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Silver Wheaton Corp. Message Board

  • freetoquestionu freetoquestionu Feb 2, 2013 9:10 AM Flag

    Currency wars

    Interesting piece on the yen and euro and the impact of devaluation.

    Say you're a Doc, working out of NYU Hospital on 1st and 34th, and on October 29 you park your car in the lot next door. Sandy rolls in, and the next morning your car is 20 feet underwater. You've got insurance, so a week later, check in hand, you look at new cars and narrow it down to two. A decked out Lexus LS460 and very nice Audi A8. The walk out price on both cars comes to 80 grand. Which one do you choose?

    That was just three months ago. At that time the relative value of these cars was equal. If you assume that 80% of the cost of the car was the imported value, then you were "paying" 50,394 Euros for the Audi and 512,000 Yen for the Lexus. At the exchange rates in early November, the Euro component of the Audi was $64,000 (80,000 X 80% X EURUSD 1.27). The Yen cost was also $64,000 (80,000 X 80% /80.00). The EURJPY exchange rate was 102.
    Today the EURJPY FX rate is 1.2650. The dollar cost of those Euros and Yen have changed substantially. $68,900 is now the Euro component of the Audi (+3,900). The dollar cost of the imported Lexus has fallen to $55, 350 (-$8,649). Looking at just the FX rate changes, the cost of the Lexus is down to $71,350, the Audi is up to $84,910. In three months there is a $13,560 price gap. Now which one do you choose?

    I bring this up to make the point about how very rapidly the terms of trade have turned against Germany (all of the EU) and in favor of Japan. What is striking, is how quickly the adjustment has been. Consider this 15 year chart of the EURJPY:

    Sentiment: Buy

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