Daily Brief – FX Rates in 2035

FX Rates in 2035

Goldman Sachs yesterday published their long term forecasts for FX rates in 2035. Those forecasts are based on the “mean-reverting behaviour of real exchange rates adjusted for structural factors such as productivity growth and terms of trade”. Before getting too excited, it is worth pointing out that using that methodology is exactly how FX forecasts have been made for many years albeit overlaid with the GS FX model used by them to calculate currency fair values. Not to be taken too literally other than as indications it is rather the direction of the forecasts that are worth noting: USD is 15% over valued at present; the Japanese Yen and the Chinese Yuan are undervalued; there is no clear valuation for the Euro; very strong potential in emerging market currencies such as the South African Rand and the Brazilian Real. Possibly useful to include in one’s world currency view toolbox but what is for sure: at some point in the next 10 years those forecasts will be judged to be correct – that’s the beauty of such a long timeframe with rather small price movement objectives. Except that is for the Japanese Yen which is predicted to rise to USD/JPY 100 versus the current USD/JPY 154. Now that would be a wave worth riding.

EUR/USD 1.1570.

WPP

In the not so distant past we used to measure the strength of an economy and in particular the global economy by how much companies spent on advertising as a strong indicator to reflect prosperity and confidence reflecting the willingness of the business sector to spend a slug of present revenue on generating additional future revenues. Then WPP was the largest advertising company in the world. Now of course Publicis has assumed that mantle. The other implicit assumption is that the advertising industry includes the sharpest minds and the most savvy operators in business who are adept at selling dreams and at the same time prising money out of company boards. Those assumptions are currently being tested as WPP shares slump due to changing advertising spend. WPP has not kept its share of global market wallet having struggled to tap into social media and so far has apparently failed to ride the wave of AI.

EUR/JPY 178.41.

Government Debt to GDP Ratios

A country’s economic health is acknowledged as being reflected in its government debt to Gross Domestic Product or GDP ratio. All too often we hear about the UK with a GDP ratio of almost 100% or Japan at the very back of the class in the sin bin at 230%. There are plenty of smaller economies at the other end of the spectrum in other words at the front of the classroom and with low GDP ratios: Saudi Arabia flush with oil revenues and not needing to borrow at 29%, Iran unable to borrow at 36%, natural resources rich Indonesia at 41%, Chile at 43%, and Australia at 51%. Then there is South Korea at 53% and Mexico at 59%. But at the very top of the class is gambling territory Macao which is the only economy we could find at 0%.

GBP/USD 1.3152.

Ski Season

With the news that snow has been falling in the Alps and chichi resort Verbier, Switzerland already clicking into its ski bindings and opening the resort tomorrow, anticipation is building for the 2026 ski season among some of our clients. One lady reader commented that the cost of a week’s skiing for her family of 5 was simply unaffordable during the school half term, let alone the holidays. To test out whether this was merely anecdotal or whether winter skiing costs really have taken off, we asked for a quote from one of the ski companies for 2 people to fly business class to Colorado and stay in a resort hotel for 1 week in March. The quote came back for 2 people to fly on United to Denver on a room only basis (breakfast extra) with 2×6 day ski passes included at a stratospherically unaffordable GBP 32,885. Faster than a meteorite, permafrost set in on the notion of Colorado as a 2026 ski destination, and on the basis of that quotation alone, skiing in North America and travelling business class is for plutocrats and oligarchs only.

GBP/EUR 1.1363.

Chislehurst Caves

Looking for rock n roll behaviour in previous years on this the day of Halloween, I came across this gem from 1974 when Led Zeppelin needed a launch pad for their then new record label, Swan Song and selected Chislehurst Caves deep in the heart of the South East’s stockbroker belt. If that sounds a bit tame, drinks that night were served by nuns in suspenders, a naked woman lay in a coffin covered in jelly and naked male wrestlers put on a display that female attendees are still gasping about 50 years on. Doubtless this number featured in the proceedings:

There’s a lady who’s sure all that glitters is gold
And she’s buying a stairway to Heaven

When she gets there she knows, if the stores are all closed
With a word she can get what she came for

Ooh, ooh, and she’s buying a stairway to Heaven

There’s a sign on the wall, but she wants to be sure
‘Cause you know sometimes words have two meanings

In a tree by the brook, there’s a songbird who sings
Sometimes all of our thoughts are misgiven

Ooh, it makes me wonder
Ooh, makes me wonder

There’s a feeling I get when I look to the West
And my spirit is crying for leaving

In my thoughts I have seen rings of smoke through the trees
And the voices of those who stand looking

Ooh, it makes me wonder

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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