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.

Big Mac Index 2008

Interest Rate Differential

Interest Rate Differential...updated Jul'08