Czech Koruna

The chart depicts that the US dollar has more than cut in half against the Czech koruna over the course of this decade. The Czech koruna? Really?

Apparently so.

The Czech Republic is one I keep tabs on because Jyske Bank covers it closely and writes about it a couple of times a week and I read Jyske’s commentary every day.

The Czech Republic certainly has its issues. It is a deficit country, with the deficit getting larger, inflation has recently broken to the up side, they don’t corner the global market in something the rest of the world needs, the stock market has participated in the global sell off dropping 18.5% from its high last fall so there doesn’t seem to be much in the way of standout information.

Yet the koruna has more than doubled. It has a trade surplus with the US that has been growing maybe that is part of the equation? In 2007 GDP grew by over 6% so that might be it too.

I certainly do not have all the answers but I think this more about strength in the Czech Republic than weakness in the US. One reason to draw this conclusion is the koruna has gone up a lot against the euro during the same period it is up against the greenback.

This might be consistent with something I have theorized about before which is that there will be many countries that one way or another become more important in the world economic order. This could mean a country goes from completely irrelevant up to merely unimportant but still becoming more important.

The point is not that anyone should go out and buy korunas but in thinking of cash as an asset class and trying to look ahead to where returns might need to come from we need to understand this sort of thing.

On this second chart we see the koruna going up more than SPY. Sometimes the two correlate kind of closely but the koruna has been immune to declines when stocks sell off.

Before the decline that started in October the equity returns charted were just fine and the currency was right there with SPY.

That is obviously looking back. Looking forward I wouldn’t think foreign currencies could go up that much from here versus the dollar (insert nervous smile). But what if some currencies average 6-8% over the next couple of years and domestic equities do the same?

Currency is usually less volatile than equities. If the two return the same wouldn’t choosing the product with less volatility make more sense? Unfortunately there is no way to know if equities will return less than normal but there is some visibility for it. In that context allocating some small portion to currency makes sense. Maybe that should be via some sort of managed vehicle like a fund or a manager or on your own but as an asset class it has been and I believe will be compelling. It will also become easier to access currencies.

These types of posts always draw comments about currencies not being appropriate for most people. Well maybe except there are fewer moving parts to most currencies than most stocks. Also just because something may not be ideal does not mean that it should not be studied and possibly utilized in moderation. Do you think anyone out there ever started out with mutual funds and then as the learned more began to integrate individual stocks?

Don’t misread this as currencies are easy, they are not, not by a long shot but that still does not mean they should be avoided either.

15 Comments

  1. In other words maybe we should avoid one currency – the dollar.

    Ok maybe thats just me and not Roger.

    seg

    Reply
  2. Roger,

    I have seen some chatter on other blogs indicating a great deal of concern for Eastern Europe due to the fact that many of their loans and mortgages are denominated in foreign currencies. I believe the Swiss Franc is the vehicle of choice. I guess the concern is the Swiss Franc strengthens, but these people are paying their mortgages in forints..so its a double whammy?

    Do you have an opinion on any of this from your various sources?

    Thanks!

    Linda P.

    Reply
  3. not in touch with a lot of detail here but Hungary is a high yielding currency, overnight rates at 7.5%, i believe, and on their way to 7.75%.

    Swissi is obviously a very low yielder so taking a mortgage in Switzerland looks good for a Hungarian.

    Two years ago CHFHUF was at 161, went as high 180, as low as 147 and is now at 165. Anyone taking a mort at 180 is happy, 147 is bummed, so what really is the impact? No sure but that is the deal for Hungary.

    CHF has pretty much gone straight down against CZK but the yield differential is much less so borrowers in CZK-ville are ok there, if there were any.

    one more, the Slovak koruna. CHFSKK has spent the vast majority of the time in a 1 koruna range but i do not know the interest rate situation there.

    i do not know how prevalent the type of borrowing you cite is but for now the effect mentioned doesn’t seem that bad?

    Reply
  4. uh, Roger,

    If you plot USD against just about any other currency in the world … doesn’t the chart look pretty much the same ?

    So, I might respectfully disagree with your contention that it does not reflect the weakness in the USA.

    I think the chart is a chart of USD being re-valued somewhere in the toilet paper range.

    Reply
  5. you could be right of course but in the case of CZK it started to strengthen in 2000, has been a one way trade the whole time and in terms of magnitude is quite substantial relative to other currencies.

    Reply
  6. Roger,

    Can you provide your view of the pros and cons of currencies, gold, and gold miners. I view these as similar but different as they all vary versus the dollar.

    Reply
  7. that might make for a good post for sunday.

    Reply
  8. Somewhat OT but there is serious whackage going on in the muni bond markets (e.g., http://tinyurl.com/2ro8cu )

    The wave of doubt that began with the so-called sub-prime problem is growing into a d*mned tsunami. I look forward to snapping up some prime issues on the cheap but I will only do so where I plan to hold to maturity, a left-handed way of saying I (temporarily I hope) no longer own any muni-bond mutual funds or, if it comes to that, many domestic bond funds at all.

    Reply
  9. I’m still thinking that chart looks like

    USD/AUD
    USD/GBP
    USD/CAD
    USD/EUR
    USD/NZD
    USD/BRL

    Yen and peso are a little weird, but they probably deserve to be different 😉

    The common denominator is the dollar, which is losing value every day. Most likely due to printing $$$ as fast as possible, and shipping most of our value-producing jobs elsewhere.

    Reply
  10. One interesting way to get currency exposure is through the Powershares Currency Harvest (aka carry trade) fund – DBV. It’s long 3 currencies with high interest rates and short 3 with low interest rates. According to the Powershares prospectus you get equity like returns with less beta. Experience with ~ one year of existence seems to show some correlation with equities but a decent return.

    This seems like a no-brainer way to get currency exposure without worrying about which currencies to invest in. Probably would lag someone who understood the currency markets but for a “lazy” portfolio diversifier, it seems like a decent product.

    Reply
  11. I think you’re wrong about the majority of loans in CZ being in swiss francs. It was previously the case that they were euro loans and this is still sometimes the case with major real estate and industrial development but personal mortgages are czech crown mortgages. I hold a small real estate portfolio here and am thinking of selling and getting out of czceh currency – it seems unsustainable to me. Bo. Prague.

    Reply
  12. RW,
    i respectfully submit that now is the time to start seriously thinking of buying munis. i read the reuters article you linked and i interpreted the article as showing that certain parties bought munis (apparently partially based on the insurance), levered themselves, and now face negative leverage as the price for some of those munis adjusted with the potential downgrade of the insurers. this is a liquidity crisis for some muni holders, not a solvency crisis for virtually any of the muni issuers. if this were an issuer solvency crisis, you would be correct to be concerned, but since this is a liquidity crisis (with no issuer involvement) you should probably think in terms of opportunity.
    admittedly, the subprime fallout might very well eventually impact the solvency of some muni issuers, but i haven’t heard of any recent defaults. the current crisis is a supply demand imbalance. not enough people are familiar with the muni market to step in and buy when the leveraged players have to sell instantaneously–and the previous providers of liquidity (the investment banks) have all abandoned providing liquidity due to the collapse of their own capital structures (i.e., their balance sheets).
    this past thursday bloomberg carried a story that bill gross is actively buying munis because the pretax returns on many of them now exceed the aftertax returns on treasuries. according to several sources, the default rate on munis has been well under 1% over a very a long timeframe (meaning not just the most recent five good years, but something like 50 years).
    over the past ten days i bought several aaa-rated, uninsured (because if it is uninsured with aaa rating the issuer itself should be strong enough to payoff the bond), non-callable, general obligation (you have a claim to the tax base and in the event of default the bondholders get precedence to the payroll of police and firemen etc–sorry, roger) one to three year bonds. i would argue that this money is as safe as YOUR money market fund (regardless of what money market fund you hold–post the name of your mmf fund and i will look at the most recent holdings list submitted to the sec and estimate the “asset backed” holdings of your fund). you might even consider escrowed munis–in this case the issuer arranges to fund the bond with treasury issues to, in essence, economically retire a bond that they could not legally call. hence, these “muni” bonds are now backed by the full faith of the us government (that is the asset that the bond now holds–but because it is a muni issue, you get the fed tax break too. as of wednesday some of these escrowed “muni” bonds sold with non-taxed rates of return exceeding the pretax rate of return on treasuries–that makes absolutely NO sense, but the market is offered it to us because of someone else’s distress. if bill gross is buying this, my bet is that buffet is also, and you should consider buying it too, rather than bailing out.
    –gjg49

    Reply
  13. gjg49: exactly, some individual issues are looking extremely attractive and I’m buying a few myself but I no longer own any muni funds since there is no method to assure their current holdings match the latest report and, by definition, they can not mature (non-callable or fixed-date are the only bonds that interest me right now). The notion of bond insurance for muni’s would never make much sense to anyone willing to do their homework.

    Reply
  14. Roger,

    You hit on the reason the Czech currency is strong.
    THEY HAVE A TRADE SURPLUS WITH THE U.S. When are people going to realize that the value of the U.S. dollar is not low because 1. we have a budget deficit, 2. we have a slowing economy, 3. we have a housing mess, 4. we have a Republican President, or any other reason. The reason is we have a TRADE DEFICIT. You cannot run a 750 billion dollar trade deficit and have a strong currency. Period. This is what the U.S. has a weak currency. There is no other reason. Period!

    Reply

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Czech Koruna

The chart depicts that the US dollar has more than cut in half against the Czech koruna over the course of this decade. The Czech koruna? Really?

Apparently so.

The Czech Republic is one I keep tabs on because Jyske Bank covers it closely and writes about it a couple of times a week and I read Jyske’s commentary every day.

The Czech Republic certainly has its issues. It is a deficit country, with the deficit getting larger, inflation has recently broken to the up side, they don’t corner the global market in something the rest of the world needs, the stock market has participated in the global sell off dropping 18.5% from its high last fall so there doesn’t seem to be much in the way of standout information.

Yet the koruna has more than doubled. It has a trade surplus with the US that has been growing maybe that is part of the equation? In 2007 GDP grew by over 6% so that might be it too.

I certainly do not have all the answers but I think this more about strength in the Czech Republic than weakness in the US. One reason to draw this conclusion is the koruna has gone up a lot against the euro during the same period it is up against the greenback.

This might be consistent with something I have theorized about before which is that there will be many countries that one way or another become more important in the world economic order. This could mean a country goes from completely irrelevant up to merely unimportant but still becoming more important.

The point is not that anyone should go out and buy korunas but in thinking of cash as an asset class and trying to look ahead to where returns might need to come from we need to understand this sort of thing.

On this second chart we see the koruna going up more than SPY. Sometimes the two correlate kind of closely but the koruna has been immune to declines when stocks sell off.

Before the decline that started in October the equity returns charted were just fine and the currency was right there with SPY.

That is obviously looking back. Looking forward I wouldn’t think foreign currencies could go up that much from here versus the dollar (insert nervous smile). But what if some currencies average 6-8% over the next couple of years and domestic equities do the same?

Currency is usually less volatile than equities. If the two return the same wouldn’t choosing the product with less volatility make more sense? Unfortunately there is no way to know if equities will return less than normal but there is some visibility for it. In that context allocating some small portion to currency makes sense. Maybe that should be via some sort of managed vehicle like a fund or a manager or on your own but as an asset class it has been and I believe will be compelling. It will also become easier to access currencies.

These types of posts always draw comments about currencies not being appropriate for most people. Well maybe except there are fewer moving parts to most currencies than most stocks. Also just because something may not be ideal does not mean that it should not be studied and possibly utilized in moderation. Do you think anyone out there ever started out with mutual funds and then as the learned more began to integrate individual stocks?

Don’t misread this as currencies are easy, they are not, not by a long shot but that still does not mean they should be avoided either.

Submit a Comment

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