By Dr. Hans Black
Interinvest Review & Outlook
European currencies strengthened in early July only to give up these gains as the problems in the credit markets continued. The euro, which started the month just under 1.36 and made it up over 1.38, is now almost back where it began as this is being written. Similarly, the Swiss franc strengthened and then weakened along with other European currencies. We believe the actions regarding the credit markets will be at the heart of changes in the months ahead. Despite numerous opinions to the contrary, we expect the dollar to strengthen as global liquidity shrinks and various bids against the dollar are reversed. We maintain our target for the euro at 1.10 within the next 6-to-12 months and for the Swiss franc to trade lower toward the 1.40-1.45 level over a similar time frame.
The yen, consistently weak over a number of months, has strengthened lately as the now infamous carry trades are unwound. While this process has probably further to go, we suspect the path of least resistance for the yen is further weakness. In cross trade terms, however, and particularly against such high-yielding currencies as the Australian and New Zealand dollars, we expect the yen to strengthen. The upper house election in Japan is a considerable blow to Prime Minister Abe and will likely exacerbate his political problems and those of Japan in general. We maintain our target of 130 for the yen against the dollar later this year.
With the Canadian dollar, we concede that ultimately citizens know best and the citizens are back to doing what they did so often in the 1980s - heading south. Given lower sales taxes and generally lower prices south of the border, is there any wonder that Canadians are heading in droves to shop there? More eloquent than any economic discussion, this action is an important signal as we remain convinced the loonie is one of the most overpriced currencies. Reliance on high base metal and energy prices should in time fall by the wayside as we anticipate a drastic change in the real value of the Canadian vis-à-vis the US dollar.
Both the Australian and New Zealand dollars finally succumbed to the inevitable downside pressures we have described in recent months. In the case of the Kiwi dollar, in three days it lost all the gains made last month, illustrating what some unwinding due to credit issues or problems with carry trades can do. We continue to consider both currencies as extremely overvalued and would urge the negative view going forward. For the moment, we maintain our target for the Kiwi dollar to trade in the low .60s in the next 6-to-12 months and for the Australian dollar to trade into the low .70s over the same time frame."
Editor's Note: Dr. Hans Black is editor of Interinvest Review & Outlook, P.O. Box 51462, Boston, MA 02205, 1 year, 12 issues, $125, published by Interinvest Corp., a global money management firm. www.interinvest.com.
