What is going to happen to the USD after this?

What is going to happen to the USD after this?

Imagine what will happen if the USD takes a plunge against all the major currencies of the world. The immediate reaction of most of you will be:

• Not possible

·  Not exactly. Till a year back many of us were used to thinking that the international (Brent/ WTI) crude oil prices cannot go below a certain rate because it is unviable for producers to produce below that rate. In fact, the production of Crude Oil as of now is far in excess of demand and the prices have dipped. The production still remains unabated because the producers are now weighing how much losses would they incur by not producing vis-à-vis by continuing to produce oil.

Sometimes we are unable to see the unforeseen because of lack of our past experiences.

What if USD actually goes weak?

I can think of two possible outcomes of greater significance:

•        The USD denominated debt of most of the countries in their local currencies will get reduced – A welcome outcome
•      Theoretically, if the exchange rate of USD goes below the cost price of the reserves of the Central Bank of a particular country, you can expect the country/ Central Bank to sell the USD reserves and buy stronger currency (instead of being saddled with losses) and the USD rate will further go in the tail-spin – A situation somewhat similar to that of the crude oil discussed above but with different reasons

This is how most of the financial markets work and though it may sound impractical it may actually happen in real life. We have in any case seen the live case of Crude Oil.

Coming to a Billion Rupee question: What is the worth of a USD? Do we have a formula to calculate the value of USD? What is the real exchange rate of USDEUR or USDINR?

Simply put, the real and absolute exchange rate of a currency cannot be determined. There is possibly no single econometric or statistical model/ method which can determine an accurate exchange rate between two currencies. All exchange rates are relative.

To make things simpler for readers, I will take an example of the stock price of a company/ firm. The stock price of a company/ firm always keeps changing and is a function of a host of factors, including but not limited to the:

•          Value of the company
•          Outstanding nos. of ordinary stock
•          Growth rate of EBIDTA/ Earnings/ EPS
•          Reserves and Outstanding debt, etc., and
•          An element of speculation

If the company/ firm issues ordinary stock far in excess of the current outstanding stock, the stock price of the company reduces proportionately to the excess stock issued.

Similarly, the value of a currency is also always relative to itself (over a span of time – short/ medium/ long) and to other currencies and is a function of a host of factors, including but not limited to the:

• GDP of the country
• Amount of currency in circulation in domestic and international markets
• Growth rate of the GDP of the country
• Trade data and dynamics (surpluses and deficits) with its trade partners
• Forex reserves holdings, outstanding National Debt, etc., and of course
• An element of speculation

Personally, for me it is tough to understand how a country (I am referring to the US) which had been printing more currency year after year for last so many years (under QE); with its Central Bank’s balance sheet size exceeding US$ 4 trillion from a balance sheet size of US$ 1 trillion 7-8 years back (no doubt with an increasing GDP), can have its currency’s value going up phenomenally against all the currencies of the world. Either the other countries are doing too badly or the US is doing exceedingly well. Everything is relative.

Or perhaps, because everything is relative and the fact that there is no true measure to find the worth of a currency, a greater degree of element of speculation comes in play to systematically rig a currency.
Please see the fresh link posted in the comments section.

My intent here is not to invoke any discussion regarding a statistical/ econometric/ mathematical formula (to reveal the secret – I am poor in statistics) to calculate the worth of USD, but to have a critical view about the worth of USD against currencies of significance and where is USD headed for in the near future in light of the example given above about the stock price of a company.

Here are two charts that I want your attention to be drawn to and these charts are worth examining closely:

USDINR graph – May 01, 2011 - Sep 10, 2015

Silver Graph – Jul 01, 2010 - Sep 20, 2011

Legends:

Yellow line – Actual data values

Middle line – Moving average suitably chosen as per the cycle of the commodity/ currency

Upper/ Lower Band – Adapted from Bollinger Bands

If the latest graph of USD is mirroring somewhat like that of silver in the past, don’t you think it is worth considering as to WHAT HAPPENED TO SILVER graph if it were extended in time. That will perhaps unveil the secret to the Billion Rupee question posed above: “What is the true worth of the USD?”

Here’s What Happened to Silver

Silver Line Graph – July 01, 2010 to Sep 30, 2011

I will leave you all with these thoughts:

• Will a 0.25% rate hike by FED make the USD much stronger?
• Will a 0.25% rate hike by FED impact the profitability of the US Companies so much that the US markets will fall?
• Will a 0.25% rate hike by FED will lead to all the US Dollars in the world march towards the USA, leaving all the local currencies high and dry?

Alternatively:

• If a 0.25% rate hike is deferred by FED, would it take the US markets to the previous highs?
• Will a 0.25% rate hike deferment by FED lead to the USD being weaker?

Perhaps none of this will happen. Perhaps all the factors are in-built in the rate of the USD or perhaps none of them is in-built if the governing factors of the value of the USD are entirely different from what I have discussed elsewhere in this post. Perhaps a FED hike of 0.25% rate is an over-hyped event which is not of any significance but probably a great reason to be advanced by the punters of the stock markets or the currency markets to generate turbulence. Perhaps we have crowded our minds with all sort of questions which have no relevance to what is bound to happen to the US markets and the USD.

Perhaps the chart of silver shown above can decipher the track of the USD.

We will all perhaps come to realise this in a very short span of time.

Contact

The author can be contacted at riskadvisory@outlook.com

Disclaimer:

These extracts from my trading books are for educational purposes only. Any advice contained therein is provided for the general information of readers and does not have regard to any particular person's/ corporation’s investment objectives, financial situation or needs and must not be construed as advice to buy, sell, hold or otherwise deal with any commodities, currencies, securities or other investments. Accordingly, no reader should act on the basis of any information contained therein without first having consulted a suitably qualified financial advisor.