By Dr. Hans Black
Interinvest Review & Outlook
European currencies were largely steady throughout October and widespread dollar bearishness. Given the extreme sentiments in the market, we are somewhat surprised that a larger move has not occurred. It should also be noted that despite the higher prices for the euro at this moment, the Swiss franc is still trading below the levels of previous extremes in late 2004 and in mid 1996. We continue to anticipate a major bottom for the dollar and that the path of least resistance over the next 12 to 18 months will be higher. For the moment, we are maintaining our 12-month target for the Swiss franc to trade close to 1.40 and for the euro closer to 1.20.
Once again it is worth noting that the price of the Japanese yen is virtually unchanged from where it was one month ago. Trading in this currency continues to be, at least in the short term, an expression of the success in the carry trade field. Market participants are concentrating on yield advantages and not necessarily on some of the fundamental weaknesses that are reappearing in the Japanese economy. We believe that although the yen will weaken decisively over the longer term, there is a chance that with any substantial unwinding in euro/yen positions, it may indeed strengthen over the next two to four months. Embedded in this thinking is our attitude toward the credit markets, rather than toward some of the more serious issues facing the financial system as a result of their debt structure.
The Canadian dollar keeps us perplexed and humble. It is creeping higher despite all the fundamental reasons that tell us it should not be doing so. As we have learned on many occasions, sometimes the best thing to do during irrational markets is to stand aside. Once rationality returns, it does so very quickly. It is our sense that the Bank of Canada is extremely uncomfortable with current levels and that here, too, we will see a rapid rebound taking the Canadian dollar back up toward 1.20-1.25 rather than at the current level of just under parity.
Both the Australian and New Zealand dollars continue their visit to the stratosphere, although it should be noted that the Kiwi dollar has been noticeably weaker. Both of these currencies face considerable downside risk due to carry trade unwinding, which we expect to occur again in earnest.
Editor's Note: Dr. Hans Black is editor of 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 affiliated offices in Boston, Montreal, Hamilton (Bermuda) and Zurich.
