By Dr. Hans Black
Interinvest Review & Outlook
As far as the dollar is concerned, October was truly a mixed month as dollar weakness during the first half of the month was replaced by dollar strength into early November. Significant corrections took place in a number of currencies and this included the major European currencies as well. Worries about the strong euro prompted a number of European central bank officials to comment on the problems that this posed for their domestic export markets. The euro retreated at one point below 1.47, and as this is being written, the Swiss franc has just touched 1.03 versus the dollar, the highest point this month. For the moment we are maintaining our positive view toward the dollar in European markets, believing that we will see both the euro and the Swiss franc move significantly lower over the next eighteen months.
With each passing week we look at the Japanese economy and indeed the Japanese government with increasing puzzlement and even perhaps bewilderment. After all, with an aging and declining population, savings rates close to zero, and accumulated deficits now at 200% of GDP, the new government led by Mr. Hatoyama has very little room to maneuver indeed! The U.S. treasury secretary Timothy Geithner has stated publicly that the Japanese should re-engineer their economy away from a dependency on exports: easy to say - but not so easy to accomplish. Over time we believe that the yen will decline significantly as the country, after twenty years of problems, has almost no wiggle room left.
The Canadian dollar weakened during October as the combined effect of verbal intervention by the Bank of Canada as well as generally weak statistics (GDP, consumer spending, etc.) have take some of the shine from this currency. We find it impossible to believe that the Canadian economy, perched on top of the struggling US market (still the largest economy in the world) will escape scott free. Indeed, many of the trends we are noticing convince us of the opposite. Over time, any slow-down in the global recovery will once again propel the Canadian dollar sharply lower, a process which we believe may surprise many. For the moment we are maintaining our 1.30-1.35 twelve-month target.
Both the Australian and New Zealand dollars have also declined during October as the sharp run-offs of the previous months were largely reversed. Here too, we remain quite skeptical over the prospects for these currencies should any slow down in China materialize during 2010. Indeed, as our clients know, we are quite worried by the situation in China as we feel surprises over the next twelve months may be to the downside.
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 by Interinvest, a global money management firm. www.interinvest.com.
