Mining Portfolios

Posted November 27, 2008

The euro is strengthening against the dollar. The Australian and New Zealand dollars are rising on news of impending interest rate reductions.


In the “old days”, people would invest in the equity markets or the currency markets and manage long term positions.  The investor today that intends to make money goes about it a whole different way.  A common term being used is “mining portfolios”.  You take what you can get and then get out or back in depending on what is happening that day or even minute when talking about currency rates.

In the past though, even the Forex markets were more predictable.  You could do the paired currency charting and look for trends.  Right now it is very difficult to predict anything though analysts are still trying to do so.  That has been one of the most puzzling aspects of the economic crisis.  You can turn on the financial news channels and almost see the experts scratching their heads.  The result is investors are mining their portfolios as if there is no economic tomorrow on the horizon. 

Except for the Japanese investors who are operating more under the old rules of investing, people are taking their profits on a minute by minute basis. That is one reason the stock markets are swinging so widely in a single business day.  And when the stock markets swing…so goes the currency.  The euro, predicted recently to continue its fall, is now rising against the dollar.  In US dollars it was valued at $1.2896 as of the close of the markets on Wednesday, 26/November/2008 but continued to rise.  Currency trading is a 24 hour, 7 day a week market and is the only market that never “sleeps”. 

There are a couple of big reasons why the US dollar is weakening.  The economic data being reported always seems to be worse than anticipated which makes investors believe there are longer term financial issues yet to be resolved.  The speculation is the US Federal Reserve will cut interest rates again before the end of the year.  In addition, the new $800 billion dollar bailout plan making world headlines caused the 10 year credit-default swaps on the United States bonds to hit new highs.

But as the US dollar falls, the Australian dollar is making new gains.  It was valued at $.6429 which is a significant gain this week having started Monday at $.66314.  In fact, the Aussie has gained for 4 days straight as the US stock markets rose.  The New Zealand dollar is rising also and ended Wednesday at $.5520 which is up from $.5385 on Monday.

The rise in the Australian and New Zealand dollars is being attributed to a couple of factors, but it is interest rates and rising equity markets having the greatest impact.  China is Australia’s biggest trading partner. China reduced interest rates to 5.58% yesterday to spur economic activity.  Australia and New Zealand are prepared to announce interest rate reductions no later than the first week of December.  New Zealand’s dollar is responding to rate reductions in swap rates also.

The economic reports coming out of the US are grim to say the least.  The US government talks about a $700 billion stimulus package, but the fact is that over $7 trillion has been committed to propping up both the US economy and global trading partner economies.  The stock markets right now are increasing partly in response to promises by President-elect Barack Obama to make the continuing economic crisis a priority his first day in office.  The rise in the stock markets impacts the currency rates.

So investors will continue to mine their portfolios on a day to day basis right now looking for safe havens and profits.  This kind of mining is not for the nervous though, because this mine could still collapse at any point in time despite the excessive amount of cash injections into the financial markets.