Global Markets Update: Gold Downside, US Dollar Upside; + BMI Expects Myanmar Kyat Depreciation

Occasionally, a chart comes along that signals a potentially massive shift in global financial markets. My colleagues and I thought that of the extraordinarily overextended move in oil prices in July 2008, for example, which led us to believe that an inflationary boom was about to turn to a deflationary bust as oil prices moved sharply lower.

At this juncture, the spot gold price offers up such a chart. Gold is likely to find technical support in the short term in the US$1,520/oz area. However, any break below this level could well trigger a major correction, leading to a medium-term unwind of many of the gains witnessed over the past decade.

The potential downside for gold would tie in with a very strong upward move in the US dollar in the months and years to come, as suggested by the historic record of dollar bull runs (1980-1985 and 1995-2001), which occurred alongside weakening gold. Therefore, should this move happen, it would very coincide with our ongoing and long-held bullish view of US equities, which recently broke to all-time highs, as well as our positive stance towards the US economy and the dollar. This would also correspond with our long-held view that developed market stocks will continue to outperform emerging market stocks over a multi-year horizon.

Myanmar Currency Depreciation Ahead

Meanwhile, BMI has published its latest forecasts for the Myanmar kyat currency in our online service and in our weekly Emerging Markets Monitor magazine. The kyat has weakened by 2.8% since the beginning of 2013, and we see little reason for this trend to reverse itself in the near future. Indeed, the kyat remains a somewhat expensive currency in view of prices within Myanmar’s key economic hubs (particularly Mandalay and Yangon), and government and central bank officials have repeatedly issued statements indicating their preference for the unit to weaken further. We therefore expect the kyat to end 2013 slightly weaker at MMK904/US$, compared to MMK880/US$ today.

As we saw in other countries that witnessed a rapid and sudden increase in foreign direct investment (FDI) after opening their doors to the global economy (such as Vietnam in the early 2000s and Mongolia in 2007), Myanmar’s current account will likely fall into deficit over the coming years as capital and consumer goods imports soar on the back of strong economic growth.

While much of this deficit will be financed by FDI, the net effect on the kyat will nevertheless be negative. As such, we are forecasting moderate depreciation of the currency, averaging 3.0% per annum through to 2018.

Risks to this forecast are to the downside. In the event of a global economic shock, Myanmar would likely witness a substantial retrenchment in FDI inflows, while the current account deficit would likely remain stubborn. Furthermore, Myanmar is still fraught with considerable political risks, and a misstep by the government in the management of these risks could prove catastrophic for the country’s nascent economic reform drive.

Investors who are looking to enter the Myanmar market but are unsure of the interplay between the country’s political and economic risk environments should find our article useful. Further analysis of Myanmar can be found in our Cambodia, Laos, and Myanmar Business Forecast Report and in our online service.

BMI Forecasts Other ‘Exotic’ Currencies Too

BMI has a long history of tracking and forecasting ‘exotic’ currencies, that is to say, the currencies of frontier markets. On our website, subscribers can access forecasts for currencies such as the Armenian dram, Guatemalan quetzal, Haitian gourde, Iranian rial, Mozambican metical, Ugandan shilling, and Uruguayan peso, among others, as well as more ‘mainstream’ emerging market currencies and, of course, the majors. We kid you not.

This Week’s Trivia Question

Our previous trivia question had an Easter theme. We asked, which prolific spy thriller author wrote a novel in the 1970s that ends with the revelation that Jesus did not die on the cross, but was in fact substituted by another prisoner? And, along similar lines, which Asian country has a small town that claims to have the ‘Tomb of Christ’? The answer to the first part is Robert Ludlum (best known for The Bourne Identity and follow-ups, and the book in question was The Gemini Contenders (1976). The answer to the second part is, intriguingly, Japan.

For this week’s question, we are sticking with the theme of obscure currencies. Which currency has apparently doubled in value against the US dollar over the past six months, due to a big influx of funds from expatriates? Hint: the country is recovering from a long period of conflict.