1 1 1

This is just a small observation. As the dollar is loosing value three different currency pairs are gradually moving to parity---the AUDUSD, USDCAD, and USDCHF.

The closest one is the Frank. It closed at 1.008 this week, just shy from the parity mark.

Then there are the commodity currencies, that have been riding the recovery wave as a couple of easy going surfer dudes. The Aussie and the loonie are trading respectively at 1/0.922 and and 1.052 to the greenback, nearing this point where all the dollars in the world will come together as equal and throw a big party to celebrate their colonial heritage.

It seems that these three 1s will be reached at the same time, so when this happens, close your eyes and make a wish. What happens next, however, is anybody's guess. All this talk of how the cheap dollar is hurting the economies of all other countries but the US whispers of a big massive coordinated intervention. It will be a game of chicken, and is there a bigger chicken then the ECB?

And to avoid making my case for ECB intervention, I am just posting a link to an FT article that does it for me.

Commodities and currencies

I've always wandered what does it mean to be a commodity currency. It's obvious that there are countries, whose fortune depends enormously on the prices of raw materials, but the question that lingered in my mind was can you play the commodity game purely with currencies, without using any actual futures or commodity ETFs. After doing some late night research, and some Matlab based simulation my question was answered--yes you can do it, fairly easily. I note that what follows does not account for interest rates, but regardless they constitute a nice observation.

I took the currencies of three countries which have economies heavily dependent on commodities, Australia, Canada and Russia. I know that Russia has a funny currency that is controlled (or at least tried to be controlled) by its central bank, but its place is definitely in the commodity basket. I designed a simple index, which in brief consists of a weighted sum of the return of all of these three currencies for the given period--Jan, 2007 to present. Then I assumed an ETF whose performance is the triply leveraged index return.

For comparison I used the GSP ETF based on the Goldman Sax Commodity Index, and here is the result:
To me it seems pretty good. Note that for this period you would have had positive rollover rates for the currency portfolio, therefore my guess is that the adjustment will further converge these two curves.