Big macroeconomic changes that affect the relative investment attractiveness of countries vs. one another can play themselves out in two ways:

–changes in the local currency value of the country’s investable assets, and/or

–changes in the value of the country’s currency.

The easiest way to see this is to look at Japan.  The election of Prime Minister Shinzo Abe and the enactment of wide-reaching policy changes he campaigned on have produced two major effects so far:

-a one-year gain of 60% in the yen value of the Japanese stock market and

–a 20% fall in the yen against the US$.

The net result for a ¥-oriented investor is a bonanza–and more joy than the Topix has seen since the 1980s.  For a $-oriented investor, however, it’s a 28% gain.  That’s not much better than the 22% advance in dollars the S&P 500 achieved over the same span.

Looking more closely into the Japanese stock market, weak-yen beneficiaries (exporters and import-competing firms) have been rocket ship rides; domestic-oriented firms, especially those that use dollar-priced raw materials, have languished.

But this is old news.  What’s happening today?

The big movements I see are in the euro and the US dollar.

Over the past three months, the EU currency is up by 4% against the dollar and by 2% against the yen.  The dollar, in contrast, is down against everything except the Canadian currency.  It’s off by 5% against sterling, 4% against the euro, -3.5% against the Australian dollar, -2% against the yen, and -1% against the renminbi.

I think currencies are reflecting two main things:

–primarily, the belief that the EU is finally past the worst economically and is beginning the slow road back to recovery.  Same thing for the UK, only more so.

–secondarily, loss of faith in the US because of worse than usual policy paralysis in Washington.

The big question for investors of all stripes is whether we are in early days of a trend reversal or whether what we’re seeing is just white noise, or random currency movements that may soon reverse themselves.   The answer has important implications for portfolio positioning.

I’m in the former camp.  This means that in Europe, like in Japan a year ago (but on a smaller scale), I should be shifting away from foreign currency earners and toward users of foreign currency-denominated inputs.  I should be doing the opposite in the US.  So far, I’m only changing my (relatively minor) holdings in European stocks.  But I’m worming up to do more.