The 2012 Recap – Part 2
In case you missed it, here’s part one of our annual recap.
We’ll jump straight in to part two.
6. The Dollar is strong – WRONG!
Well, I guess, technically, the Dollar was strong in the sense that it held in there. By July this forecast even looked brilliant. But the Dollar softened up a bit in the second half of the year, trading right back down where it began the year.
Along with my Dollar prediction I had a few tangential calls. I thought the Australian Dollar would weaken (it didn’t). I thought the Peso would be particularly strong (it wasn’t). And I thought the Loonie would have a great year (it sorta did).
It wasn’t a great year for guessing the right currencies. I was correct about abandoning the bearish views that had been dominating the mainstream for the previous year. But the Dollar just kinda held in there through 2012 instead of building much on the strength we saw towards the end of 2011. There’s a chance more of that strength is still to be seen in 2013, however.
LESSON: Within this failure there’s a good lesson. Currencies are incredibly difficult to predict. That’s nothing new, of course. But we forget that irrational Dollar pessimism is a prediction, a prediction that the Dollar will fall apart. That’s something to keep in mind the next time you get panicked about Q-Infinity or whatever. What appears to be an ironclad thesis in the world of currencies rarely materializes as such.
Currency markets are immensely powerful things and I think investors are better served using currency analysis to avoid the nations with the largest risks rather than trying to pick the ones that will outperform. An understanding of currencies is much more helpful towards protecting your capital and having it parked in the right places than it is for growing it. I’ve never heard any analysts frame it this way, but I think this is an important, subtle point.
Don’t try picking the currency winners, just worry about avoiding the losers. That’s good enough.
