Currency Selection - PPP (Purchasing Power Parity)

Over the short term, interest rate differentials govern currency moves.  This includes a widening spread versus a narrowing spread.

Because un-leveraged currency returns are smaller than stocks, I don't chase currency returns in the short-term. I also don't want to deny a value opportunity because of currency.

Over the long run (5-7 years), you want to own the currency with the highest purchasing power.  Currencies will revert to the mean over time running from undervalued on a PPP basis  to overvalued. Of course, you want to sell overvalued and buy undervalued currencies.

Selected Big Mac Index Currencies...Updated July'07

Overvalued +%

Iceland 124%

Switzerland 53%

Denmark 49%

Euro Area 32%

UK    17%

Canada 9%

US 0%

Czech Republic    -27%

South Africa    -35%

China -58%

The best currency by far is the chinese yuan.  It will double from where it is to 0.30 to the USD.

Last interest rate change (widening differential favors currency)

Latest Central Bank Decision-

US                           Decrease

ECB                        Flat

Japan                       Increase                

UK                           Decrease

Canada                    Decrease

Australia                 Increase

On a short-term basis, Australia and Japan are the best currencies.

US - ECB        widening

US - Japan       widening +

US - UK          flat

US- Canada    flat

US - Australia  widening +