Zimbabwe’s new gamble

Zimbabwe has a long and troubled history with its currency. After a period of hyperinflation in the early 2000s, the country abandoned its currency in 2009 and switched to a multi-currency system dominated by the US dollar. However, economic woes persisted, leading to the reintroduction of a local currency, the Zimbabwean dollar (ZWL), in 2019. Unfortunately, this attempt backfired, causing renewed inflation.

In April 2024, Zimbabwe took another stab at currency reform with the launch of the ZiG (Zimbabwe Gold). This time, they're hoping a gold-backed currency will be the answer.

The ZiG: A New Approach

Unlike previous currencies, the ZiG is backed by a "basket" of assets, including:

- Foreign currency reserves: US$285 million at launch, raising concerns about its adequacy.

- Gold: 2.5 tonnes of gold currently held by the Reserve Bank of Zimbabwe (RBZ), with plans to increase gold production and channel it into the reserves.

- Other precious metals and minerals: Platinum, lithium, and diamonds mined in Zimbabwe could also contribute to the reserves.

The ZiG's value is tied to the price of gold and a comparison of inflation rates between the ZiG and the US dollar. This, in theory, should provide stability and prevent hyperinflation. Link here.

Can the ZiG Succeed Where Others Failed?

Skeptics abound. Critics point to the following weaknesses:

- Insufficient reserves: The current reserve value is considered too low to provide real import cover or meet regional liquidity recommendations.

- Government mismanagement: Zimbabwe's history of economic troubles raises doubts about the government's ability to manage the ZiG effectively.

- Lack of trust: Years of currency instability have eroded public trust in Zimbabwean currency.

A Glimmer of Hope?

Despite the criticism, there are some potential positives:

- Gold-backing: Gold is a historically stable store of value, and linking the ZiG to it could provide some stability.

- Increased gold production: Zimbabwe's plans to boost gold production could strengthen the ZiG's reserves in the long run.

The Verdict: Too Early to Tell

The success of the ZiG remains to be seen. Only time will tell if it can overcome public skepticism and become a stable and trusted currency.

USDJPY

 

What you see here is a point-and-figure chart. I love these charts because they remove the noise and time other charts show so that you can focus on the break of support and resistance levels. Volume can be displayed as well.

The one above shows the evolution of the USD/JPY from the 70s till today. Why are we writing about the Japanese yen? We have received many questions about this pair. Some asked us because they were thinking of moving there, and others in relation to buying real estate in Japan.

The most important aspect of the chart is marked with a square: a powerful bear trap. After that we can see the beginning of bullish movement that will very likely continue. Our target prices are first 160 and then 180.

EURUSD forecast

Remember this post? November 2021. Under parity happened this year, but as we always say, big movements have drawbacks. Our perception for the coming year is the rebound might not be finished, perhaps reaching around 1.1, but eventually the dollar is going to keep on strengthening and target 0.8.

We will see if we are right…, meanwhile have a beautiful 2023.

Super dollar, till when?

DXY is the common reference for USD against the rest of the currencies.

Historically, we have seen a movement from around 165 in the 80’s to 70 (A to C) stopping at B. The natural target now would be B, 120. If you want to change USD to EUR, for instance, it makes sense to start changing there.

Some colleagues think the target should be 150, however. Currencies are complicated and they can be moved by governments’ hidden agreements.

In any case, if you are not sure, just do partial purchases of other currencies if you need them. USD will probably continue behaving upwards. Small weak currencies will suffer (check Turkish lira, for instance, or even the British pound).

How to build a currency basket III? Benchmarks

To continue with our approach about building a currency basket, we will try to look for different benchmarks. Perhaps, you don´t know but this question is one of the most complicated nowadays. For instance, the Central Bank of China keeps the percentage of their reserves portfolio in secret (that would be a really good benchmark!).

So let´s start with our first option: the SDR (Special Drawing Rights) designed by the IMF. They held the following: USD 42%, EUR 31%, RMB 11%, JPY 8%, and GBP 8%. There is an interesting link about the concept of a new reserve currency here.

How to build a currency basket? II

In the first article, we predefined a fix number of currencies (AUD, CAD, CHF, USD, and GBP), and we calculated a reasonable portfolio to hedge against EUR. In this second article we want to determine why these currencies and why we started using 20% of each one when some of them behave approximately the same. For instance, AUD and CAD have a high correlation and if we use them separately we are overweighting their importance in our basket.

How to build a currency basket? I

Imagine our main currency is euros. We are paid in euros and we live in a euro country. But we don´t trust our currency that much, or we are not sure where we will live in a few years, or simply to diversify our portfolio, we want to create a currency basket. Problem: which currencies and in which percentage?

First of all, we don´t want to talk about the different tools to invest in a specific currency (funds, Forex account, foreign stocks...). Here we will only show an algorithm to build a reasonable currency exposure.

Euro/USD forecast…

The EURUSD closed on 2021.11.19 at 1.1285.

On the charts, an old support becomes a new resistance. The key level is marked by the red pen. It has bounced there, and the new way is down. Also the movement up is NOT supported by any momentum indicator.

If we had to bet, we would see the EURUSD lower than 1.1 and eventually crossing the parity. What we don’t consider is any big strengthening in the euro for many years.

Turkish lira, out of control

10 years ago, we just needed 2 liras to buy 1 euro, now we need 11. What is going on with Turkey?

The old Ottoman empire is gone, and we need to accept it. It has happened to others in the past. Just remember the Spanish empire covering America, Europe and Philippines…, and see Spain now. Or the British empire, still influential but losing pace every year.

Turkey has a powerful military and has been trying to be a key piece in the Middle Eastern political turmoil, supporting one or another. Perhaps it is time to focus on itself and start sending a modern, positive message of a business oriented country with a wonderful young generation.

The currency in most cases reflects the country´s situation, but to change the macro variables and the perception abroad takes time, and meanwhile, instead of lowering interest rates that only decreases the faith in the lira, a possible solution could be the creation of a currency board. It will protect the currency but it will limit the Government mobility.

With a currency board, the exchange rate and money supply is managed by an independent money authority, which more often than not, backs the domestic currency with a basket of different foreign currencies (ideally in a proportion similar to its trading).

It has been done more or less successfully in Bulgaria in 1997 (link).

Why is the Norwegian krone so weak?

The chart above shows the EURNOK exchange for the last 10 years (if it goes up, it means the euro is stronger). As you can see, lately the EURNOK has overpassed the former resistance, 10, which means the krone is getting weak. Many readers ask us why and we clearly understand their question, basically because somehow the Norwegian economy is strong and the oil price is not so low as people were forecasting.

Some analysts have tried to explain this paradox in terms of inflation. As the inflation in Norway was higher than in Europe, if we wanted to buy the same basket of products year after year, the currency with the higher inflation should weaken (PPP theory). In fact, we think it is part of the reason, but not totally. Inflation in Norway is surprisingly being lower than expected during this year, even with a bigger fall than the Euro Area.

In terms of interest rates, the Norges Bank has marginally been increasing them to a extremely low 1.5%, higher than the ones in the Euro Area though. If we add the soundness of the Norwegian finances, we think the EURNOK is too high. Probably, the exchange is controlled by Central Banks to avoid making the NOK the new Swiss franc. In any case, at today’s prices, it could be interesting to bet on the NOK strengthening.

Gold sinking..., again

As predicted, USD is becoming stronger. However, gold priced in USD is falling in a bigger percentage and it is losing territory even against the euro (right now 1038 EUR per ounce).

Reasons? Probably the need of some nations (Turkey for instance) to buy dollars to stop their currency bleeding and one of the few assets investors want to purchase is gold. We expect this movement to be a summer storm, but we will see.

On our twitter account, @SimplyNoRisk, we have posted a composition of 4 interesting tweets about the gold trend right now.

10 years of NOK and GBP

With all the Brexit, how is the pound behaving? What about the Norwegian krona?

As shown below, we are touching the upper band of the euro against these 2 currencies. It wouldn’t be crazy to think that during the next years the euro will weaken.

We will be following.

EURUSD: initial target 1.16

According to the Elliott Wave Principle, the natural target for a correction like the one we are experiencing in the EURUSD is the end of the 4th wave, in our case around 1.16 (red line).

It might go directly to 1.16 or it could delay it a bit, but it seems a possible stop. In any case, the long-term trend is bearish for the euro.

It doesn’t matter if we are right or wrong, but having at least some percentage of our investments in other currencies makes a lot of sense. Remember: real diversification is the key to low volatility.

Bitcoin, follow up

We have received many, many questions about bitcoin. We thought we were clear about it, but it seems not. Let us sum up our position:

1. We love bitcoin from a philosophical point of view, however we wouldn’t invest big money there.
2. Bitcoin is not working as it was supposed to do, transactions are slow and expensive.
3. There is a big difference between blockchain (technology behind bitcoin) and the bitcoin itself. Blockchain has a very bright future ahead.
4. Many people think bitcoin is already dead. We don’t know yet, however, just for the guys who held bitcoins from the beginning and sold half of the position in December (link), if we reach above 30,000, it could be a good moment to sell a high percentage of the remainings. It is like playing with the house money.

Some gurus don’t understand that they might be right about the bitcoin being a bubble, but markets like this one can very easily be manipulated and the price can keep on going up for a long time (story of Herbalife).

EURCAD, almost no words

Chart:

Links:

• Longforecast
• Scotiabank
• Cadforecast

Best books about bitcoin

As we all know by now, bitcoin is a virtual currency based on a distributed database called blockchain. It was the first crypto money, but there are many others which can be even more interesting, like ethereum.

We have zero doubts about the future success of blockchain. It is one of the most brilliant advances scientists have achieved. However, even if we love the idea, we are not so sure about virtual money. Governments could ban it as they want to have the exclusivity of money creation. In any case, if you are interested in this topic, we have chosen some of the best books about bitcoin so that you can learn on your own:

• Mastering Bitcoin, by Antonopoulos
• Digital Gold, by Popper
• Wildcat Currency, by Castronova
• Blockchain, by Swan
• Ethereum, by Diedrich

Bitcoin, don’t buy, sell?

Some months ago most of the financial analysts were recommended to sell bitcoins. We didn’t agree (link). It seemed it was going to go much higher... And in fact it did:

Now everyone is talking about bitcoins and you hear its target is 40000... We don’t know, of course. However the way it has soared doesn’t “smell” good. Therefore, just to be practical, it might be the wrong moment to enter into this market and it might be the good one to sell half of the position with big gains.

What is going on with the Bitcoin?

Sometimes, a couple of images tells a story better than words. Here we show the long-term chart of BTC paid in EUR, a strong currency right now. It clearly trends upwards, but once in a while it scares buyers with a sharp counter movement:

If we zoom up last year:

So, when you hear that Bitcoin is dead at 2500 EUR, that is not clear at all. We have seen similar patterns in the past.

EURUSD follow up

On April we wrote the following piece of advice: link. We saw a "trap" at the end of 2016, so we decided to bet on a temporary climb of the euro. We were right. Now we are outside the former range and 2 things could happen:

- We can see another trap, but now on the upper side of the range (therefor a bearish movement for the EURUSD). In just a few weeks we will know.

- We can see a pullback to the former resistance (lower red line) and then a movement to the upper red line.

We expect the second is going to happen for a few months. We don't think the EUR will structurally recover from the peak, in fact, in the long run we are betting on the USD, but everything takes time and the bearish movement could start next year.

Ethereum

It is the "new thing", the new bitcoin? Not exactly. Ethereum is a platform based on blockchain, but while the bitcoin blockchain is used to track ownership of precisely the digital currency called bitcoin, the Ethereum blockchain focuses on running the programming code of any decentralized application. While all blockchains have the ability to process code, most are severely limited. Ethereum improves this. Instead of giving a set of limited operations, Ethereum allows developers to create whatever operations they want. This means developers can build thousands of different applications that go way beyond anything we have seen before (smart contracts):

Ether is a form of payment made by the clients of the platform to the machines executing the desired transactions. Ether can be trade independently.