By Dr. Hans Black
Interinvest Review & Outlook
Volatility has increased again in a number of different currency markets as participants continue to be thrown from side to side by a confluence of events. One minute Greenspan tells the world that interest rates must go up and just a few hours later a hurricane hits the United States and interest rates may not go up at all. This has been the currency market of the past several weeks. Over time, however, we continue to believe the dollar will work its way higher and the current rally for the euro should fail between 1.24-1.26. Eventually the euro should head down and test the lows earlier this summer below 1.20. Over the medium term we maintain our targets of 1.10-1.15 against the euro and 1.35-1.40 against the Swiss franc.
The yen has largely reacted in tandem with the same forces that have thrown European currencies up and down over the past several weeks. Indeed, now that the uproar over the Chinese government's decision to float its currency has largely subsided, we expect the yen to trade in a relatively tight band between 108-112 for a while longer. Should our worst fears about the Chinese banking system be realized, the yen will inevitably weaken as the Japanese economy is now so export dependent for growth. Ultimately we still believe that the path of least resistance for the yen will de downward and perhaps even profoundly so.
The Canadian dollar has continued to trade in a somewhat erratic manner. Although it has clearly reacted to higher oil prices in recent weeks, we continue to view the Canadian economy with a great deal of skepticism. Recent numbers for housing starts and employment are weaker than expected and in time we believe should lead to a weaker currency as well. In addition, the most recent rate rise engineered by the central bank in Canada will likely be the last for quite a long time to come. For the moment we are maintaining our medium-term target for the Canadian dollar between 1.35 and 1.40, possibly achievable late this year or during 2006.
We remain negative on both the Australian and New Zealand dollars, believing as before they are both vulnerable to any shocks in the global economy. Should the aftermath of Hurricane Katrina prove to be a more destabilizing factor for the global economy, we would expect both Australia and New Zealand to lead on the way lower. For the moment, we are maintaining our medium-term targets in the low .60s for the Australian dollar as well as the .58-.61 for the New Zealand dollar.
Editor's Note: Dr. Hans Black is editor Interinvest Review & Outlook, P.O. Box 51462, Boston, MA 02205, 1 year, 12 issues, $125. www.interinvest.com. Interinvest is a global money management firm with offices in Boston, Montreal, Toronto, Hamilton (Bermuda) and Zurich.
