History says paper currencies always die.
In today’s Money Weekend we’ll suggest a possible candidate for destruction and why you should keep an eye on it.
If you think we’re talking about the Iranian rial, we’re not. Although the Hanke-Krus Hyperinflation Index recently added the Iranian rial to its hyperinflation list.
Iran is obviously a story at the centre of mainstream news lately.
But we’re actually thinking about something closer to home – the Hong Kong dollar (HKD).
Here’s why…
If you think buying a house in Australia is expensive (we do), check out Hong Kong. ‘The Hong Kong government’s toughest efforts yet to curb a growing asset bubble in the city’s property market probably won’t be the last as record-low mortgage rates drive demand for the world’s priciest homes,’ reported Bloomberg last week.
The article quotes a study done last September that puts Hong Kong home prices 65% above Tokyo, the second most expensive place to buy a home in the world.
Hong Kong recently slapped a 15% tax on foreign buyers to try and cool its real estate market. But what Hong Kong really needs to do to snap off its rampant property bubble is to raise interest rates to increase the cost of borrowing.
That’s too bad, because Hong Kong’s monetary policy is determined by the US Federal Reserve.
The Hong Kong dollar is pegged to the US dollar, and has been since 1983. Maintaining the peg amongst the Fed’s policy of ‘quantitative easing’ has unleashed inflation in Hong Kong. If the US Fed drops interest rates and prints money, Hong Kong has to follow suit.
There’s no relief in sight either.
You might remember we mentioned what US Federal Reserve Chairman Ben Bernanke said in Tokyo last month. He was responding to accusations that he was hurting foreign countries. If you don’t remember, here it is again:
‘Of course, an alternative strategy – one consistent with classical principles of international adjustment – is to refrain from intervening in foreign exchange markets, thereby allowing the currency to rise and helping insulate the financial system from external pressures.’
Bernanke wants to cheapen the US dollar relative to other currencies to boost American exports. Bernanke has already said he will keep interest rates at a record low until at least 2014. This helps the American government finance its 16 trillion dollars deficit.
We doubt Bernanke had Hong Kong specifically in mind when he spoke in Tokyo. But a side effect of Bernanke’s money printing is it destabilises other economies like Hong Kong. So how long can the peg between the Hong Kong and US dollar hold?
Probably not long. That means the Hong Kong dollar would start to rise against the US dollar.
Perhaps the Hong Kong Monetary Authority would peg the HKD to something else to stop it appreciating too far. But what? There isn’t much choice.
It doesn’t take much imagination to work out that Bernanke’s tactics will drive Hong Kong into further integration with mainland China. After all, Hong Kong is a ‘special administrative region’ of the Chinese mainland, and half of Hong Kong’s trade is with China.
The CIA world Factbook says, ‘Hong Kong has also established itself as the premier stock market for Chinese firms seeking to list abroad. In 2011 mainland Chinese companies constituted about 43% of the firms listed on the Hong Kong Stock Exchange and accounted for about 56% of the Exchange’s market capitalization.’
With figures like that, the peg to the US dollar is starting to look pretty outdated.
If the peg breaks, a free-floating HKD would appreciate on the back of Hong Kong’s strong economy.
But it’s not crazy to think at some point the Hong Kong dollar might be abolished completely and replaced with the Chinese remnimbi (RMB). It’s an idea that’s been around for a while, but hasn’t really worked out yet because China has not internationalised the RMB.
But the argument for the Hong Kong dollar as an attractive foreign currency play stands over the long term. If some sort of peg with the RMB is established, the tailwind of a rising remnimbi (when it eventually floats) could take it much higher. If the HKD is abolished completely, it’s a backdoor way to bet on the remnimbi rising.
It’s a gamble of course, but you’d think Bernanke just increased the odds with QE3.
All this tells us the currency market will be much more important for investors to watch for the foreseeable future. Shifting global capital and central bank money printing is bound to cause serious fireworks that effect asset values worldwide.
That means you should be on the right side of the flow of money. The Hong Kong dollar might be a way to profit from this type of trade. There isn’t an ETF for the HKD, so the only way is to open a bank account holding cash.
We know, it sounds complicated and a hassle, but it’s an idea worth exploring.
This is a similar theme to something our mate Nick Hubble wrote in his recent report. His view is that the key to safeguarding a comfortable retirement is to position your portfolio for key money trends that develop over time.
He has plenty of his own ideas worth reading, so check them out. They’re immediately actionable.
But another take is to investigate adding exposure to a foreign currency to your portfolio. It’s a solid diversification move.
You don’t have to open a foreign currency account. You can buy foreign shares, ETFs of foreign stock markets, or even trade commodities. All offer various ways of getting exposure to another currency.
Callum Newman
Co-Editor, Scoops Lane
The Most Important Story This Week…
Most balanced super funds over the last ten years have barely managed to beat the return from a simple term deposit. But with interest rates falling, retirees that rely on fixed income are getting little help from the Reserve Bank. So if cash doesn’t pay, what do you do? Nick Hubble’s job is to solve that problem. As editor of the new Money for Life newsletter, he’s already on the case – see what he says in How to Retire Rich, Happy and Free From Money Worries
Highlights in Money Morning This Week…
Nick Hubble on Super Fund Results: Whoopdeedoo: ‘If all this seems like pointless number fiddling, you’re onto something. After tax and inflation, are you really achieving much with any of these investments? Just like anything in life, you don’t get paid for doing nothing. It just doesn’t make sense. There is one exception though. You can get paid for doing nothing if you own something that does the work for you. And pays you the income it earns.’
Kris Sayce on Tell the RBA to Shove It…Invest Without Taking Big Risks: ‘It’s easy for the RBA to tell investors to take more risks when their own savings are unaffected by lower interest rates. But for you as a regular investor…someone who doesn’t have psychotic dreams of reaching the top rungs of government and bureaucracy…you do have to think about your investments and your returns.’
Murray Dawes on Forget the US Election, This Stock Market Event is the One to Watch For: ‘But what about the idea that the stock market does better depending on which party wins the White House? If you want to trade stocks on the back of the US election outcome then stop. You should keep reading today’s Money Morning before you punt your retirement savings using that strategy…’
Bryon King on What’s Happening in the Real World of ‘Gold and Oil’: ‘Long term, I foresee a very strong “Northern European” currency – deutsche mark redux – backed at least in part by a fortress full of gold. Come to think of it, that’s sort of how Germany looked 100 years ago, just before World War I. Back then, the Germans had a fortress full of gold at Spandau, near Berlin. The gold was literally their “war chest”.’