Currency Report: June

By Dr. Hans Black
Interinvest Review & Outlook

       After several uneventful weeks, the end of May became exceptionally volatile after France gave an emphatic "non" to the European Union constitution. With Holland, which is voting as we speak, expected to follow suit, the euro should trade lower but probably to a near-term bottom over the next several trading sessions. Although we could easily see a euro rally offset the present over-sold conditions, we still feel the path of least resistance for European currencies is decidedly lower. While it remains to be seen what the policy response will be to the earth-shaking political development in Europe, they cannot be looked upon as positive over the medium term. Our target for the dollar continues to be 1.10-1.15 against the euro and 1.35-1.40 against the Swiss franc.
        At this time of writing, the yen is trading close to 109, having been similarly affected by the strong dollar vs. the euro. As we have written a number of times in the past year, the fiscal situation in Japan remains precarious and unfortunately should lead to a substantially lower yen. Although many market participants seem to feel that the Chinese yuan revaluation will drive the yen higher, we decidedly disagree. Our medium term target for the yen remains 120-125.
        The path for the Canadian dollar has been largely dependent on the vicissitudes of the Canadian political scene. In May we witnessed several masterful strokes by the current Liberal government to ensure they will stay in power, including, but not limited to, the recruitment of a senior member of the Conservative party whom many had seen as a likely leader had she stayed on. We are referring of course to Belinda Stronach in what must be characterized as one of the most remarkable stories in modern Canadian politics. Despite the relative stability of the government, we feel that the path of least resistance for the Canadian dollar will continue to be lower and that near-term volatility notwithstanding, we see the loonie trading back in the 1.35-1.40 zone later in 2005 or early in 2006.
        Both the Australian and New Zealand dollars have also trended lower. We remain adamant in our expectation of lower prices in the weeks and months to come as both these currencies are overvalued and an accident waiting to happen. Clear evidence of a slowing Australian economy led by a weaker housing market should make market participants worry about lower, not higher, interest rates. For the moment we are maintaining out target for the Australian dollar in the .64-.68 zone while we still expect the Kiwi dollar to descend heavily to the .58-.61 trading zone.
        Editor's Note: Dr. Hans Black is editor of Interinvest Review & Outlook, P.O. Box 51462, Boston, MA 02205, 1 year, 12 issues, $125. Interinvest is a global money management firm with offices in Canada, USA, Bermuda and Zurich. www.interinvest.com