Like almost everything in my life, if something works, then I keep using it, but when it stops working, I move on. Currencies used to be so reliable in finance, I build my whole investing process around it. I am provoked to write this note, because the Korean Won has just had a straight line 15% move.
What is noteworthy for me, is that for the life of me, I could not understand why Korean Won was at all time lows to start with. Korea has a cyclical currency, which tends to follow equity markets. It also tended to move with semiconductor cycle. Given semiconductor prices, it should be much stronger than it is. The lack of currency adjustment has fed into by far the largest trade surplus ever booked by Korea.
Taiwan has a 24% of GDP trade surplus, and while not weak like Korean Won, the currency has done nothing. One reason for this was the weakness of Japanese Yen. Until recently it was trading at 30 year lows.
The trigger for this has been, seemingly, the US treasury deciding that the Yen was too weak. So one side of the currency market has been currencies that should be strong, have been weak. On the other side of the market is that currencies that should be weak, have been strong. One such currency is the Mexican Peso. On of my best trades was shorting Mexican Peso in 2011 until 2016. I remember someone tried to convince me it was a long, not a short. All about cheapness relative to the US, and higher interest rates than the US, manufacturing was moving there etc etc. I just remember saying, “yeah…. but its still Mexico”.
“Why so mean on Mexico?”, you may ask? Am I MAGA man in disguise? No, numbers drive me - and the numbers associated with state owned Pemex are so poor, its diabolical. This Economist article explains.
Mexico also has an inflation problem. Since 2000, prices have risen 200%.
One trade I used to love putting on was long Yen, short Mexico Peso (you could call this the “reverse carry” trade - or the “work in practice but not in theory trade”). This was a super successful trade in 2008 and 2015/6, but since then the Peso has been much better than the Yen.
Over the same period, Japanese prices have only risen 20%.
Currency markets use to reward success (Korean semi exports for example), or ability to keep price low (Japan), and punish poorly run state owned businesses (Mexico). But these days not so much. But the quid pro quo of currencies not adjusting has been much higher inflation, and bond yields.
In practice, weird currency moves seem to be driving higher bond yields. There is no good theory for it - other than maybe pointing out that weird currency moves indicate a move away from free markets, which is itself inflationary.
