Global Interest Rates and Foreign Currencies

Almost every month, there are news of some central banks in some corner of the earth slashing their interest rates to fight the ongoing credit and financial crisis. These came along with aggressively generous economic stimulus packages by various governments, drawn from reserves or borrowed from future generations. Theoretically, the potential amount of money flooding the market is sufficient to create a tsunami, devaluing their currencies and loosening credit. But I see no sign of any minute rise in tide across the horizon.

Global Interest Rate Trend


The above chart shows the Interest Rates of some key central banks. The aggressive slashing of the interest rates can be seen quite clearly and if extrapolating the trend make any sense, all are headings towards 0%, following the lead of Bank of Japan (BOJ) and US Federal Reserve (FED).

Signs of bottoming?

It seems to me that various currencies (against SGD) have more or less bottom out not because things had gotten better. Some governments are still borrowing, some are still printing money quite aggressively. But because most of what can be done are already done. Doing more actually does not have much impact now (other than potentially creating new bubbles for the future). What's left to do really, is to let the market consolidate, weed out the excesses and patiently wait for the dust to settle, i.e. clear the debris and start afresh.

Potential Actions

Without taking into account whether MAS will change its stance on SGD policy in the next deliberation in April, I am considering the number of options I had to take advantage of bottoming currencies.

Foreign Currency Fixed Deposits

A check on UOB foreign currency fixed deposit rates show some expectedly disappointing rates (mirroring the recent aggressive rates cuts above). USD, for example, had no interest on 3 months fixed deposits and NZD only offer 1.83%, a far cry from a year ago. Thus, unless my intention is capital preservation, these fixed deposits are still not appealing at all.

Equities quoted in foreign currencies

A check with SGX shows up a list of equities trading in foregin currencies, e.g. USD, HKD and AUD. Most of these equities are quoted in USD, a number in HKD and AUD. HKD is still pegged to USD and the equities quoted in AUD are mostly (unappealing to me) property developers. Thus what remained interesting are those quoted in USD.

A few interesting ones are Chemoil Energy Limited, Lyxor Commodity CRB Fund and Pacific Shipping Trust. Chemoil Energy is an integrated supplier of marine fuel products. It is currently trading slightly below book value and about 5.2 times rolling P/E. It could bounce back when the marine sector recovers. However, at about 4.3 times debt-to-equity ratio, it remains to be seen whether it can survive the ongoing credit crunch.

Lyxor Commodity CRB Fund tracks a basket of future contract on commodities, especially energy, metals and agricultural products. Assuming demand on commodities will eventually recover, there should be sufficient upside if one is willing to take a long term view on this.

The most interesting one is none other than Pacific Shipping Trust. Without any short term refinancing risk and no asset-to-loan covenant to worry about, Pacific Shipping Trust should be able to ride out the current storm quite comfortably. Perhaps the only treat to its dividend distribution is one or more of its charterers going bust. Its relatively high dividend payout per quarter of about 0.9 cents USD (about 24% yield) should be quite sustainable despite having to pay off an amortizing loan due to its long term leases.


Conclusion

Most major economic power houses in the developed west are in recession and the export-oriented emerging economies are beginning to struggle despite building up massive reserves after the Asia Financial Crisis. The aggressive interest rate cut by so many central banks almost all at the same time and seemingly racing toward zero simply meant a collective weakening of their currencies. But currencies are relative in nature. Thus, I believe their value vs SGD have neared or reach a bottom. Other than riding on severely battered equities for the huge potential upside when the business cycle eventually recovers along with the general economy, why not give it a an additional boost of forex leverage.