An asset or currency that wakes up from years of inaction is an opportunity. And Market psychology that goes gung ho is scary. We at Or-phe-us differentiate between the two clearly. We are alert when an asset is ready to move out of inaction and we are careful when market psychology gets going. For us waking up of market psychology is a sign of extremity and time to exit.
Let us explain. Yen is moving sideways for the last 22 years and has touched near 120 levels for more than 10 times in the respective period. This means on average every 2 years. This is a huge currency inaction compared to dollar. This we consider a multi year potentially rewarding opportunity. And on the other hand we have the emerging Eastern and Central European currencies like Hungarian Forint, Romanian Ron, Bulgarian Lev and emerging Indian Rupee, which are some how directly or indirectly the talk of the town. If not long term, short term, we do have some gung ho lurking around.
Market forces as we explained last time slowly find their way to define the value of the asset. All other parameters like the charisma of central bankers etc. is make believe. The C&E European currency story is going on for half a decade now. And with Bloomberg announcing that Romanian Ron was the strongest currency of the World in 2006, everybody knows the secret now. This is what forced us to get down to our workings again to reassess whether dollar will eventually break down this year or is there a surprise cooking for atleast the first half of 2007.
The USD/YEN ratio line (right) broke the 22 year trend suggesting YEN is ready to move out of inaction and head to potentially below 80 (33% strengthening) for many years. However, before it does that we might see some final bit of dollar surprise strengthening. Technically many factors still favor dollar strengthening in the short term, whether this takes an intermediate strengthening remains to be seen. But if we add the gung ho factor, dollar might just wake up against it.