A quick fortune? I don't see it
When it comes to the New Year pastime of gazing into the crystal ball to predict where the Hang Seng index, the US dollar or the price of oil will stand at the end of the year, I confess to being something of a party-pooper. I either decline to play, or I choose figures which are boringly close to existing levels.
I might defend myself against accusations of cowardice by claiming that I am merely applying the principle of efficient markets. This states that if everyone has access to all relevant information, and if people collectively process that information efficiently, then mankind's present state of knowledge is accurately reflected in current market prices.
Forward rates and futures prices can be found in the financial press; they are seldom very far from today's spot prices. In theory, you can only improve on that, and potentially make a killing in these markets, if you know something significant which has not been widely disclosed - classic insider-dealing.
Do I really believe all that? As far as it goes, yes. Financial markets may be quite efficient in the sense of the common availability of information - although some, such as the foreign exchange market, more so than others, like the share market.
But this does not mean that they are necessarily rational, in the sense of delivering prices that properly reflect fundamentals.
These markets are notoriously susceptible to the herd instinct. People latch on to a trend simply because it is there, for fear of being the odd man out.
When some event triggers a turn of the tide, they all head off back again. Even if a trader loses, he finds it easier to defend himself if he can point to the many others who have lost, too.
Even so, these markets comprise thousands of players, and there must be a good many who profit - and lose - from not joining the herd. Three years ago, the forward foreign exchange market was offering no hint that the euro would by now have risen by some 50 per cent against the US dollar; but it has, and there must be huge numbers of people who have won, and lost, as a result.
Whither now the US dollar? It is hard to recall any past occasion when, after such a large move in a major currency has already taken place, there remains such a wide spectrum of views as to where it is heading next.
The bears point to the continuing need to correct the US trade deficit and the fear, or expectation, of a major sell-off of US dollar assets by Asian central banks. But they perhaps fail to allow for time lags in the adjustment of the trade balance to the depreciation that has already occurred. And central banks are surely less likely to sell now that the US dollar has fallen so far and the probability of a further sharp fall has diminished.
The bulls point to the underlying resilience of the US economy and the fact that some of the global flow of money to Asia may be once again finding its way into bubble-type investments, or projects with poor and risky returns.
Therefore, they say, there will soon be a revival of investor sentiment in favour of the US (not that there was ever really a collapse), and hence sustenance to the US dollar exchange rate.
If I had to come off the fence, I would venture that the US dollar is probably now near its floor against the European currencies and the yen. Whether or when it may move against the yuan is a separate matter; it will depend in part on the mainland's appetite for accumulating yet more US dollar reserves; there is no clear sign of that abating yet.
But readers should not take my musings too seriously. If I had ever possessed any talent for forecasting exchange rates, I would certainly by now be affording myself the luxury of something rather more exotic than writing a newspaper column.
Tony Latter is a visiting professor at the University of Hong Kong
