This week’s election is a powerful symbol of the political nature of world events these days.  With banking systems partly nationalized across Europe and the Americas, government decisions have become the thing to watch in the forex market.  Economic data still moves the market on a day-to-day basis, of course – But even the most ideological, free market-worshipping trader would admit that decisions made in the halls of finance ministries will be determining the fate of the world’s major currencies for the next while. 

Nowhere was that more clearly on display than in the “race to the top” that occurred between American and European finance leaders several weekends ago.  Europe’s stronger banking and credit guarantees forced American policy makers to match European national absorption of risk.  If treasury and the fed hadn’t followed suit, a major capital flight from the country would have been caused by private American institutions moving liquidity to European markets in order to take advantage of government guarantees across the pond.

Those decisions were, at their heart, political.  Treasury and the fed had been moving aggressively, but in a fashion that reminded more than a few observers of the actions taken by the US government before the great depression.  Specifically, their actions were significant but highly “bounded by ideology,” in the words of Theda Skocpol, a previous president of the American Political Science Association (APSA), and scholar of the New Deal.

So, in a disconcerting environment, the mainstream sentiment of political scientists and economists was one of further concern over the actions of the US government acting in a manner not strictly guided by technical economic and political economic analysis – until the Europeans forced  Paulson and Bernanke’s hand.

In such an environment, the market moves dramatically due to variables difficult to analyze and far from the range of expertise of most traders.  What happens in this scenario?  Trading risk goes up while potential pay-off stays roughly the same.

Which brings us to much of the flight to safety of the past month.  Yes, the vast majority of it has been the result of large-scale traders and institutions moving to safe investments.  Investors of all scales, however, have been feeling less than confident about their ability to successfully ride the political waves that have been washing over the market recently. 

So, it’s not a surprise there have been a lot of questions about good, safe places to invest your money until  the “economy” part of “political economy” can once again become the prime determinant of the dynamics of the forex market.   

Where to put your money for genuine safter is a tough question to answer these days.  The traditional major sources, gold and the US dollar, aren’t as clear-cut right now as they were several weeks ago.  Though gold’s seen better days times than this week, it’s still relatively close to historic highs, and is one of the more politically sensitive commodities. 

With Libor softening significantly as government money starts to really flow into the credit markets, it’s clear that some semblance of normalcy is just starting to return to markets, at least for the time being. 

Costs of money are falling, and some of the markets that got really battered recently are good bets.  In a couple months time, for instance, start keeping your eye on the Aussie.  After this week’s rise, we might want to be skeptical about how long investors will be truly comfortable with higher-yielding assets .  After a couple of months of tepidity, though, investors might start warming to a gold-powered Aussie.   

The US dollar’s strength and potential for a softening makes it hard to recommend treasury notes right now.  For at least the next three to four weeks, the Euro will probably be the most stable place to put your money.  At that time, let’s see where oil is.  If it takes another hit during that time, it might be time to flirt with that commodity for a bit.

Similarly, in six month’s time, it’s likely the market will have priced in almost all the commodity softness from a major economic downturn, and the Loonie will probably begin looking set to stage a bit of a bounce-back  from its recent free fall. 

So, in conclusion, look to those currencies and other investment opportunities that are most battered but whose future existence isn’t in question.  Don’t be afraid to be an active investor right now, but keep with conservative estimates of global economic health until at least 2010.   

This entry was posted on Wednesday, November 5th, 2008 at 4:37 pm and is filed under Australian Dollar, Canadian Dollar, Currency Trading, Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.