Tags: hans | parisis | Global | Unrest | Force | Revamp | Currency

Global Unrest May Force Revamp of Currency Tactics

By    |   Monday, 31 January 2011 11:43 AM

First of all, I want to make it clear this isn’t part of a political analysis.

I’m not a specialist in Middle Eastern and North African affairs. Also, as recent times have taught us all too well, it is always extremely difficult to predict the effects in complex and interconnected systems.

A perfect example of such a situation of complex and interconnected systems is how difficult it was to predict beforehand the sequence of events in September 2008 that would lead from the collapse of Lehman Brothers to the implosion of Iceland just two weeks later.

Therefore, I must leave it to others to express their opinions about how events in Egypt could play out politically or what could happen to regional markets and economies.

Notwithstanding all that, it doesn’t prevent us to think for a moment, from an international investor standpoint’s view, about the likely broader impact the events in Egypt will probably have on financial markets now we have that serious Egyptian “Black Swan” event, which is a metaphor that encapsulates the concept of a surprise event to that has a major impact.

We already have had a “foretaste” of how markets are likely to react from what happened on Friday. In the face of political uncertainty, investors reacted initially by buying the dollar, U.S. Treasurys and, more interestingly, gold and oil.

This, in itself, was a clear indication that investors view the current and still developing crisis in a rather different way to the way they saw the financial crisis in the second half of 2008. Back then in 2008, one of the main concerns was about a collapse in the financial system, a major economic slowdown and the fear of a wave of deflationary forces. As a result, in the second half of 2008, we saw the price of gold and oil collapse.

In contrast, today’s crisis is very much about the re-emergence of political risk and uncertainty about whether a pattern of contagion will emerge from here.

Let me explain for a moment. Although there is no evidence that the Suez Canal is under any threat of closure, concerns about this possibility were clearly a factor in driving oil prices higher on Friday along with the shares in shipping companies.

Nevertheless, investors shouldn’t overlook the fact that “only” about one percent of global oil production passes through the Suez Canal, which isn’t a percentage that is big enough to bring the Western economies to their knees. Of course, that doesn’t also mean we couldn’t see a serious spike in the oil price if a closure of the Suez Canal would have to occur.

According to “Canaccord Genuity,” approximately 1.8 million bb/day of oil was transported through the Suez Canal in 2009. This means that a closure of the Suez Canal at the present time wouldn’t be as economically damaging as the original one in 1956. In fact, there is a much-smaller fraction of the world total of oil going through the Suez Canal today that stands at 1.1 percent versus 8.8 percent in 1956.

As already noted here on Friday, in my opinion it is certainly not an overstatement to say that recent events in Egypt and in the region may also bring significant upward pressure to bear upon international food prices.

We shouldn’t overlook that one of the main causes of popular dissatisfaction in Egypt, Syria, Algeria, etc., has been the high cost of fuel and staple products. In some countries, such as in Jordan and Syria, the authorities have already acted by either cutting prices or by increasing tax allowances. 

In others, such as Algeria, the authorities have begun stockpiling essentials such as wheat. Tellingly, and this is extremely important, this stockpiling hasn’t been confined to the Middle East.

Last Thursday, Bangladesh has doubled its import target for the grain to 1.2 million tons, up from an initial estimate of 600,000 tons in response to “panic buying” among the population.

Given that a wide range of nations are likely becoming increasingly concerned about the threat of inflation, I think this trend towards stockpiling could become rather more widespread.

If I’m right, then the recent developments mark out the forces characterizing the current and still spreading crisis as being particularly different in nature to those forces that dominated the crisis we faced in 2008. Today, we are dealing with a set of potentially inflationary, rather than deflationary, forces.

If I’m right, then global investors are also likely to ultimately react in a different fashion as well.

In my opinion, it becomes more reasonable by the day to take into account that all this would feed into fresh demand for commodity-supported currencies or those backed by, what we could call the “hawkish” central banks.

Bottom line: This hardly bodes well for the dollar.

Also, I wouldn’t exclude at all that we could see a significant “rethink” of the currency policies among a number of emerging economies.

Let’s say it this way; I wouldn’t be surprised at all when central banks and finance ministries of emerging economies would, in the face of rising inflationary pressures, discover the advantages of strengthening their currencies.

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First of all, I want to make it clear this isn t part of a political analysis. I m not a specialist in Middle Eastern and North African affairs.Also, as recent times have taught us all too well, it is always extremely difficult to predict the effects in complex and...
Monday, 31 January 2011 11:43 AM
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