Shaping a Portfolio for 2016: currency and interest rates


Japan and the EU have tried over the past several years to jumpstart their economies through massive currency  depreciation.  This has resulted in a gigantic loss of national wealth in both regions.  It has also depressed the local standard of living by making dollar-denominated commodities–energy, food, metals, textiles–more expensive.

But the move has also revived industry, at least in the EU, by making end products cheaper.

Therefore, Europe could see substantial export-based growth in 2016.  As usual, I’m thinking that Japan is a lost cause.

interest rates

The US is alone among major countries of the world to have recovered far enough from the 2008-09 recession to begin to raise interest rates from their current intensive care lows.

The Fed Funds rate will most likely be be boosted to +0.25% next week.  And the benchmark will doubtless be raised again in 2016.  Nevertheless, the initial increases will probably have little, if any, negative effect on economic activity.

My guess is that we’ll exit 2016 with the Fed Funds rate at 1%.

At first blush, it would seem that by increasing interest rate differentials between the US and the rest of the world, the Fed would induce international fixed income investors to reposition their portfolios. Selling foreign bonds and buying US Treasuries would give them both higher interest income and the chance at a currency gain–since the flow of foreign funds into the US would imply further strength in the US$.

However, the Fed move has been widely telegraphed for an extended period of time.  We’ve already seen considerable struength in the US$ in 2015.  My guess is that most of the potential asset shift has already taken place in 2015.

So, I’m thinking that the Fed’s interest rate moves will be a non-event in both domestic economic and currency terms.

Tomorrow:  petrodollars

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  1. Pingback: What stocks to invest in = currency and interest rates « PRACTICAL STOCK INVESTING | Stock Investing

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