Weaker USD-JPY in the short term

As we can see from the chart below we are looking at the USD felling to the JPY101.8 level in the short to medium term. The rationale for that is the more vulnerable US economy, the prospect for an Fed rate cut in the USD, and the unwinding of the carry trade.
At some point in time the USD might fall through this support, but it remains strong for now. Longer term I think it depends on what Japan does to arrest the impact of a softer economy. Historically Japan has been a country capable of radical reforms. eg. The Black Ships, Meiji Era, post-WWII reconstruction. But first it needs to develop some backbone. The current generation of Japanese people just have not suffered enough. The transition continues slowly.

It will take a charismatic leader with good advisors, but unfortunately they are likely to have streaks of nationalism in their air, so lets not hope for too much. But in true Japanese style, its just as likely to be just another pop-facade, ie. Kozumi - Mark II. My favourite Japanese politician is the Major of Nagano. He is a very smart guy, and he rides to work on a Harley Davidson with a side car if I'm not mistaken. Legend! Dancing with Richard Gere makes Kozumi a poor second. Having said that - you an't take Japan too seriously. Not for the time being. The US economy is by far the more flexible economy, so they are the odds-on favourite to hold that support at this time despite their problems in the debt & property markets.
- Andrew Sheldon www.sheldonthinks.com

Range trading & consolidating in JPY-EUR

I actually dont forecast much variability in this cross-rate. I see both markets soft with global demand. The JPY will be strong because of the unwinding of the carry trade, but exports will be weak anyway with the US, though might hold up somewhat in Asia. So I largely see consolidation in this market. So expect range trading between JPY143-168.
The promise of reform looks stronger in Europe at the moment, but then they will struggle with their currency issues and I think a softer Japanese market could actually push reforms there long term. But first they need to find a leader with balls.
Japanese personal debt levels are not so high, so there is some possibility support in the domestic economy. But since the Japanese consumers are easily spooked, I dont see that strength for some time. We also have to remember that Japanese employees are alot more vulnerable than in the 1980s since we have seen an increase in the proportion of part-time workers. The positive side is that these are mostly students and women, so in many cases they can return home or rely on a 2nd income. Though it might mean more tired single workers, thus less spending on everything - except rail transport. So if i was to invest in equities in future, I would be inclined to invest in pure rail operators without property development interests. But we are 6mths away from that bet.
- Andrew Sheldon www.sheldonthinks.com

New target for AUD-USD forex rate $US0.80

The AUD-USD has pulled back from its high of USD0.94 and is now trading at USD0.878. There are many factors working for and against the AUD - and I list the following:
Strong AUD arguments
1. There are alot of investments in commodities already in the pipeline that will feed through to higher commodity sales - albeit at higher prices. Bulk commodity prices (iron ore, coal) are locked in until Apr'08. Higher mineral and agricultural export capacity (from new new mining investments and farm restocking) will take time to feed through to export sales.
2. Australia is experiencing growing inflation. Alot of people think inflation is simply a demand phenomena, so as global growth stalls, so will Australian inflation
3. Australian inflation will require higher interest rates to offset the loss in real buying power of the AUD
4. The possibility of an improvement in agricultural exports as a result of the cessation of the drought
5. A fall in domestic spending will reduce imports, and in the short term strong export receipts should result in a much improved terms of trade, but the flight of dollars into JPY (carry trade) will weaken the current account deficit, and the AUD.

Weak AUD arguments
1. Higher interest rates and the deleveraging of the global economy are likely to unwind the carry trade that sees institutions selling JPY and buying riskier, higher yielding growth economies (currencies) like AUD, NZD, CAN. I think these funds will end up in the home economies.
2. The prospect of a slowdown in global growth is already affecting the perceived long term attraction of AUD. Commodity prices have actually been surprisingly resilient. I see 2 reasons for this: (i) China has yet to respond to the slowdown in the USD. As usual they tend to be the last to pick up on global outlook. They will slow purchasing only when they see softer orders. (ii) Weaker USD is actually helping support the USD price of these commodities. (iii) Post-Xmas, pre-Chinese New Year buying.
3. Higher inflation in Australia will undermine the real value of the AUD
4. Economic uncertainty, high household debt levels, rising interest rates, falling equity and property values will undermine Australian household consumption, which will slow economic growth.
5. Australia is more vulnerable than the USD because it is a smaller currency market - so there will be a flight to avoid volatility.
6. Interest rate differentials will not help the AUD because they are being achieved on the backdrop of economic softness, so the prospect of higher interest rates in Australia, and forecast Fed easing does not move me for now. Its also true that I think the Fed easing will do little to support the US economy, though will likely be justification for a short term rally in the Dow Jones.

As a result of this analysis I see the AUd-USD falling back to the strong $US0.80 support that was established between Jan-04 and Jan-07. Having reached that 'over-sold' level, I think you will see a retracement to $US0.87, and thereafter alot of consolidation for a number of years until debt levels are cleared to some extent, existing global industrial capacity re-absorbed and asset prices rising again. No doubt traders will have some fun in the currency market. But the lesson is - go easy on the leverage - this is a time for economic shocks. eg. Companies disguising weaker earnings, accounting scandals, failed banks and hedge funds. It has already started. This week the $US16 billion writedown by Citibank, then $US11billion by Merril Lynch.
- Andrew Sheldon www.sheldonthinks.com

Commodity based currencies in play

It is in times like these that you want to be trading the commodity based currencies. Why? Because markets are undergoing a change in perceptions - they are adjusting their growth & inflation forecasts. No currencies in these circumstances are better than the A$ - against the USD of course since commodity prices are based in USD. Looking at the charts:
1. AUD-USD: Its apparent from http://finance.yahoo.com/q/bc?s=AUDUSD=X&t=5y&l=on&z=m&q=l&c= that the AUD is at the base of an uptrend. You might legitimately ask - if this the end of the uptrend? I suspect it is not for this reason - base metals are still relatively strong and gold is getting stronger. Indistrial commodities like iron ore and coal are priced on the basis of 1 year annual contracts - those are currently being renegotiated. We might expect some weakness in iron ore & coal, but not alot. But expect delays settling. Looking at a short term price chart, and they are not the best charts, but they are the best I can do on the road - http://finance.yahoo.com/q/bc?s=AUDUSD=X&t=2y&l=on&z=m&q=l&c=. Here we can see that 0.79c looks like the best support for the AUD.
2. CAN-USD: The Canadian dollar is actually fairing alot better than the Australian dollar. The reason for that might be the fact that Canada exports alot of oil to the USA, though Australia also has some advantages. Australia is a bigger gold exporter, and Canada more reliant on base metals. Having said that Australia I think is poorly positioned to retain its status as a large gold producer. The bulk of exploration is moving offshore. The stark reality is that Australian explorers are seeing icey Greenland as more attractive than Australia. It must be a short mining season.... and I would hate to be carrying their heating bill. Pity the investors in that new float. Looking at the 5yr chart - we can see http://finance.yahoo.com/currency/convert?from=CAD&to=USD&amt=1&t=5y that the CAN$ is off its recent highs as oil prices got close to $US100/barrel. Recently they found support at USD parity ($1) http://finance.yahoo.com/currency/convert?from=CAD&to=USD&amt=1&t=1y, and it seems likely that we will see further short term strength in the CAN$, but dont count on it. Whilst oil prices might be strong, I think the broader economic outlook for bae metals will pull down the CAN$. I see weakness down to 95c support.

- Andrew Sheldon www.sheldonthinks.com