal. The days of this feast are fast coming to an end.

Even when the situation is reversed, there must also be a sequence of events. The inherent liquidity of the stock market means here is where the first shock is felt, but that does not mean that the liquidity crisis would dissipate along with the adjustments in the stock market. With the fading wealth delusion, more funds will be locked in the stock market, which inadvertently will have repercussions on other asset prices. Even the booming property market is not spared. The phenomenal surge in home prices over the past year is in stark contrast to the stagnated price of commercial properties.

Another important index that deserves scrutiny is the short-term price of U.S. Treasury bonds. Despite the fact that Federal Reserve left interest rates largely unchanged, bond prices are still heading downhill; 10-year bond yields had jumped above 4%, while 20-year yield registered 4.5%. On the one hand, this is another proof that liquidity is being pulled out; at the same time, as the bonds are used by banks as a hedging tool against long-term interest rate fluctuations, this jump in yields will trigger a hike in the medium- and long-term commercial lending rates. Undoubtedly this will hit property speculators really hard. With the lessons of 2007 fresh in our memory, do not forget them easily. Do tread very cautiously in your investment decision-making.

Keep your eyes peeled for fluxes in the forex rates when you make investments this coming Year of the Tiger. Apart from variables, you can also expect a volatile climate. As an active investor, you should seriously consider trading in VIX Index or forex given this opportunity. Are you ready to invest in the Year of the Tiger? Come down to our seminars to gather more invaluable insights!

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