Has anyone looked at long term strategy of looking at just buying real growth/low money printing?

[Saltynuts]

Meanwhile back in 2002 the Swissie was worth approx 1.54 U.S. dollars

So, now I'm confused. I googled long term Sessie-Dollar prices, and found this:

https://www.macrotrends.net/2558/us-dollar-swiss-franc-exchange-rate-historical-chart


Sure enough, 1.54 back in 2002 looks about right. But look at present time. It is at about .8855. But in my link further up above, it lists current present time as ~1.114. So which is it? Or are they mirror images of one another? Seems nuts to have them quoted differently.

In that long term chart in this post, since 2000 has the Swiss Frank *appreciated* or *depreciated* versus the U.S. dollar? Now I am even more confused lol...

 

[SunTrader]

So, now I'm confused. I googled long term Sessie-Dollar prices, and found this:

https://www.macrotrends.net/2558/us-dollar-swiss-franc-exchange-rate-historical-chart


Sure enough, 1.54 back in 2002 looks about right. But look at present time. It is at about .8855. But in my link further up above, it lists current present time as ~1.114. So which is it? Or are they mirror images of one another? Seems nuts to have them quoted differently.

In that long term chart in this post, since 2000 has the Swiss Frank *appreciated* or *depreciated* versus the U.S. dollar? Now I am even more confused lol...

FX symbol is USDCHF and US Dollars per Swiss Franc (note with a c not k), Futures symbol is CHF and how many Swiss Franc per US Dollars.

 

[sef88]

Another newb question Sig. So do I understand these prices correctly?

https://www.barchart.com/futures/quotes/S6*0/futures-prices

1 Swiss Frank now gets 1.11 dollars, but at the end of 2025 it is forecasted to get 1.18 dollars more/less. So it is forecasted to increase in value versus the dollar. Just as I suspected haha!

By contrast:

https://www.barchart.com/futures/quotes/M6*0/futures-prices


For Mexican Pesos today they get .049 dollars and at the end of June 2020 they are projected to get .047 dollars. So a big knock against buying Mexican equities on the Mexican stock market.


That sound about right?

Thanks!!!

It's an incorrect interpretation. You have to consider the cash and carry effect.

 

[Saltynuts]

It's an incorrect interpretation. You have to consider the cash and carry effect.

Thank you sef88. I am googling this cash and carry, but can you explain why it would effectively stop the strategy I typed? Thanks!

 

[sef88]

Thank you sef88. I am googling this cash and carry, but can you explain why it would effectively stop the strategy I typed? Thanks!

If there's no change in spot price, the future contract will trend towards the spot price with 0 days left.

 

[Saltynuts]

If there's no change in spot price, the future contract will trend towards the spot price with 0 days left.

So what does that matter if I am not trading the futures? I see (just for example, made up) that the futures markets are predicting Swiss Francs (not K, thanks!!!) will go up versus the dollar. So I buy stocks of companies on a Swiss stock exchange. If the futures markets turn out right in their expectation, have I not made my g/l when I sell stocks on the Swiss exchanges, plus the gain in the Swiss Franc vis a vis the dollar?

Thanks!!!

 

[sef88]

So what does that matter if I am not trading the futures? I see (just for example, made up) that the futures markets are predicting Swiss Francs (not K, thanks!!!) will go up versus the dollar. So I buy stocks of companies on a Swiss stock exchange. If the futures markets turn out right in their expectation, have I not made my g/l when I sell stocks on the Swiss exchanges, plus the gain in the Swiss Franc vis a vis the dollar?

Thanks!!!

It doesn't matter if you are not not buying futures. The futures market is not predictive for spot prices. I suggest that you look up investopedia or some other places to understand how futures work.

 

[Saltynuts]

It doesn't matter if you are not not buying futures. The futures market is not predictive for spot prices. I suggest that you look up investopedia or some other places to understand how futures work.

Thanks sef88. Again, in my scenario I am not buying futures. Just like I'm not buying options. Or pork bellies from outer space. I direct you again to my question.

Thanks!

 

[Sig]

Thanks sef88. Again, in my scenario I am not buying futures. Just like I'm not buying options. Or pork bellies from outer space. I direct you again to my question.

Thanks!

The key thing we have to do in our mental model is disconnect the futures price of forex and the actual future price. That's confusing for sure. The futures price is a contract you can enter into today to lock in a price at a given time in the future. The pricing on this is entirely determined by the relative interest rates of the two currencies. The reason for this, as we discussed, is because otherwise a no-risk arb exists and that, for the most part, is always arb'd away if it gets too far out of whack. The actual future price, however, is not controlled by the futures price. Going to your example earlier, the futures price of MXN on say Dec 31, 2021 is .047 vice the current spot of .049. If you enter into that futures contract, then indeed you will end up with .047 MXN delivered to you on Dec 31, 2021. However the spot price moves up and down in response to supply and demand, as well as to any changes in interest rate that occur. So it's very possible that if you just held a cash position of MXN it would be worth .045 or .055 on Dec 31st. For currencies that aren't under some sort of peg by their government, it's very likely over the long term that a high interest rate currency like MXN will devalue vs a lower interest rate currency like the USD (Note the CHF pegged was and now isn't, making it a very bad historical example of what we're talking about).

However nothing says that this has to happen and over the short term it often doesn't. In fact, for many years in the 2000s the JPY had a far lower interest rate than almost any other currency so should have been appreciating but didn't. That resulted in what was known as the "carry trade" where one would enter into a forward contract and simultaneously enter the opposite position in cash and make a small profit at the end of the futures contract. That's pretty rare, so rare that this is the seminal exception to the rule everyone in forex brings up. But it does demonstrate that the futures price can definitely uncouple from the actual future realized price.

IMHO there isn't a lot of there there when it comes to trying to predict future forex prices, which are essentially a random walk around the futures price. There are some very small inefficiencies that you can arb, but its difficult to do so because you have to have your cash position and your futures position in the same account to offset one another as the currency randomly moves against one position and for the other during the contract term. Or you end up wiring money between the two accounts every few days to account for that, which eats up your tiny profit. Plus you need very high leverage to make any money off it and that means you're likely to get autoliquidated on one account even though net you're flat. You can also make bets on pegged currencies changing or eliminating pegs, that's were the real money is (it's how Soros made his money) but it's a black swan thing where you basically suffer small losses for years until you get one big payoff. If you want to get really advanced, there are some non-discretionary forex transactions that you can predict somewhat and trade off. For example, let's say you could trade the Dominican Republic Peso. The country's economy depends largely on tourism, bringing in a large amount of USD. That's stopped for the past year, but will probably start back this summer and fall. You can think through the impact of that sudden demand for DR Peso's that will happen in the fall that wasn't there for the past year and a half.

 

[Saltynuts]

Thanks so much for all that Sig, I really appreciate you taking the time to type all that out. A few follow-up questions:

1. Looking at the attached link:

https://www.investing.com/currencies/usd-chf-contracts

So the current spot price of Dollars-to-Francs is 1.115 dollars to buy 1 Franc it sounds like. The December 2025 future is at 1.864. And those are listed as "Swiss Franc" contracts. So if I buy one of those contracts, I am contracting to pay 1.864 dollars times the contract notional amount, whatever that is, for 1 Swiss Franc times that same notional amount, as of December 2025, correct? Or do I have that reversed?

Damn, that's a 67% increase in the value of the Franc expected in the value of the dollar over the next roughly 5 years. So is that not people forecasting that all this dollar printing the Fed is doing is indeed going to devalue the dollar vis-a-vis the Franc, with the Swiss government I assume printing mush less money than the Fed? Or would else could be expected to cause such an increase? Maybe its the "cash and carry" effect that I do not yet understand, or the interest rate effect that I don't understand.

2. Why would currencies with the lower interest rate tend to appreciate versus currencies with lower interest rates? I thought in the FX markets if one county had a higher interest rate than another the one who held the side of the contract with the lower interest rate currency had to pay the other one the delta in the interest rates? Wouldn't that push for the higher interest rate currency to appreciate? It might be tied into the whole cash and carry thing I don't understand.

3. Would this not be a true statement? "The December 2025 futures price between the Dollar and Franc set what the "market" believes will be the actual spot exchange rate between the two currencies as of December 2025 when it arrives." If that is true, and I think the market is right, and I also believe that there is no reason for Swiss stocks to perform worse than U.S. stock through December 2025, then wouldn't the right thing to do be to buy Swiss stocks on the Swiss exchanges, thereby converting dollars to Francs today, to take advantage of that (expected) appreciation in the Swiss Franc (in addition to any appreciation on the Swiss stocks), INSTEAD of buying those Franc futures, which already price in that anticipated appreciation?

Thanks again Sig!!!