Foreign exchange markets tend to be the domain for short-term technical and momentum based speculators. However, with central banks around the world holding real interest rates negative and printing large quantities of money, investors’ home currencies in developed nations such as the United States, Europe and Japan may not be a safe store of value.
Stretched valuations across bond and equity markets make this an apt time to take profits, but what currencies should investors hold their cash? Here’s my top seven strongest currencies based on long-term economic fundamentals.
7) Korean won
South Korea has become a manufacturing powerhouse. The quality of Korean goods such as Samsung Electronics, Hyundai and Posco meets and often exceeds Japanese competitors. In spite of a weak yen, South Korea maintains competitive advantage versus Japan. South Korea’s fiscal health is also strong with a 35% debt to GDP, 3.3% GDP growth, and 3.8% current account surplus.
6) Malaysian ringgit
Malaysia is the only developed nation since its independence in 1957 that has not defaulted or experienced a full year of inflation above 20%. The Malaysian central bank has an excellent track record of keeping inflation low and exports of crude oil, palm oil, minerals, and other natural resources keep foreign reserves well stocked. The tricky part for Western investors is that the ringgit can only be traded via non-deliverable forwards due to capital controls left over from the 1997 Asian financial crisis.
5) Norwegian krone
Norway has the most stable currency in Europe. With oil exports, a high standard of living, a 13% current account surplus, and a debt to GDP of just 28%, Norway is in excellent shape to maintain currency strength and hold off the structural problems of the rest of the continent. Because Norway is not part of the EU, it can serve as a financial safe haven for investors if the European debt crisis deteriorates further.
4) Chinese renminbi
China is transitioning from an export based economy to one that relies on more domestic consumption. Part of this transition will be RMB appreciation as higher domestic purchasing power of imported goods such as food and energy will be needed to increase the wealth of middle income Chinese and get them to spend money on local consumer goods and services. China has stockpiles of foreign reserves and trade surpluses which will also hold up the renminbi as the government has been intervening less to keep the currency down. The renminbi would be rated higher if it was not for strict capital controls.
3) Hong Kong dollar
The Hong Kong dollar is like the call option of currencies. It is pegged to a narrow band to the U.S. dollar, so downside risk is limited. However, if trade pressures and a weak dollar break the peg, that the Hong Kong dollar has appreciation potential of greater than 20% to match the recent gains of the renminbi against the U.S. dollar.
2) Singapore dollar
With increased disclosure in Switzerland, Singapore has become the new global center of hidden money and a favored tax haven. As income inequality increases along with the increased rates and enforcement of taxation, foreign capital inflows will continue to increase in Singapore that puts upward pressure on the currency. Singapore also has an 18%.6 current account surplus and has been the greatest beneficiary of the growth of Asian economies and Asian tourism. As seen in the chart, the Singapore dollar has one of the most stable paths of appreciation against the U.S. dollar of any currency.
(chart source: tradingeconomics.com)
1) New Zealand dollar
The New Zealand dollar is the safest store of value among the bunch. The Reserve Bank of New Zealand is the only developed nation central bank that plans on raising interest rates in the near future and the country has reformed its tax code to lower rates and increase transparency. New Zealand also has stable exports from undervalued agriculture assets.
Nicholas Pardini is the founder and managing partner of investment firm Nomadic Capital Partners, which specializes in investing in emerging and frontier markets around the globe. His book, “The Definitive Guide to Emerging Market Currencies,” was written in response to his inability to find research on the subject. You can reach him at firstname.lastname@example.org.