Japanese yen sinks to forecast Y86 level

In May 2009 I made the forecast (see blog post here) that the USD would fall to 86.5 before it would recover. This happened on the 7th October 2009, or near enough. The USD has been in a recovery against the Yen since. I would not be surprised to see the USD-JPY fall back again to this level before it rises. The justification will be primarily stronger interest rates in the US.

The prospect of an increase in energy taxes will also help the country's tax receipts and the terms of trade. I would not however be expecting any great improvement in the USD however....but expect some consolidation. The USD remains technically in its down trend against the Yen.

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Andrew Sheldon www.sheldonthinks.com

The USD set for further weakness

I'd be willing to bet that the USD is set for further falls against the Japanese yen in the coming months. All that Fed pump-priming has placed solid support under the stock market, no doubt raising confidence in the business-end of the US market. The problem of course is the continuing rise in unemployment and the decline in retail sales. We might ask whether the market is anticipating a recovery, or some sustainability in the equities market. I think there is little prospect of that. The USD and equities are likely to weaken, however it will not be a total collapse since there is no significant inflation in the market yet, and a little bit of inflation works wonders for balance sheets.

For the reasons above, I am expecting the USD to fall back to 87 yen over the next 6 months, thereafter I would expect to see some strengthening in the USD as property prices are perceived to have bottomed, and interest rates are raised to boost savings. Expect energy taxes in the US at this point to improve the US budget deficit. The weak USD will of course help offset the 'below the line' deterioration in US export competitiveness. At this point I don't see a fall to the Y80 mark, as occurred a number of years ago (see earlier posts), though I leave an open mind on this point. A short-lived fall to Y80 is possible. I actually don't regard this correction (recession) as an end to the bull market. I think the derivatives market will take the global economy to new highs until the derivatives market ultimately collapses in 10-15 odd years. The recovery will affirm the positive thinkers that their management was always good. The regulation that you might perceive today is really just perception-based. Regulation in future will be no better than in the past. Companies will get away with dubious disclosure.
There are a great many people expecting tragedy from the US market. Basically I don't see that. The US is one of the freest and most dynamic countries in the world. So as long as that is true, and it could be a great deal freer, then it will continue to trump the EU and Japan. It will do what needs to be done. Savings will need to be boosted as occurred under Clinton, to correct the imbalance left by Reagan. Most of the US imbalance was corrected just by the collapse in spending.
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Andrew Sheldon www.sheldonthinks.com

AUD set for weaker outlook

Australia has had a strong recover over the last 6 months, rising from 62c to 82c to the USD. In the next 6 months I would not be surprised to see the currency come off. There are of course some positives:

1. Some recovery in commodity prices
2. Government stimulated economic activity
3. Residual mining & energy investment
4. Continued weakness in property

The negatives are:

1. Decline in bulk commodity prices - priced annually based on Apr price fixtures for iron ore

2. Rising public deficit

For these reasons I believe the Australian dollar will pull back to 73c, but probably not before rising to 85c. Clearly the justification for a stronger AUD will be a weaker than expected USD. I don't expect this. I believe the US is looking at higher interest rates to boost savings, and higher energy taxes. I believe global warming will provide the justification for a carbon tax, but in this national emergency the proceeds will be spent on anything but the environment. In fact, the whole idea of artificially stimulating economic activity is contrary to stopping global warming. So I am expecting some Clinton-like austerity measures which will be strong on US interest rates, so a strong USD. So I'm expecting a 73c medium term target for AUD-USD.

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Andrew Sheldon www.sheldonthinks.com

EUR to reach 1.45

The EUR is probably likely to go higher against the USD, but I would wait for confirmation of that trend because there is still more scope on the downside. I am however expecting the EUR to reach 1.45 in the next month.

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Andrew Sheldon www.sheldonthinks.com

USD-JPY looks like falling to 86.50 yen

The USD technically looks like weakening. The head & shoulders pattern is indicated. There will be two points you can look for - a breach of the uptrend, and a confirming break of the 95.75 support level.
You might have expected a Clinton-like response from Obama on policy. But given the capacity of higher interest rates to undermine the housing sector, you can expect taxes on energy and the wealthy.
There is a meeting of countries in Copenhagen in Oct'09. I think that they will conclude that an agreement on Climate Change is too hard, so why don't we just tax energy heavily, reduce our reliance on the Middle East, raise a lot of money from discretionary spenders, give food vouchers to the poor, and just think deep thoughts about climate change. It was always only a facade to bring in a more comprehensive energy tax. Goerge was against it since it would have undermined his share price for Halliburton, but Obama fear not for the environment. That ought to raise a lot of tax as well, and I think America just might see a 'green is good' religious conversion as well. I am expecting they will annoint a 'green god' in the likeness of Obama.

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Andrew Sheldon www.sheldonthinks.com

The Yen set to strength against USD

After the recent rally in the USD I would be looking for some weakness. The market is due for some bad news. My bet is that the bad news over the next few months is going to be the 2nd stage of the property crisis. Stage 1 was the sub-prime mess, and next we are about to move into a succession of ARM-reset initiated foreclosures. This will kill any confidence inspired by the recent rally in equity markets. I would also suggest that it will also likely prompt the Fed to bail the US government out of another truck load of debt.
Anyway, this chart structure is telling me that there is considerable (6-point) resistance to a stronger USD, so on this occasion I sold USD-JPY. The target price is around 94.60.

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Andrew Sheldon www.sheldonthinks.com

AUD and NZD appear consolidating

The Australian (AUD) and New Zealand dollars (NZD) have recovered against the USD from their lows over the last week. There is more upside, but I would not expect it to last. There is really no basis for celebration in the coming months, so I would expect a series of short term rallies. The idea that low interest rates can stimulate the NZ and Australian economies is really false advertising. Since when is the answer to excess debt more debt. We will instead see more printing money, but give it time. In the meantime, its denial.
A stronger outlook for these economies can be expected when we see a recovery in food prices. Basically the problem with these two countries is that we need to see a lot of deleveraging. So we are not going to see a lot of spending by the private sector. Expect government public works. The farm sectors will fare the best, but they are just a smart part of the economy, but they will help the external account for both economies.
The NZD and AUD are likely to consolidate for a while. The John Keys Conservative government is saying the right things so I would expect foreign markets to be supportive of his government.

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Andrew Sheldon www.sheldonthinks.com

NZD outlook presents good investment prospects

The NZD is languishing at new lows of 49.5c to the USD. The question is - will it fall further to 40c, the hostoric low last reached in 2003 if I am not mistaken. At that time NZ was battling a bad current account deficit, much like today, and like today it was contending with a low commodity price outlook. In this context, one might expect the NZD to fall to 40c. The problem I have with this scenario is the weak outlook for the US economy. I am thinking we can expect a lot of monetary inflation in the US, but we might also expect some taxes on the rich and an energy tax. We need to remember that any slowdown is going to demand the government to raise taxes since Bush was engaged in tax reductions, now we are looking at tax increases.

The weak NZD is going to be a saviour for the NZ economy, and the prospect of NZ expatriates returning from abroad cashed up from offshore earnings is going to offer a stimulus of its own. I suspect a few Europeans and Americans might also be considering retirement in NZ, and some families will be changing their priorities, and deciding emigrating to NZ means more times for the kids. These are the dynamics which move a small nation like NZ. Falling NZ interest rates however suggest that we might just see the NZD move to 40c. As per normal, we should watch the market for some direction. Certainly the falls in equities are reason to think the NZD is not going to be a growth currency for some time. But perhaps you might consider buying property in NZ at this time. Economic malaise creates the best possible setting for contrarian investments. You can buy a house in NZ for as little as $NZ68,000 (USD35,000). This is a natural move for retirees, intellectuals, programmers and international explorers. In 5 years you will be able to sell any property investment at a higher exchange rate. More info here. Chart updates from Yahoo Finance.

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Andrew Sheldon www.sheldonthinks.com