FOREX Trading

New European currency bloc needed

2011-06-30T16:45:00.000-07:00

In March 2010 I penned a blog article suggesting that the southern European countries - Greece, Italy, Spain and even Portugal - which are struggling with high debts - should form their own currency bloc. Its gratifying to see Warren McGibbin, director of the Reserve Bank of Australia (RBA), draw the same conclusion. You can read his justification here. Might I suggest a name for this new currency - the drip - to acknowledge the 'slow leak'.

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Andrew Sheldon www.sheldonthinks.com

The emperor has no money

2011-04-20T20:08:00.000-07:00

Have you heard the one about the 'emperor having no money'. It is a variant on the theme of 'the emperor with no clothes'. It highlights the moral relativism or 'monetary rationalism' that goes blistfully unawares in the largest economies in the world. Consider these facts:

1. Most of the world's financial resources are denominated in USD, EUR or Yen

2. Most of the world's wealthy people are located in those countries as well.

Monetary authorities in these countries need not draw attention to their economic malaise if they all sabotage their economies in the same stride. i.e. The Japanese have a bloating public debt of 220% of GDP, Europe has the indulgent southern and northern states to support, whilst the US has its twin deficits. Now, these countries account for so much of the global wealth base, that if any large public or private holder of these cuurencies decided to do anything, what difference would it make? The 'rest of the world' is too small to account for significance.

The implication is that currencies like the Australian, Canadian dollars, South African Rand, etc can become priced very high in USD terms, and these currencies will remain in-sync, and thus relatively attractive by virtue of the size of these economies. None of the monetary authorities will question the strength of these commodity currencies.

So what is the next step? The problem is that these 'strong' currencies will be forced to sabotage their economies too so that their currencies weaken. After all they have to remain competitive against the major currencies....otherwise they will simply become miners of commodities, which employs only 3-5% of any labour force directly. Clearly they are not going to allow that. So expect commodity producers to sabotage their economies, i.e. Expect them to increase taxes and welfare, so that a greater piece of the cake goes into unproductive welfare. Expect them to keep interest rates artificially low to drive their currencies down.

This is where perceptions become more important than facts. That is why the 'emperor has no clothes'. People care not about the reasons....so long as the illusion of comparative advantage or the illusion of wealth is preserved. In the meantime, the global wealth creating potential of the globe will be sabotaged. Collectivists around the world can rejoice....they are extending tyranny to the strongest nations in the world. The good will be forced to discard financial discipline. Morality or fiscal responsibility will become irresponsible or impractical by this standard of value. Welcome to the contemporary system of public administration. It was always there, you just didn't see where it was taking you. It gets worse...are you going to wait for worse?

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Andrew Sheldon www.sheldonthinks.com

The AUD will continue strength - $1.25 anyone?

2011-04-07T20:43:00.000-07:00

You might wonder for how long can the AUD exchange rate sustain its strong rise against the USD. I would suggest that it can do it for a while yet. We might think that the strong $A is going to jeopardise our international competitiveness. The reality however is that:

1. Until recently, the USD was being debased more than the AUD was rising. This is evident against other currencies such as the Philippines peso, a strong Asian market, which is not a significant commodity exporter. It should be, but corrupt/failed state impacts its prospects.

2. The AUD is benefiting from stronger commodity prices, but alas they have tends only to strengthen because of a weak USD, which most commodities are denominated in.

3. The Australian economy is such a commodities export machine sitting on the door-step to Asia, so there is good reason to expect strong export income growth, as well as strong business investment.

4. Australia is a net oil exporter. We must remember that whilst Australia produces little oil, i.e. about 60% of its needs if I recall correctly, it produces a hell of a lot of gas, and conventional and liquefied gas is priced based on an oil reference price, i.e. If there is a Middle East crisis, a lot more energy dollars is coming to Australia. Mind you some of it will be flowing out again as dividends to US, European and Chinese/Japanese/Korean equity partners.

5. These strong exports is driving more investment, which leads to capital inflows, i.e. strong $A.

6. High local indebtedness: The Australian private household is well-geared to property. The Reserve Bank is going to keep interest rates low so that people keep spending. i.e. It wants people spending as much as possible because the domestic economy will be a little weak...mind you unemployment is pretty good. But people will not be confident about the external world. But interest rate rises will probably depend on if housing turns into a bubble...so there will need to be some increases in prices coming...to cool that market.

It is true that tourism will be hit by a strong AUD, and the government is clamping down on immigration growth. We can also expect some weakness in the broader market thanks to weakness in property. A little weakness in the broader domestic market might actually help to curtail spending. Fears of inflation, problems in the Middle East and the US economy also help.

For these reasons....I think the currency will stay strong.

I just don't see anything negative on the horizon. I don't see China collapsing. High oil prices will hurt Asia more than Western markets, though its probably tensions in the Middle East will probably not impact oil production.

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Andrew Sheldon www.sheldonthinks.com

Australian dollar lives up to expectations

2011-04-03T17:56:00.000-07:00

For a number of years I have been very bullish on the Australian dollar. The reasons are clear for a person with an understanding of currency markets and mining. I have both. So when you witness the activity going on, and you read headlines like the following - one becomes sharply optimistic:

"HSBC estimates the total value of Australian mining and resource projects proposed or under construction at $777 billion, or about 60 per cent of gross domestic product".

The implication of this is that in a few years there is going to be mining operations contributing about $150 billion in wealth to the Australian economy, i.e. about 15% of GDP is going to be added to the Australian economy. We need to be careful here because:

1. Not all these projects are committed

2. These are capital costs - but we might expect conservatively a 4 year payback on these projects

3. These projects will have variable mine lives, anywhere from 3 years (for smaller gold mines) to t0 20-30 years for a gasfield, to 50 years (for iron ore mining projects)

4. Resources are still being discovered

5. Mineral prices are still rising, and can be expected to keep rising so long as the global labour market place keeps liberalising.

6. A mining project can take anywhere from 2-10 years to commission.

Based on this information, we might expect around half of this investment to be earning export dollars in the next 3 years (i.e. 25% of 30% of GDP) offering 7.5% growth in GDP. i.e. Mining is adding about 2.5% growth to GDP. But then we need to acknowledge that this is just part of the economy, and this ignores the capital inflows to fund this investment.

This is why it is good to be Australia. Well actually there are a lot of reasons. In fact, I can only think of one bad one. We have a government - 2nd only to Mussolini in terms of is fascist foundation for governance. Australians are unwittingly vulnerable given they are just basking in jobs, high pay and excess sun.

This is obviously a problem because people will start spending, raising foreign debt levels, people will stop working, reducing workforce participation, and thus economic efficiencies tend to creep in. That is when government starts importing labour...which brings you to Australia. The land of milk and honey..and bad government. A miners paradise. Clearly there is some vulnerability to global events; most particularly global metal prices. I actually think we can expect some vulnerability as a result of an oil price spike in the Middle East, as revolutions broaden in scope.

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Andrew Sheldon www.sheldonthinks.com

USD-JPY set to weaken

2011-02-08T15:14:00.000-08:00

The current chart for the USD-JPY is strongly suggesting a fall in the USD back to 80yen. The USD has struggled to break out of the current trend, and we expect it to fall back to that support. This is the short term price action, though we do believe that the medium term outlook for the USD is stronger than for the JPY. The Democratic Party of Japan (DPJ) has allowed its fiscal reform opportunity to slip away with in-fighting over leadership. It is therefore expected that any sign of reform is at least a year away; perhaps under a new prime minister and some reinvention of the LDP.

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Andrew Sheldon www.sheldonthinks.com

Australian dollar set to recover

2011-01-05T20:09:00.001-08:00

The Australian dollar can be expected to recover in the next week, holding out above $1.00 parity with the USD. The principal reason I think will be a weaker USD based on the cross-rates. The USD has recovered against the Yen, but it will quickly wither, and test previous low.

The Euro also looks set to strengthen against the USD, though I'd stick with the hard currencies, not the pretend (main) ones.

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Andrew Sheldon www.sheldonthinks.com

ECB repudiated by British representative

2010-11-25T14:24:00.000-08:00

This is an interesting excerpt from the last meeting of the European Central Bank, where the British representative Nigel Farrage MEP gave a stinging rebuke to the ECB model. I am curious though....how exactly does he think the 'markets are going to deliver justice to these central bankers when the Japanese and Americans are only too pleased to debase their currency in the pursuit of moral relativism or moral scepticism, depending on your 'relativist' apathy. He is a politician....supposedly a 'moral agent', so where was he over the last 10 years when the ECB, Fed and Bank of England were enabling their governments to blow out their tax-payer funded hides. What a hypocrite!

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Andrew Sheldon www.sheldonthinks.com

EUR and JPY weakness to outpace USD debasement

2010-10-20T12:06:00.000-07:00

I actually expect the debasement of the EUR and Japanese Yen to outpace the USD debasement, so we can expect a relatively strong USD. All these currencies will of course be weak against the commodity currencies and emerging markets. See my article about the Fed and Asian property.

The interesting aspect is the impact on the commodity producing countries like Australia, Canada, South Africa, Chile, Brazil; as well as the emerging markets like China, Korea, Thailand, Indonesia and the Philippines.

We can expect these countries to be strong. It is interesting of course because the Fed and EU are blaming the Chinese for the strong Yuan; but partially the reason for the strong Yuan is that the US and European Central Bank (ECB) are debasing their currencies. True, the Chinese are funding the US deficits, and that has artificially raised the USD, but that is with the support of the US government.

We might well expect emerging markets to survive this currency crisis fine this time; largely I think because they can expect a lot of property investment by Western fund managers. Expect a property boom in Asia, particularly the Philippines, China, Vietnam and Thailand. Small Western players are better off in the Philippines because of favourable language (i.e. English), familiar legal system, generous visa rules, and good yields of 8% on high-end apartments.

So what about the commodity producing countries? Australia, NZ, Canada, Brazil and Argentina rely greatly on commodity exports. The problem of course is that mineral commodities do not price at parity with agricultural commodities. This is has to result in these countries sabotaging their currencies with debasement, or more likely we can expect the stronger foodstuff prices to continue. This development makes investment in countries like the Philippines more attractive, or other countries which might have cheaper agricultural land. I know the Philippines does have marginal land as cheap as PHP10-20/m2 (USD0.20/metre2), however you could probably do better elsewhere. Certain higher value crops like coffee are better in the Philippines. Nestle certainly produces a lot. Some of the mountain provinces are also suitable to growing more temperature foodstuffs. e.g. Baguio City is a food basket for the Philippines. It is one of the few cities with malls in the cool mountains...aside from Tagaytay, south of Manila. Anyway, the Philippines is a distraction from the currency strength that is gripping these commodity and emerging markets. So expect stronger commodities as the central banks debase currencies with more 'quantitative easing'.

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Andrew Sheldon www.sheldonthinks.com

The Yen set to fall against the Philippines peso

2010-10-10T02:27:00.000-07:00

Whilst I am looking at exchange rate action, its noteworthy for Japanese people and Western expats living in Japan that they ought to consider buying property in the Philippines. Why? Well...the Yen is about to fall, so it would be a good idea to remit money before the currency collapses. Property yields in Japan are about 12-13% now, compared to 8% in the Philippines. The difference however is that Philippines population growth is 2% per annum, whilst Japan's is negative, and does little better than 1.5% in certain districts of the major cities.

The Philippines is attracting a lot of investment from Taiwan, China and Korea in tourism, and also a lot of business from US, Australian and NZ call centres. Aside from that, it also has a healthy exposure to expat remittances and domestic commodity production. In recent years the Philippines has been growing at 7-8%, and there is no reason why that will not be sustained.

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Andrew Sheldon www.sheldonthinks.com

The AUD play with a Japanese property twist

2010-10-10T02:03:00.000-07:00

The AUD-JPY is not a currency I have been giving much attention to of late because my focus has been on the commodities (AUD-USD) rather than property. Though since I have an interest in Japanese (foreclosed) property, I was interested to look at the implications for the property market....which is offering yields of 12-13%.

We can see from the chart that the AUD might be strong against the USD, but against the Yen, the AUD has actually been a bit lacklustre. That is about to change. The Japanese yen is going to come under a bit of pressure as the govt there debases its currency. You can expect this to lead to a strong AUD against the yen. In fact I am expecting the AUD to rise to the previous high of Y107. This is a good long term currency trade, as you will never earn more spread interest than on this trade. With the unemployment rate 5.1% in Australia, there is actually scope for more rate increases as well. Stimulus in the Eurozone and Japan can only help Australian commodities demand.

The implication is that there is a good opportunity to trade AUD-JPY and then use your profits to buy a holiday house in Japan. Don't forget to get your Japan Rail Pass! God, I should be selling the things...I'd told so many people about them. I love trains. :) I take GPS coordinates for every station I stop at. That's right...I don't have a life. Glad you could join me though.

NZ Property Guide Philippine Real Estate Guide Japan Foreclosed Guide

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Australian dollar going to $1.15

2010-10-10T01:47:00.000-07:00

The AUD is just about to reach parity with the USD. Followers of the currency price action might have reflected on the trends in the other currency. In this era of currency realignment, you might be thinking that the prospects for a strong USD will mean a weak AUD. I would challenge this point of view. In the short term, I would not be surprised to see the AUD find resistance at parity, but I do believe that we are looking at a stronger AUD currency in the future as a result of currency (i.e. economic) relativism. Yep, economic relativism is about debasing your currency faster than the competition. Countries like Australia have relatively hard currencies in these periods, so we can expect a sustained strong currency. I don't expect significant weakness in China. It will happily keep prospering along for decades to come. So long as there is a high household debt in Australia, we can expect measured increases in interest rates, but also a great deal of sensitivity to those rises. We will not be able to afford interest rate increases...so expect a strong currency. That is alright....all other commodity based currencies will be strong as well, so expect stronger commodity prices across the board.

I actually am expecting to see the AUD reach $1.15-1.20 in the next few years.

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Andrew Sheldon www.sheldonthinks.com

Currency market realignment coming - JPY:USD

2010-10-10T01:27:00.000-07:00

Just as we are going to see a turnaround in the EUR, we can also expect a turnaround in the USD against the Yen. Japan has been complaining of late about its reduced export competitiveness. Of course this is just justification for printing Yen to repay the debt which is denominated in Yen. i.e. The Japanese have to debase the currency in order to inflate asset prices, in order to stimulate some spending in the Japanese economy. They will want to expand the economy in order to increase taxes (i.e. GST increase), and they will want to pay off that debt. Reforms will be easier if there is stronger economic activity.

The USD against the Yen is about to reach a yet level of 80yen. The yen has not reached this level for decades, so it will be an important achievement. For reasons already stated above, I am not expecting this support to be breached, as there is just too many reasons for the Japanese to weaken their currency. Its a case of who can be the biggest currency debaser. Unfortunately I have not got the history back to the 1970s on this chart...I just remember the forecast I made last year that it would reach this level....so its finally happened.

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Andrew Sheldon www.sheldonthinks.com

Currency market realignment coming - EUR:USD

2010-10-10T01:20:00.001-07:00

There are some important developments occurring in the currency market. We are about to see a change from a weak USD to a strong one. Not yet, but we are close. The justification is going to be:

1. Stimulus measures in Japan which will weaken its currency

2. Stimulus measures in the EU, which will refinance Greek/Spanish debts, but also expect some broader-based stimulus.

A turnaround in the USD will of course reduce the appeal of the Dow, as competitiveness will shrink, but not considerably if the later countries are dolling out most of the stimulus. The target value is 1.45 USD for the EUR.

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Andrew Sheldon www.sheldonthinks.com

Nobel Prize winning economist states the bleeding obvious

2010-10-03T19:13:00.000-07:00

Joseph Stiglitz, the former chief economist of the World Bank and Nobel Prize winner, has come out and said that he thinks Germany ought to break off the Euro currency. I made more profound statements 5 years ago....When do I get my Nobel Prize? In my Global Market Commentary blog I suggested Spain, Italy and Portugal, given there different cultural values, ought to be on a different currency. I guess my Nobel Prize is in the mail :)

This particular dumb-nut economist is suggesting that 'Keynesian stimulus' might be necessary. In the interests of global peace was he also one of the World Bank, govt-funded economists who supported the stimulus that made the 'extra stimulus' necessary in 2008, or did he back away from that stimulus. Maybe he didn't turn up for that office meeting. Read more in this NZ Herald article.

I am a bigger genius than I thought....I actually said the same thing 5 years ago...read here. There you go!

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Andrew Sheldon www.sheldonthinks.com

Outlook for Australia dollar (AUD)

2010-09-15T15:49:00.001-07:00

The Australia dollar is charging ahead in recent trading. The AUD was always destined to be a strong or 'hard' currency given its outlook. This outlook is inextricably tied to the success of China and India, which largely rests on the 'small government', 'selective government' and irrelevance of government. Basically, in China the government is incidental. Rule of law is inoperative, so market rules, albeit with little integrity. If you are expecting China to become a market paradise, think again. China is only going to develop coherent market values if the West does, and sadly ideas don't have much sway in the West either. We are in a scientific era to be sure, but science is the product of a small (2-3% minority), and under our democratic tradition, the idiots retain power.

So let's get back to China. China has a huge population. This means that farmers will be flooding into the cities in order to get higher paying factory jobs. This is great news for Chinese productivity, wealth creation, and it keeps inflation in check around the world. They get cheap raw materials from Australia, Russia and Mongolia. Fears of a Chinese melt down or ci

vil unrest are misplaced. In fact, China has a great deal of mineral resources in the outer provinces, so those areas are likely to become future centres of output....perhaps the food basket for China as we extort higher prices for agricultural products in the seaborne market place.

China will be like this for at least another 20 years, which means that it will have an insatiable demand for food and minerals for the next 20 years. The implication is that Australia will be in a strong position to benefit from exports of ores. Both strong growth in export volumes and high prices are assured. Of course there will be competition at the margin from China and Russia. It remains to be seen whether India will play a significant role. This will depend I think on political reform in that country. Representative democracy is not the 'god-send' it is supposed to be. India can only flourish, like the West, when the recognise that, and identify consensus

based democracy as a better mode of governance. It is the only way to end the tyranny of the majority, who are idiots. In India's case, uneducated idiots; and in Australia's case, morally skeptical idiots too accustomed to not paying the consequences for their actions, i.e. Not thinking. And I have yet to speak of the 'enablers', whether corporate CEOs, parents or politicians.

Anyway, back to Australia.

Australia really has no problem in future. More capital is going to flood into this coun

try than you can imagine, funding mines and energy projects mostly. A huge wealth effect for what is a very small population. Of course we might expect two things:

1. A materialistic splurge as people buy more houses, etc

2. Governments staking more of this wealth threw resource rent taxes

3. Decadence of all sorts resulting in greater crime, drugs and rock n roll. Yep, may

be even a sexual revolution. Let's hope, I missed the last one :) I was born in 1968.

Looking at the chart, its apparent that the AUD is just about to reach its 6mth high of 0.93 USD. We might expect a sell-off at this point, however its probably likely to continue to its 2-year high of 0.96, set back in July 2008.

At such times the currency has a tendency to fall back because spending gets out of control. Is that going to happen this time? Hmmm...that will depend. I suggest 'No' for the following reasons:

1. An overheating Australian economy is going to place pressure on the Reserve Bank to raise interest rates, so you will be able to spend less on consumerism, and you will be forced to pay more off your debt. You ought to already be doing this, or buying gold stocks.

2. Australia household debt levels are high, so this monetary policy will be very effective

3. The Australian govt will prefer to allow the AUD to rise rather than raising interest rates, because its constituency is the poor households rather than rich farmers and miners. You might expect the 'farmer-friendly' Independents to make a difference, but I doubt it, because I don't think they even know what monetary policy is.

What does all this mean? It means strong AUD for a while now - either way. More likely there will be a balance of interest rate rises to temper a strong economy. We need to consider the 'flow on' of that trade balance. Will it translate into benefits for Australian households? Yep, in terms of lower interest rates than otherwise, and low price pressures from imports.

4. We might expect a lot of Australians to be holidaying in the USA. We are not accustomed to being on par with Americans

5. The big caveat is how the Labor govt behaves. They are inclined to sabotage the economy of late, and the Independents do not inspire confidence.

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Andrew Sheldon www.sheldonthinks.com

USD set to strengthen against the Yen

2010-08-22T15:48:00.001-07:00

These are indeed interesting times. We can see from the following chart that the USD is close to reaching its historic low of 81.86 against the Japanese Yen. It seems destined to reach this level in order to give traders some sense of upside. It is a fait compli that the USD is going to weaken. Why?

Well the Japanese economy is not exactly in a strong position either. We can expect some stimulus in Japan to come in the form of mass-printing of Yen. This will of course stimulate some domestic demand, and probably even stronger property prices. It will not contribute to the real economy, however it will allow the government to balance its fiscal debt, which is of course owed to the Japanese people.

At the moment the yen is at a support level of 84.94-85.00. I would expect this to be breached, and for the currency to plummet to the 81.86 level, if only for a day. The implication is that traders ought to be looking to take a trade position here. This also makes a great opportunity for Japanese people to buy a house in the USA foreclosed market given the weak USD. It is not a bad time to sell your property in Japan if you are repatriating USDs, but to what end when the yields are so much better in Japan. There is not going to be any huge recovery in USD in the short term, however there is sufficient upside to consider selling investments like property, i.e. A recovery is possible, and it could be as high as 125 Yen. The deciding issues are going to be:

1. Japanese budget balance - The extent to which the government resorts to taxation vs printing money to resolve the domestic public sector debt

2. Your time line - the longer you wait, the greater prospect of a US recovery. The US is still absorbing all their surplus property stock and liquidating the related debts.

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Andrew Sheldon www.sheldonthinks.com

Flat EUR-USD currency market outlook

2010-08-22T15:38:00.001-07:00

The EUR can be expected to fall back weaken in the short term. It might sfind support around 1.24, or otherwise fall back to previous support at 1.1879. My position is the former proposition, and we can in the middle term expect a stronger EUR. Of course its all relative with the major currencies, as both governments and the Japanese engage in currency debasement.

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Andrew Sheldon www.sheldonthinks.com

The outlook for the AUD positive

2010-08-22T15:22:00.000-07:00

The Australian dollar is confronting several competing forces at the moment. In the short term there is the uncertainty of an unknown election result, even if it appears as if the Coalition will have the power in the House of Representatives, given that most of the Independent MPs are alligned to Liberal-National values.

The trading in the AUD suggests that the currency is close to breaking out to a new high, or set to fall to the old 80c support.

I am confident that once the election uncertainty has cleared we are going to see a stronger AUD. The reasons will be:

1. An end to the Emissions Trading Scheme

2. An end to the Mining Tax

3. Strong mineral export revenues

4. Strong business investment by the Chinese and Indians in coal & iron ore

The economy is currently bumping along with capital inflows of $3.5-4 billion per month. They are going to keep the AUD strong for the foreseeable future. The USD does not convey such strength, but the Chinese economy does. I see no reason to expect a slump in China, which is still benefiting from a great deal of stimulus. I can see upside for the AUD to as high as 98.38c, the previous high. I cannot see that support being broken in the medium term. It is probable that Australia will witness a recovery in domestic spending by that point. i.e. When Australians know they are on a good thing they go out with their credit cards in hand.

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Andrew Sheldon www.sheldonthinks.com

Forex market attitudes to Australian PM candidates

2010-08-18T15:30:00.000-07:00

Interestingly the Forex markets are signalling that Australia is confronting a bad choice of leaders - between two idiots to be sure. The NZD is surprisingly strong. I think the markets are anticipating a bad choice either way. Certainly there is no question that Gillard is dire news for the AUD in the short-medium term (say 0-5 years), whereas Abbot is the opposite I feel. Really its about the Gillard risk. The considerations are:

1. Resource Rent Tax - it will kill investment in the long term, but committed projects will continue. In the long term there will be balance of payments benefits in the Australian government receiving more money through extortion, but there will be a retained distaste in financial markets in the form of an interest rate risk premium for the extortion, and its surprise introduction.

2. Ideology - Gillard is a socialist who will invest long term in education. It will be inefficient spending, so considered a debasement of the currency value. Mind you? Any worse than Obama? The implication however is that wealth will unnecessarily be squandered.

3. Interest rates - I think both parties will have similar implications for interest rates - except for the Gillard 'tax premium' of say 0.25% x $750 billion of household debt for Australia. Basically they will have soft monetary policies because of the high housing debt, so they will let the exchange rate jump around with commodity prices and speculation about global economic growth.

4. Fiscal policy - Abbot could be expected to cut govt spending to repay debts.

Little surprise then that investors wanting AUD exposure are bidding up the NZD. Expect that disparity to correct after the election results.

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Andrew Sheldon www.sheldonthinks.com

AUD-USD close to support levels

2010-05-17T15:42:00.000-07:00

The AUD has fallen off considerably in May. The AUD is destined to find support at the 0.8574 level, which ought to provide a good platform from which to trade forward. The critical factors shaping the AUD are interest rates and the Resource Rent Tax (RRT) under consideration by the Rudd government. A RRT would undermine a great deal of investment interest in Australia, particularly in the iron ore, coal, coal seam methane and the conventional oil & gas sectors. Several LNG terminals have been proposed. If this tax is adopted, a few more energy projects will be directed towards Oman and Yemen instead. That is how seriously Kevin Rudd has crippled the sovereign risk weighting of Australia. What an idiot! Rudd can be categorised with other infamous expropriators of private wealth - President Mugabe and President Chiraz. A 40% tax off the top is not much better than nationalisation with nominal compensation.

I would not even be surprised to see the AUD breach this support. The factors working against this are the internally strong economy, and thus its relative merits over other economies, since it promises to keep interest rates relatively high.

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Andrew Sheldon www.sheldonthinks.com

EUR-USD turnaround imminent

2010-05-17T15:37:00.000-07:00

Expect weakness in the USD this week, as the focus shifts from the Eurozone to the USA. The Euro has fallen to an important support level, and recent trading suggests it will find support at these levels. This of course provides a good basis for future trading once the downtrend is technically breached.

------------------------------------Andrew Sheldon www.sheldonthinks.com

USD has short term upside, though consolidating

2010-03-01T17:19:00.000-08:00

The USD is likely to experience some strength in the short term against the Yen. We can see in the chart that there is upside to 91.89. Thereafter I would expect it to preserve its consolidation for the next few months.

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Andrew Sheldon www.sheldonthinks.com

Euro weakness in the short term

2010-03-01T17:12:00.000-08:00

The Euro is coming under pressure because of the Greek, Portuguese and Spanish economic fears. I don't see much of a problem with this exposure, but its weighing on the market. There is talk of a bail out. It seems probable that the Euro is falling back to 1.2492 support, though there is an interim support level at 1.2969 which will need to be tested.
The best outcome for the Eurozone would be for these 3 nations, as well as other Eastern European countries lacking in monetary and fiscal discipline to have their own currency, so the puritans in the north can define their own monetary identity. The Mediterranean countries can then peg their new currency to the price of red wine.

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Andrew Sheldon www.sheldonthinks.com

Australian dollar has strong short term outlook

2010-03-01T16:44:00.000-08:00

Stronger commodity prices and a strong economy are likely to give short term confidence to the AUD. The currency is currency trading within an expanding envelope, which will eventually break down.
In this case we can look for resistance at the 90c mark in the short term, before rising to 92.44c level in the medium term. I would thereafter expect weakness in the AUD down to 84.58c.
The sustainability of the current strength in commodity prices is in question, though the currency will be buoyed by rising interest rates. I believe the currency will test the 84.58c level before it goes higher.
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Andrew Sheldon www.sheldonthinks.com

Euro set for a 10% rise against the USD

2009-11-17T18:36:00.000-08:00

In the last post we talked about the strengthening in the USD on the basis of interest rates. We suspect the Fed is simply talking up rates and the USD to satisfy the Asian central banks who are getting no interest from their treasuries. The US government of course has to placate these countries because it borrows so much money from them.
Nevertheless in the short term, I'd be looking for US economic weakness to drive the Euro (like the Yen) to the July 2008 high against the USD. We can see in the following chart that the Euro has to rise by another 10% before it reaches that point.
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Andrew Sheldon www.sheldonthinks.com

The USD-JPY poised to strengthen

2009-11-17T18:12:00.000-08:00

The Fed has apparently stated that it expects interest rates to rise in future. That is a commonsensical given:

1. The easy monetary policy, both in terms of low interest rates and the credit extended to US and foreign banks through other central banks.
2. The level of US debts, and the governments subdued capacity to raise tax receipts without increases in tax rates

I am still waiting for my energy tax. I suspect the US government is waiting for some resolution to climate change. They are waiting I think for scientists to get some consensus that there is no climate change consensus, before they step in and say, well just to be sure, we'll tax all energy, so in case there is a problem, we'll have our backs covered by spending on health care, etc.

Despite the fact that we are looking at a stronger US in future thanks to higher interest rates, I think we can expect further weakness in the short term. The cause of this is likely to be weaker economic indicators out of the USA. I am expecting the USD to find support against the Yen at its previous 15-year low of 81.6-83.6 yen. Currently the USD is trading at 89.32Yen, so there is room for a further 10% fall in the USD. I think it will be a quick recovery, and it might even be prompted by a global consensus to support the USD.
We must remember that Obama was in Japan, China and Korea last week, and there is every reason to think currency issues were discussed. No doubt those countries were looking for an assurance that the USD would not be allowed to fall, since they have large holdings of US treasuries. The US cannot expect these countries to support the USD unless they are prepared to raise rates. The chart below shows the trading history of the USD-JPY:
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Andrew Sheldon www.sheldonthinks.com

Japanese yen sinks to forecast Y86 level

2009-10-22T16:37:00.000-07:00

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

2009-09-01T22:35:00.000-07:00

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

2009-06-20T21:44:00.001-07:00

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

2009-05-12T01:31:00.000-07:00

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

2009-05-12T01:16:00.000-07:00

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

2009-03-24T19:35:00.000-07:00

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

2009-03-13T22:30:00.000-07:00

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

2009-03-02T11:07:00.000-08:00

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

AUD and NZD range trading at best

2009-02-16T21:12:00.000-08:00

The AUD and NZD are likely to range trade for the next month, as the focus is on the EUR trade. There is still some play in the Yen, as it falls to the Y83-85 on weaker economic news out of the USA. We are going to see a weaker USD, and that I don't see adding either weakness or strength to the AUD or NZD. I would nevertheless expect a volatile AUD trading between 58c and 70c.

The NZD is likely to trade between 50c and 60c. I don't see any reason for a fall at this point to its historical level of 40c in the short term, though I can see that as a possibility in the longer term. The John Keys government is shaping up as a disappointment. A swear the guy is the illegitimate child of John Howard the way he is running policy at the moment. He must have been stillborn for the last 2 decades because he has learnt nothing, and he is fully against the trend. Counter-cyclical or just stupid? You be the judge.

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Andrew Sheldon www.sheldonthinks.com

The USD set to plummet!

2009-02-16T20:23:00.000-08:00

The USD is set to plummet against a number of currencies. You might be thus wondering where to place your money. Against the gain currencies I would suggest the EURO offers the better opportunity. Some months ago I forecast the Yen falling to Y85. As you can see that move is almost complete, with the USD currently trading around Y90. At the time I attracted considerable criticism for this forecast. I would however expect the EUR-USD to offer far better trading however in the next 6 months.
The question is - Can we expect the USD to break Y83? I think if this were to occur we could be looking at the end of the USD as the international base currency. The question is - what would replace it? Clearly its not going to be the dysfunctional EUR, the distrusted Yuan, the disenfranchised Yen, and what of the worthless USD? Well, the implication is clear, its the USD or its a new global currency. Is it possible that the US debt profligacy was nothing more than a political statement by the US government. Was the US government thumbing its noses at mercantilist Japan and China and saying, SCREW YOU. By all means hold our USD debts as we are going to dilute the value of them. This is interesting times because we are looking at a global emergency, which can provide the justification for a strong USD (higher interest rates) or a new international currency. I would expect Obama to support higher interest rates in the spirit of former President Clinton. But then maybe he wants to distinguish himself by taken the road rarely taken. The implications for gold and the USD are clear.

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Andrew Sheldon www.sheldonthinks.com

NZD-USD set for rally to 57c

2009-02-08T14:01:00.000-08:00

The NZD has fallen to the USD50c support as expected. The current does however remain in a downtrend. There is no hope of a reprieve from commodity prices in the short term, but it is evident from the short term chart that there is scope for a rally to 57c before the currency resumes its downtrend (and short term traders can take profits). If you are buying NZ property, which can be very cheap outside the cities, then I would suggest you take the opportunity to exchange currency on this future weakness. NZ has one of the most flexible foreign investment regulations in the world. There are 3 ways you can make money from property:

1. Capital growth - through market price fluctuations
2. Rental income - long term or holiday rentals, perhaps whilst using it in the off-season
3. Foreign exchange exposure - by trading volatile movements in the NZD
4. Value-add through improvements - whether DIY or outsourced
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Andrew Sheldon www.sheldonthinks.com

AUD carry trade back in play (Jan 09)

2009-01-04T19:31:00.000-08:00

This Monday's trading signals a return to the carry trade. Last October (2008) Japanese and other fund managers abandoned the AUD, NZD and other high yielding currencies in favour of the safety of the USD and EUR. This week investors are re-entering the AUD in droves. In Oct-08 we saw the collapse of the carry trade, today we are witnessing its re-building.

Why you might ask would fund managers throw money back into commodity currencies? There are several reasons:
1. The vulnerability or exposure to low commodity prices has been priced in
2. The Australian economy will benefit from a low AUD since its commodity exports are priced in USD
3. The Australian economy produces a lot of food as well as minerals, and its now out of drought, and producing record harvests.
4. The interest swap trading AUD:JPY is still very good, and that will always be the case as long as the Australian economy retains its relative size and character to the Japanese economy.

A few weeks ago traders were saying that the carry trade was over. But in fact its a cycle more than a fling. It will always exist, if not the AUD it will be another currency. Interestingly the NZD is not responding as favourably as the AUD. The reason for this is likely to be the poor NZ current account deficit, currently running at 9% of GDP. mind you, that reluctance to buy NZD will be soon corrected. I think we will see the AUD strengthen quickly from Y65 to Y70 very quickly, so I recommend that trade, thereafter I would expect some bad news to curtail it in the short term.
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Andrew Sheldon www.sheldonthinks.com

Outlook for the AUD-USD - support is in sight?

2008-10-08T14:24:00.000-07:00

The AUD has been absolutely hit in the last few months, falling from a high of $US0.985, just short of parity to $US0.6995 in recent days. The currency has since recovered to 0.714. The question is - Is this the bottom? The market talk is that the Australian government, having lead the central bank cuts with 1%, might be looking at another 1% in future. In fact the ECB and Fed are taking the same direction. As long as asset prices are falling there is no possibility of stimulus. The flipside of that is that interest rates are ineffective as a basis for stimulating the economy. if asset prices are falling because people buy generally when they think prices are going to rise. Asset prices will keep falling for as long as people think they are overpriced. The market talk is that property prices need to fall another 25% in Western markets.
The argument is - Is the carry trade over? No, not for years yet I suspect. Until the Japanese government decides to adopt some fiscal courage there is no possibility of the Japanese central bank raising rates. The unwinding of the carry trade has brought the AUD down, but watch as people jump back on board that boat. This is why the currency is so volatile. Traders are going to trade it back up again.
The next question is - What is the bottom for the AUD? The AUD did hit a support at 0.704 and recover, though I would not be surprised to see it test $0.678 in the next two days. Certainly your trades should reflect that possibility. This is a sweet opportunity to buy AUD. The Australian economy is among the most healthy.
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Andrew Sheldon www.sheldonthinks.com

Stronger USD outlook likely to rebuild savings

2008-09-08T17:19:00.000-07:00

The outlook for the US economy is certainly weaker as the Fed steps into a revive the government owned agencies - Freddie & Fannie Mae. These agencies were destined to fail, and highlight the extent to which these government-owned agencies have been used to bankroll US property market investment. Foreclosures will need to be absorbed by the market before we can expect any rebuilding of confidence in US markets. So we might ask - what is the direction for interest rates? The way I see it, something has to give, whether its:

1. Higher inflation - its not going to be asset inflation, so it will have to be cost-of-living inflation
2. Weaker USD - this is if the Fed Reserve continues to subsidise credit in the USA
3. Higher interest rates - in order to rebuild savings in the USA - which will boost the savings rate, but will likely also strengthen the USD. There will need to be tax increases as well to finance government.

The Democratic (Clinton) tradition has been to rebuild savings after the Republicans (Reagan, Bush) have decimated the treasury. I would therefore expect increases in interest rates, higher tax and increased government spending. This will be a 'rebuild America' program, with a lot of flag waving and a strong USD. The implication is that the US is going to go into hiberation for a few years, so if you are looking for a growth scenario, you will be looking to Asia, and obviously Australia will benefit from that. Though without a strong US, we would be looking at a weaker growth scenario for Asia, and I would not be surprised to see domestic stimulus to rebuild the global balance. Expect property booms in Asia. There will be great opportunities given the current global weakness. The stronger phase will be in 5 years when the US does contribute.
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Andrew Sheldon www.sheldonthinks.com

AUD-JPY faces a consolidation period

2008-09-08T17:00:00.000-07:00

The AUD-JPY exchange rate is an important indicator of the carry trade. At this point, we are witnessing a consolidation in the AUD after it hit support around Y86. This consolidation is occurring because of the mix of good and bad news facing the Aust economy. The focus is on Australia because we see notthing happening in Japan. No reform, no significant stimulus. Just a reshuffling of party leaders. One day they are bound to get it right. The factors likely to underpin some strength in the AUD include:
1. Weaker interest rates is likely to see a rebuilding of interest in property investment
2. Certain metal commodities have remained fairly strong - coal, iron ore, alumina, gold
3. Australia's commodity focus & position in Asia mean it will fair better than other commodity producers - except perhaps South Africa (gold, platinum focus)
4. Increasing takeovers and investments by Chinese companies in Australian resource projects augers well for the country's future. Remember the impact Japan's investment had on investment. China's participation will likely be more significant.
5. Stronger food prices and rains I suggest will likely see a stronger rural sector, also helped by mining.

Those factors undermining the AUD are:
1. Lower interest rates is likely to place pressure on the yen carry trade, as funds are shifted out of Australia. NZ?
2. Business investment is going to result in greater outflows, mainly for mining. These projects will see the AUD rise high in future, but investors are short term focused so they will focus on the current account deficit, although it does strengthen economic activity, it does not flow through greatly to the retail sector.
3. The weaker global economic outlook is placing pressure on commodity prices, and thus those countries with commodities exposure.

Short term I am expecting a stronger Australia equity market, initially from the broader market, but thereafter the commodity-based markets should kick back in, and will rejoice in the greater interest by Chinese investors (mostly government enterprises) in our mineral & energy resources. I actually don't see a lot of weakness in interest rates because inflation is still high and spending will likely recognise the bottom. Until the global economy can see a problem, I think we are looking at the AUD going sideways against the JPY. The greater action will be the AUD-USD until we see more positive recovery in commodity prices.
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Andrew Sheldon www.sheldonthinks.com

The USD poised off resistance

2008-07-08T21:38:00.000-07:00

The USD has been strong, though it remains to be seen if it will break 108.2. I think not given the weakness in the market. I think the Fed will lean towards a rate cut rather than concerns about inflation. Its first priority will be growth, and whilst it might talk about raising rates to deal with inflation, the reality is that most of the money supply imbalance will be corrected by insolvencies and reduced speculation (debt liquidation) rather than interest rate increases. Why? Because the Fed will be taking its time to raise rates. It will talk about it but the reality is - the economy always gets primacy. The case for this is stronger close to an election -even if Bernacke suggests otherwise. The notion that the Fed is independent is a crock. We just need a fall below Y105 to correct market perceptions.

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Andrew Sheldon www.sheldonthinks.com

The USD-JPY - a cautionary note

2008-06-19T20:17:00.000-07:00

The USD has experienced some strength lately, though I suspect that is about to come to an end around Y109. The USD did however convincingly break its downtrend, so that is reason for caution, however I would give it until the end of the month to prove otherwise. I believe the coming 2 weeks will be a bad one for the USD. I dont see stronger interest rates to support the USD. Might the US economy show some unexpected strength? Well we'll need to watch the indicators. Importantly the Dow Jones index is at a support level, and I suggest that is a basis for support.

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Andrew Sheldon www.sheldonthinks.com

AUD-NZD breaks previous highs

2008-06-05T18:46:00.000-07:00

The AUD is fairly strong at the moment due to the strong export revenues from coal, iron ore and gold, and metals in general. The agricultural commodities are also providing mixed support. This is one of the reasons why the AUD is strengthening against the NZD of late. The other reasons are the interest rate differential is opening up. NZ interest rates are showing signs of peaking and growing inflation pressures in Australia are prompting a desire by the RBA to increase rates. It therefore seems likely that the AUZ will sustain its premium over the NZD having breached the $1.25 historic cross rate, last reached in early 2006. Thats not to say I see the NZ central bank lowering rates significantly or at all. I think they have just as much need to worry as Australia. NZ'ers have never been good savers. Australia has a better track record on this statistic. So I do expect the AUD-NZD to continue its rise to about $1.33, but then I suggest there will be profit taking. This will have big implications for NZ in terms of investment - see here.

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Andrew Sheldon www.sheldonthinks.com

The USD-JPY on a knife edge

2008-06-01T18:14:00.000-07:00

One of my readers from Japan Forum was highlighting the fact that the USD has been strong lately - contrary to my few that it could be heading to Y85. I retain the view, and gave him the following response:

I think its premature to say whether I still believe the USD-JPY is going to Y85. My reasons for weak USD are that I think US Fed will lower fed rate to 1% as before, concerns about an election, weak economic news and also the possibility of a bank failure. Likely JP Morgan or Goldman Sachs based on their derivatives exposure, but who knows. Also if you look at a chart, the USD is at the peak of its long term downtrend, so you might want to hold that thought. I of course expect it to fall. In support of your view, you might want to look for strength in USD over the coming week. We are really on a knife edge.
Basically I dont see USD going to Y85 as any sign of USD worth, just as a speculative possibility. Which is why I recommend AUD, rather than JPY-USD on my blogs. AUD doing very nicely. So maybe its an issue of perspective. If you want to hold USD long term, I do think the USD will rise strongly next year. As I said months ago, the US will eventually have to raise interest rates to become a 'savings' country, so the associated higher interest rates will result in a stronger currency. Just in the short term, I see weakness. So maybe its an issue of time perspective. As a trader my money goes elsewhere.

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Andrew Sheldon www.sheldonthinks.com

Reiterating AUD support

2008-05-27T18:42:00.001-07:00

The merits of the NZD are however overshadowed by the outlook for the AUD. The AUD:USD offers better exposure to commodities for several reasons. I think the Australian food commodity export prices are rising faster than NZ food exports, Australian natural gas exports cover its oil imports, making it effectively a slight net oil equivalent exporter. Subdued property market is slowing consumption like in NZ, but Australia has solid buisness investment in mining industry - thats future productive capacity. Iron ore, coal, gold, copper prices remain high, and most of these revenues are locked in for the next year. For this reason I think the AUD is the currency to hold at least until September, then I would be switching to USD I suspect.

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Andrew Sheldon www.sheldonthinks.com

NZD makes sense as a carry trade

2008-05-27T18:31:00.000-07:00

The NZD has been having a rally of late. If you focus on the negative press you might have thought otherwise about holding NZD. The reality is that a weak domestic economy is good for the NZD since it undermines credit growth and domestic consumption, which in turn reduces imports, whilst exports remain resilient. NZ has the benefit of being a food exporter, so it should benefit more in future as we see more general increases in the prices of food. NZ produces little oil so there is some basis for weakness there. NZ is not a great story, but if you are looking for a interest swap (yield) proposition it makes a lot of sense, whether as a carry trade.

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Andrew Sheldon www.sheldonthinks.com

Westpac second to call $A-greenback parity

2008-05-07T22:47:00.000-07:00

According to the SMH Online "Westpac has become the first major Australian bank to predict that the Australian dollar will achieve parity with its US counterpart". Having forecast that the USD parity twice in the last 2 months, I'm glad the banks finally recognise the reality. I was hounded on Japan Forum for my bold forecast. The error of many was to overstate the importance of the current account deficit and foreign debt (55% of GDP). These factors are not as important in the current context as they were back in the 1980s. The reasons are:
1. The current account deficit (7% of GDP) will fall as interest rates rise
2. A significant amount of the CAD is due to capital inflows which are actually financing much-needed mining & energy production capacity. That capacity of course is going to increase our export earnings.
3. The outlook for metal prices looking forward 10 years is very good
4. We have yet to see the farm sector make any real contribution to our exports, and food prices are starting their own price rally. This is truly the era for commodities.

The implications is that rising interest rates will curtail spending, and thus imports, whilst exports will continue to increase. As far as the foreign debt is concerned, its a sign of Australia's attraction as an investment destination. In fact, we have good quality housing stock as collateral, aside from the mines. Who wouldn't want to invest in Australia's high yielding currency. Actually the AUD can be considered a 'hard currency'.

Westpac forecast today that the Australian dollar will reach $US1.01US by the start of next year as interest rates in Australia stay high and the benefits of the resource boom remain strong in the economy. I personally think the AUD will perform even better. I can see it topping out at $1.05 by year end because of rising rates in Australia, but falling rates in the US. That situation will reverse come year-end, though I still see the AUD staying in a high range, with $A0.95 a likely support in coming years. The Australian dollar was 94.84 in the New York after the Reserve Bank left official interest rates at 7.25%.

The AUD will benefit from further cuts in interest rates by the US Federal Reserve, and this is occurring at a time when the AUD is under pressure to raise rates. Its possible the RBA will hold off too, as I suspect it will not want to push the AUD higher, particularly if it too perceives the Fed as subsidising the US banking system prior to an election. There is potential for a widening in the so-called yield gap between US and Australian rates. Apart from the yield gap, there is the attraction of portfolio investment in the Australian mining industry. We have yet to see any significant investment in gold companies, and I believe we might yet see a lot of Chinese investment in Australian mining, just as the Japanese did decades ago.

The reality is that the banks never understood the metal sector. They thought this was just another unsustainable commodities rally. "Before today's update, Morgan Stanley had the strongest Australian dollar outlook among major financial firms with its prediction the currency would be at 96 US cents by the first quarter 2009". Pathetic. Can one expect their fund managers to be any better? Overpaid dicks.

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Andrew Sheldon www.sheldonthinks.com

AUD-USD going to parity with USD

2008-05-06T09:34:00.000-07:00

I have long argued that the AUD is moving towards parity with the USD. I can see the AUD rising as high as 1.05USD, however I remain to be convinced of that. Technically the AUD looks like gathering momentum, and I see the Fed keeping interest rates low in the lead up to the US presidential elections. Post-election I actually see US interest rates being raised aggressively, which will send the AUD into a tail-spin. So it will be a short term ascension for the AUD. I expect the Fed to start raising rates just prior to the election, if only to create the perception of independence. Who are they kidding?

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Andrew Sheldon www.sheldonthinks.com

EUR-USD returning to USD1.60

2008-05-06T09:28:00.000-07:00

The EUR-USD is set to rally again to USD1.60 based on technicals. The EUR is currently lying at USD1.55 support. -------------------------------------

Andrew Sheldon www.sheldonthinks.com

AUD-JPY will break Y100 again

2008-05-06T09:18:00.000-07:00

The AUD has had a good run against the Yen as expected. Although I can see short term delays breaking Y100, I actually believe the AUD is going to return to its previous high of Y108. At this point it will be sold off. The outlook for the AUD is going to remain positive. Strong capital inflows is supporting the market, whilst high oil prices and higher interest rates are helping to curb spending. It doesn't get any better. Higher interest rates is required to curb imports, which paradoxically result in a stronger AUD. At some point (Y108) the traders take their Yen and run though, and the likely reason will be weaker outlook for industrial commodities. Iron ore & coal though look good, so do the agricultural commodities. Inflation remains a problem.

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Andrew Sheldon www.sheldonthinks.com

USD is close to Yen resistance at Y105

2008-04-29T10:04:00.003-07:00

The USD-JPY has reached an important resistance level and appears destined for a sell-down. The USD has rallied to Y105, but it has yet to break out of its downtrend. The prospect of a higher US interest rates would be a possible reason for this to occur, however I dont see higher Fed rates just yet.
Still looking for the USD to fall to Y85.
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Andrew Sheldon www.sheldonthinks.com

USD-JPY still Y85-bound

2008-04-18T06:46:00.000-07:00

The chart attached shows the USD staging something of a recovery against the JPY. I see this as a short term recovery. So short term in fact that I think as we go into today's trading I am expecting the USD will be sold off. Why? Because the USD has retraced to the previous resistance level it breached. The next major support is Y85. It will go to that level because the market knows that in an election year the US government & Federal Reserve will be pulling out all stops to win the next election. It wont happen. Americans are waking up to themselves, and their cholesterol-free, low-sugar diets, and will have a reality check. So we are looking at a further 15% fall in the USD-JPY, which on top of a 8% rise in the EUR-USD, suggests we should be looking at a 7% strengthening in the EUR-JPY over the corresponding period, just as an arbitrary.
So watch tonight as the USD is sold off, and that will set the scene for next week. Strong gold week.

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Andrew Sheldon www.sheldonthinks.com

EUR-USD heading for USD1.70

2008-04-18T06:19:00.001-07:00

Looking at the chart its apparent that the EUR-USD is going to USD1.70, at which point it will do a double bottom. I would then expect it to return back to its normal trading trade. The technical reasons for this are the strong symmetry evident in the chart. The USD has a 'parityband' between USD1.20-1.35 and has traded within 35c of that band. I am sure the market will be looking to retain that symmetry. So the EUR-USD will be a good 'short' trade from 1.70, though based on prior history, we can expect a 'double top', just as it previously made a 'double bottom' in 2001-2.
In terms of fundamentals, I would expect the Eurozone to welcome the strong EUR as a way of stimulating or supporting US exports in the short term. They might even appreciate the 'lost competitiveness' as a means of driving economic reforms in the EU. The time period is quite long, but we can expect the US election to have reached a result by the time we see the 'double top', then we can expect a recovery in the USD, initially motivated by expectations of rising interest rates in the US, but later also the prospect of greater taxes on the rich. I also believe the US under Obama will adopt a tax on energy, and likely that will subsidise health and alternative energy programs.

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Andrew Sheldon www.sheldonthinks.com

AUD-USD set to break resistance at 95c

2008-04-18T03:41:00.000-07:00

Looking at the AUD-USD its readily apparent that the AUD is not about to fall back as many pundits are suggesting. In fact I would suggest its building momentum for an assault on 'parity' with the USD. Clearly breaking resistance at 95c is the next hurdle.
I have already suggested my reasons why. The only reason for thinking this would change is one factor only - the strong inflation numbers. But I dare say that will fall back as money supply growth is curtailed.

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Andrew Sheldon www.sheldonthinks.com

The AUD and its widening trade deficit

2008-04-07T06:54:00.000-07:00

I maintain that the AUD will remain strong and that the widening trade deficit is symptomatic of a strong economy. A widening deficit is a basis for higher interest rates, whilst job losses in the USA are justification (a rationalisation) for lower rates in the USA. Regardless mortgage rates will not stay low in the USA beyond 2008. The subsidisation of the bank's short term loan requirements is an electino strategy more than an attempt to secure the banking sector.
The AUD will do better than CAD, which produces a significant amount of oil, but it lacks the significant contribution that coal and iron ore make to the Australian economy. It is also exposed to the malaise in the USA economy. The notion that the RBA would cut interest rates to maintain growth is nonsense because it ignores rising inflationary pressures in Australia.

Source:http://business.smh.com.au/dollar-off-highs-after-trade-deficit-widens/20080407-2462.html?sssdmh=dm16.309681
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Andrew Sheldon www.sheldonthinks.com

The outlook for the AUD

2008-04-07T06:52:00.000-07:00

Contrary to the belief that the AUD will weaken because of softer global economic activity, I believe the AUD remain strong against the USD, and to a lesser extent against the JPY. By that I mean I expect the AUD to reach parity with the USD and for the AUD to eventually break Y90. I don’t rate the high personal debt levels in Australia or NZ as a significant obstacle, though they are certain to cause some domestic hardship for some borrowers and lenders.

The high debt level is actually a benefit. The market wants yield, and is not looking for any significant global growth, notwithstanding the opportunities to short term trade . High interest rates in environment of high debt means reduced consumption, particularly of imports. High mineral prices because of capacity constraints mean high export revenues. Paradoxically Aust is benefiting from strong prices because of its 'poor planning'. This is requiring huge capital investment in Australia, so personal consumption is weak, but investment in productive capacity is buoyant and will remain so. We might event expect the government to kick in with some public works (particularly transport infrastructure) once signs of softening emerge. Also expect strong Chinese direct investment in Australian mineral projects funded by China surpluses and motivated by the desire secure mineral supplies. Aust is a net exporter of hydrocarbons (because of LNG), so high oil prices only reduce domestic consumption, which is another plus. The Australian RBA needs to worry about inflation so I don’t see any softness on interest rate policy. Only downside is a few foreclosures but I don’t see a great problem since job losses will be minimal. I cant imagine a better looking economy.

When the food sector recovers from drought after rains last in 2007, we can look forward to stronger export earnings from the farm sector. That will be another strength, destined to drive the AUD to USD parity....but not yet. Consolidation first in the 80-90 range to USD.

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Andrew Sheldon www.sheldonthinks.com

The end of the carry trade

2008-03-30T08:28:00.000-07:00

I see no sign that the carry trade will end soon, in fact I think its as strong as ever. The critical issues are:
1. Japan's growth prospects depend on local deregulation and/or immigration
2. Japan's interest rates are linked to its mercantilist trade policies - that will not die until the USA makes it an issue. It might well be a concerted effort by EU/USA that makes the difference given the recent strength of the Euro.

Based on the fact that there is no sign of change on these fronts, we can expect:
1. Japan to continue its mercantilist policy - Japanese interest rates to remain low
2. Japan to retain its subdued levels of economic growth

As long as Japan has interest rates at 0.5%-2%, we will continue to see carry trades. But the carry trade is not a single trade, rather a series of trades, in & out based on the performance of the respective currencies. It cannot be considered to be purely a AUD play, anymore than it canIf not in Australia then other countries. So buying JPY/AUD may only hurt if Australia does be considered a CAD$ or RSA play. Its all a matter of respective merit. You can be sure however that the AUD and NZD will feature highly because of their merits and high yields.

I see little possibility of the AUD being displaced by other currencies as a better 'carry'. There are not many candidates for the very reason that makes the AUD such a great trade. These are commodity exposure (RSA, Canada dont match), relatively free market, periodically big spenders (terms of trade implications), best China/India exposure (terms of trade implications), and commodity exposure (best worldwide).
I dont see Australia loosing this status because of China/India. I cant see Asia gaining it because they will be big savers for a long time, and they are prone to subsidise interest rates. I would suggest more likely you will see Japan end the carry trade. At some point Japan & China will be forced to drop the mercantilist trade policy they learned from Britain. I dare say it will take the USA to repudiate, or threaten to repudiate its debt before it does that. Really the USA doesn't even have to do that. The USA is holding tangible assets, Japan & China are holding paper that is becoming more worthless by the day. I think the USA wants a monetary crisis because its holding real assets. After that, you can expect a huge rally in the Yen, and alot of reform in Japan to deal with its lack of competitiveness. Its the kind of crisis Japan needs.

Actually probably the greatest rival to the AUD for the carry trade is likely to be the USA. The Fed is currently subsidising short term rates to delay the inevitable rise in interest rates in an election year. You can expect that the USA will lag on rate increases whereas Australia is having an early start because of the strength of its economy. The housing boom has ended in Australia, but alot of new investment is going into mineral export capacity, eg. nickel, coal, iron ore, natural gas, mostly being spent in WA. This investment in the short run will boost domestic demand, so the economic outlook remains strong, with investment offsetting a weak consumer sector being hurt by rising interest rates on home loans. I wonder the extent of variable home loan exposure in Australia. If there was high awareness of inflation then maybe Australian consumption might hold ok. At some point there will be a shift to the USD/JPY, but it will flow back to AUD/JPY when that mineral export capacity kicks back in. Remember the bulk commodities market remains tight. There is inflation, but this is no bust. There is no huge over-capacity, so any slowdown will be painful but it wont create a huge overghang of capacity for some time yet.
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Andrew Sheldon www.sheldonthinks.com

Outlook for the AUD - a brave man's forecast

2008-03-24T02:07:00.000-07:00

Reading some commentary on the Australian dollar I seem to be at odds with most of them. The SMH asserts “The Australian dollar may fall 7% in the next two months as commodity prices weaken and global equities decline”. The AUD reached a one-month low of USD90.97 last Thursday, down from its high of USD94.98 on 29 Feb 2008 – last reached on 29 March 1984. The argument for a weaker AUD is “The commodity story from here will be mixed to negative and risk appetite is being unwound”. On that note I am in wonder – where is the risk:

Commodity prices are resilient because of the weak USD. Where is the compelling evidence for a stronger USD? I can see some weakness for commodity prices but not a great deal.
Commodity prices are mostly (coal, iron ore, bauxite) sold forward on 1 year annual negotiations and prices are higher than last year along with volumes
Agricultural commodities are set to be a contributor since the drought-breaking rains last year, so might we expect added zest to the AUD on those export flows
Australian consumer confidence has slumped so we can expect weaker imports
The spread with Japan is even better at 6.75% since the BOJ is offering 0.5%. You might think this is a problem because Australia is a commodity currency, but consider markets are driven by yields and capital growth. I don’t see much prospect for capital growth in the current market, so I am confident the AUD will get supported on the basis of yields. Why else would you buy bonds?
Australia’s public debt as a % of GDP is the best in the developed world at just 15% of GDP. The only positive legacy of the Liberal Party. That gives the current government a lot of capacity to soften any downturn with public spending. One might make the argument that Australia has huge private debt, but its mostly real estate stock and it could be readily absorbed by higher migrant inflows. I would not be surprised to see the Australian Labor government lift immigration intakes, though it will need to pay off the Greens with more national parks and windmills.
Australia is one of the governments that has raises interest rates, so preserving the attraction of the AUD for the Yen carry trade. The cash rate for the AUD is 7.25% after the RBA raised rates this month – thats a 5% spread over the Fed’s 2.25% on March 18.

I have just one qualification – money supply growth in Australia based on statistics I downloaded on the weekend is very high. In fact its at historic highs. The positive implication is likely to be that the Australian government will reign in that money supply by raising rates, at a time when the Fed could possibly lower them more. The USA is going into recession, and more importantly it faces an election.

“Risk aversion remains the dominant factor holding back the Aussie against the US dollar” according to Commonwealth Bank chief currency strategist Richard Grace. I don’t disagree with this, but that is the basis of buying opportunities. The reality is that no where is there growth prospects, so true no one is looking for growth from Australia, however I think the agricultural sector will surprise the market. I also think yield rules in these conditions. Australia is also a significant natural gas exporter and commodity prices in US terms still look good if you agree that the USD is going to its all-time low of 85Yen. I would suggest that Australian commodity export capacity is alot more tangible than the USD banking system. The gold sector is going to be another great performer for Australia in coming years. The other factor supporting the AUD is likely to be efforts by Asian governments to boost their domestic economies in the wake of a weakening US economy. Its worth considering the capacity of Asian governments to do this:

Australia – public debt 15% of GDP – but high external debt
China – public debt 21% of GDP
Korea – Its public debt is 23.8% of GDP
USA – Its public debt is 36% of GDP - but high external debt
UK – Its public debt is 43% of GDP
Canada – Its public debt is 55% of GDP
India - Its public debt is 58% of GDP
Germany - Its public debt is 65% of GDP
France - Its public debt is 66% of GDP
Taiwan – 121% of GDP
Japan – the Japanese public debt is 182% of GDP

If anyone has the capacity to lift spending its probably the USA, but I don’t expect it at a time of rising global inflation. I think the Democrats will raise taxation.

Lastly I want to reiterate - I dont see depreciation - but there will be alot of pain for holders of debt that is not fixed. You should have fixed your property loan rates, at least for the next 5 years.

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Andrew Sheldon www.sheldonthinks.com

The USD-JPY soon to test Y100

2008-03-22T16:41:00.000-07:00

The USD-JPY has recently found some support at 96.5Yen, though I still believe the USD is going weaker. I was actually surprised by how easily the 100 yen level was broken. Maybe it was just a reaction to the Bear Stearns failure, but I think the market is going to need more convincing that other financial institutions are not going to fail.
There might also be some market trepidation with the US presidency up for grabs. Looking at the chart above its apparent that the US dollar has been stronger over the last 5 days. I think its fortunes will be far worse next week. It was always going to retest that previous Y100 level it broke so easily. So having reached Y100, I think it will be fall back, eventually reaching the Y85 level. If I am wrong, we will know early next week.

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Andrew Sheldon www.sheldonthinks.com

Trade the AUD from Y90 to Y100

2008-03-19T09:09:00.000-07:00

The following is a discussion I had on Japan Forum. Got a debate going on the outlook for the AUD against the Yen.

[QUOTE=tanmedia]If NZ and Australia have a debt crisis, there will be pressure to cut interest rates. The Reserve Banks of both countries are between a rock and a hard place at the moment.

Rising energy costs yet some of the highest debt in the developed world.[/QUOTE]

No question there will be a debt crisis but you need to consider 2 things: (I) Australia, and particularly NZ have run much more disciplined monetary policies than the US, so rates never sank to the level of USA, and Australia was far more prosperous. There were 'no doc' loans in Aust, but not to the same level of abuse. (II) The drought appears to have ended, so thats another $6bil of export revenues for next year at a time of rising prices.

[QUOTE=tanmedia] "The Aussie is hostage to competing forces rigth now. On one hand, the endless rise of world commodities prices and the great fall of the US Dollar are good reasons to back the Australian currency. Indeed, Australian exporters can take full advantage of rising gold, metals and energy prices." [/QUOTE]

Well most of those commodity price rises are due to falling USD of late so mixed impact. Precious metals are rising in real terms, base metals are falling. Bulk commodities like coal and iron ore are doing very well. But AUD is rising also because of agric export outlook and higher interest rates whilst US cutting its rates. So I agree with you there.

[QUOTE=tanmedia] "On the other hand however, there is a new event on the FX markets which is bearish for the Aussie: the liquidation of carry trades. Those long-term positions were based on the different interest rates on government bonds in different countries (a basic carry trade being to buy the high yield currency and sell the low yield one). [/QUOTE]

Eh, I thought we just agreed the outlook for AUD was good. I see it breaking $1 parity no question. But maybe you are talking in terms of USD.

[QUOTE=tanmedia]"The dominant carry trade of the last few years was a strong bearish force for the Japanese Yen. It was cheap for global spculators to borrow the yen because of ultra-low interest rates in Japan for years. Since last November roughly, investors become more and more risk averse, fearing a global slowdown and the unknowns of the credit crisis. [/QUOTE]

I think the crux of this argument is whether relative yields are important or absolute yields, and I would suggest relative yields, plus monetary policy. Aust is showing a tighter policy than Japan, so all things being equal, I think we are looking at Y90 being support for the $A. I think the carry trade is not one trade, but some with a long, others with a short term perspective. What forex traders also fail to see is the bent up demand for commodities, ie. The 100 ships waiting off newcastle port, the planned mines which cant get mining equipment. That is keeping metal prices along with strikes.

[QUOTE=tanmedia]"So what have they done? Yen carry traders are getting out of long-term winning positions to lock in profits. They're also making a big change in their asset allocation, which should favour commodities. That's why the Yen is currently in a massive up trend. It's rallied against all the high yield currencies, including the Aussie."[/QUOTE]

Looking at the AUD-JPY, I can see a great looking trade from Y90 to Y100. I think it would be imprudent to expect more. I think you'll find your market comments are old news and pundits are about to jump back into AUD, whilst some will just continue to hold it. The higher agricultural export volumes & prices will take time to come. Terms of trade should improve as well. Can you say the same about Japan with oil prices at $105-115/bbl. Australia producers about 30% of its oil, but add in NW Shelf gasm and it has a net fuel balance.

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Andrew Sheldon www.sheldonthinks.com

George Bush believes in a strong USD

2008-03-16T18:22:00.000-07:00

President George Bush said in the wake of the Bear Stearns bail-out, that “the US believes in a 'strong dollar”. Does that give you confidence? Surely that news is likely to push the USD to its all-time low of Y81.12 set on 19^th April 1995. But we are a long way from that. I suspect the motive for the comment was to calm those governments holding large amounts of US treasuries, namely Japan, China and Saudi Arabia. Afterall why would a foreign government want to hold a basket of bonds in a depreciating currency on which real yields are also falling. So that’s the rhetoric to support buyers. Which raises the issue of whether the US government will have a problem financing its deficit. The US has had a succession of tax cuts under Bush, with the economy oftening it looks like there will be a series of tax increases in future. On the other side, who wants a weak currency at a time of weaker economic growth? Where is the value when most of your competitors are pegged to your currency? Only the Euro and commodity currencies like Australia, Canada and NZ offer competitive advantage, and they are not significant markets.

Currently the USD is trading at 98.05, well below its 2005 low 0f 101Yen. The doubts cast over the US economy, the high oil prices, the prospect of weaker global growth all seem to support a weaker USD, and more importantly the Fed is about to cut the Fed rate by another 1% to at least create the myth that there will not be a recession. The high oil price in USD terms is sure to undermine local spending too. It could not look much worse. The positive of course is that the USD can repay all its debts by merely flooding the world with USD. It is left holding a lot of very tangible assets, whilst Japan & China can monopoly money. But we are years away from that. Its all payback of course for the mercantilist policies in those countries. So sit back and watch the USD fall to 81.12 Yen. I actually though it would come later, but the Bear Stearns bail out will undermine confidence in financial institutions. I give the Fed credit – they are great at managing perceptions. If only they could manage money better.

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Andrew Sheldon www.sheldonthinks.com

Hail to the Yen!

2008-02-27T08:59:00.000-08:00

Anyone who knows me knows I like an argument. Call me a tease, provocative, a dick, etc, but nothing gives me more pleasure than challenging myself. Gets me thinking, and it gives me more motivation to write. So today I had a good discussion with Ken at www.gaijinpot.com/bb/showthread.php?t=49871. We are discussing the merits of buying foreclosed property in Japan.

Ken said: I expect the USD to stay weak during 2008 but rise again in 2009. I don't see the J-government/US government letting the yen go through the roof against the USD like it did in late 1990's. Bottom line: the USD is the generally the stronger currency.

Andrew said: The US 'has' been the stronger currency, but that need not been the case in the future. Its not an arbitrary principle. The reason why the USD was strong was because the economy was growing, and all that debt was performing well for Americans. But asset prices are in reverse. Which means the cost of living has to rise whilst debt is liquidated. Its a double-whammy to restore monetary equilibrium. Why should the USD strengthen? Of course it will as a short term trade. Sure there will be interest rate increases, but they will lag inflation.

Ken said: Because it's not going to crash all that much against the yen. The yen is still over 100 yen to the USD. The J-government does NOT want the USD to fall below 100 long term and will resort to currency manipulation as it has done many times in the past if need be.

Andrew said: I think the problem with those arguments is that they are old. The paradigm has changed. Spending will fall off alot in the USD, so there is no point being competitive in the USA. Asian currencies are rising, and the Euro, this is where the Japanese exporters will be making more money, not to mention the Middle East, Russia and other commodity producing countries. Japan has been shifting increasing capacity offshore anyway, so only high value production retained in Japan. Japan is almost at a point where it is a holding company like Britain, with most low-value product manufacturing is located offshore.

On your last point, it was easy for BoJ to manipulate the currency when the US economy was strong. But not its not, the carry trade is being unwound. Where will Yen go? Sinking USD, sinking US assets? Nope. Some will go into metal commodities, some into agriculture (in USA & elsewhere), some into commodity markets, but most will go home, afterall Japan is the world’s third largest economy. So Japan starts to look quite good! Weak exports, but some sound basis for domestic demand. Its a more compelling story with reform, but looks ok.

Japan will copy Korea - nice irony dont you think

Ken said: The fact is the J-government does not like a strong yen.

Andrew said: Well they didn’t like a strong Yen for the sake of exporters. But like I said, that 'mercantilist policy' has had its day. In the next few years you will see that change. You will see Japan shift to a strong Yen policy, and I suggest there will have to be a policy of economic austerity measures to make Japan more competitive. I think the fact that Korea is taking that path is actually likely to lead Japan to take a similar tact.

Ken said: Old or not the fact is the J-government prefers a strong USD to the J-yen.

Andrew said: Ken, are you 44yo, or born in 1944, because you're being a headstrong traditionalist mate. It might be time to give up the 70s disco scene and embrace the kabuki. Yen will take the lead.

The debate continues…..www.gaijinpot.com/bb/showthread.php?t=49871.
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Andrew Sheldon www.sheldonthinks.com

Outlook for the USD-JPY

2008-02-17T08:08:00.000-08:00

This chart highlights the long term decline in the USD as a result of currency debasement. They all do it, though the US is worse than any other country. Why? Because the USD is the base currency, that is the the currency in which most debt is priced, and most commodities are sold. This is a powerful position because it means that the USA has the power to debase its currency, yet still repay its debt in its own currency. So if the USA is debasing its currency it has a huge credibility problem.
You might ask - Who would care? Well you might think the Japanese, Chinese and Arab governments who are accumulating large amounts of US debt. But no - that is not apparent. We dont see alot of complaining from those quarters. The reason is that they see opportunity where others see problems. The opportunity is:
1. Higher interest rates in the USA
2. Reform of this poorly structured monetary system
3. Continued economic prosperity in the interim, which they profit from, whether its sales of Chinese & Japanese exports, or purchases of Arab oil.
In this last chart we can see that the USd-JPY has stabilised in the 100-130 Yen range. Currently the USD is trading at 107 yen, and I believe it will return to 100 yen, last reached in 2005. Once again the fall in the USD is being orchestrated by a decline in the Fed Reserve interest rate. At that point, there is really two ways for the government (likely a Democrat govt) can address its issues:
1. Increase interest rates and taxation
2. Print USD to repay all those foreign holders of US treasury notes, or some combination of these 2 options.
3. Reform the economy
The US is already one of the most vibrant economies in the world by virtue of the US values system and its dynamic, free-thinking people. But government works in mysterious ways. We have already made the point that the USA benefits from the current monetary system. But I suspect the US might be willing to debase its currency to get Japan and China (and Asia for that matter) to legitimately price their currencies. At some point, these countries will have a large portion of their savings in US treasuries.
I wanted to provide this forecast of the outlook for the USD-JPY for the sake of property investors in Japan. Refer to my report on Japanese Foreclosed Property 2008.
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Andrew Sheldon www.sheldonthinks.com

Weaker USD-JPY in the short term

2008-01-17T19:03:00.000-08:00

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

2008-01-17T18:45:00.001-08:00

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

2008-01-17T18:04:00.000-08:00

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

2008-01-07T17:00:00.000-08:00

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

History of the USD - from 1970

2007-10-09T00:09:00.000-07:00

Its worth at this point pondering the history of the USD. People talk about currencies as if they are a measure of value, but in fact thats not really the case. There are 3 things that determine the relative value of currencies:

1. The relative value of the base currency its paired with

2. The sustainable value of the currency for trade and investment

3. The short term speculative value of a currency in terms of its yield

Any class of asset that offers liquidity like the forex market can be traded successfully. So looking at the USD against the British Pound Sterling (GBP) we can see that the USD was strong in the early 1970s on the back of strong economic growth, but as inflationary pressures arose in the late 1970s it fell off considerably. In the early 1980s we have another long rally in the USD as the Fed chairman Paul Voelker aggressively raised interest rates to eradicate inflation. Thereafter there was a period of consolidation which corresponded to pretty goof economic growth in the 1990s. Its noteworthy that the USD was stronger during the brief 2000-1 US recession, but the USD has been weak in the US ever since despite strong US economic growth. This occurred because the Fed reduced interest rates to a record 1%.

There was a brief period of USD strength in 2005-6 as the Fed responded to inflation fears. But from Sept'07 the USD has weakened as the Fed focus has shifted to the weak economy. I frankly am not so confident that the Fed will engage in another period of lower interest rates. I think the market doesn't understand Ben Bernacke's intent. The intent of the Fed will always be to give confidence to the market, and it does that by saying that it will 'drop money from helicopters' to stave off recession or depression. I think the only time a government could do that is during depression or war time. For this reason I think Bernacke will step in and raise interest rates as soon as there are signs that inflation is growing. Since we can't have much faith in the CPI as a measure of inflation, we need to look at other tools, eg. Your shopping basket cost, growth in wages. These are the more reliable trustworthy tools for monitoring inflation because they are price-taker markets.

The problem is that higher interest rates will not eradicate inflation. Inflation is the markets way of correcting an imbalance between the amount of money in the economy and the sustainable level of output. If you expand an economy at such a rate and use debt to finance even faster rates, you can only preserve low inflation as long as speculative asset bubbles are inflating. This process takes pressure off staple prices (because the price increases is borne by asset inflation) and delays wage demands since wage earners are benefiting from stronger property prices and regular work for the family.

Once asset prices fall, there needs to be a corresponding rise in prices to offset the imbalance, as wage earners are now looking for higher wages to restore their purchasing power as prices rise. Inflation keeps rising not because inflation has not been eradicated but because there is still excess money supply in the economy.

I believe in the short run we are looking at a weaker US and global equity markets as Bernacke lowers rates to resuscitate them. I believe he will ultimately be forced to move hard on interest rates as inflationary expectations rise, forcing demand to soften. At that point I think the environment will become a non-issue.

- Andrew Sheldon www.sheldonthinks.com

Dont ride off the NZ economy

2007-09-29T15:04:00.000-07:00

I dont see an increase in the NZ overnight cash rate. Dont see 50bp rise, more likely they will hold, with a 15% chance of a 0.25% increase. On the negative side (in favour of rate increase):
1. New Zealanders dont save
2. Need to rein in credit creation in an inflationary setting (ie. real rates are lower)
3. Growing inflationary outcomes worldwide - but not recognised by the Fed
4. Central banks are generally not inclined to make big steps unless they want their impact to resonate. A 0.5% would kill off the economy when there are strengths emerging.
5. New Zealand farmers are already being punished by a strong dollar and rising costs

On the positive side:
1. Previous rate rises are already having an impact
2. The outlook for NZ exports (food in particular) is very good
3. NZ is principally a food exporterYou watch food prices take off over the next few years.
4. The carry trade remains in place
5. Softer global ecoonomy

The good news is that this will restore earnings to farmers who have until now been struggling under low prices, high fuel/fertiliser costs and rising interest rates. I think we will increasingly see the corporatisation of farms globally in this period. The consequence of this will be:
1. Acquisition or merging of farm interests around the world by corporate players for subsequent listing on the stock exchange.
2. Amalgamation of farm holdings under a few very large companies with interests that integrate farming, processing and retailingHopefully farmers will see what is happening and not sell off the farm too cheaply. Fortunately they are already benefiting from an oversupply of credit. But you can expect corporates will pay even more for properties IF they can generate an income.

Why will this happen?
1. Because farm prices have lagged the increases in other commodity prices. Just look at the components of the CRB Index. See www.crbtrader.com.
2. Because its a global trend - towards greater global integration - and it makes particular sense in agriculture because farms are under-capitalised, often lacking the benefits of skilled technical resources, climates are shifting around the world because of the 'natural' heating and redistribution of rainfall.
3. Because where there is money there are investment bankers
4. Because farming is no longer a lifestyle - its a business and deregulation has globalised the agri-market
5. Because the use of farm produce in biofuels will lift demand, along with growing demand for agri-products in emerging markets (eg. China, India) as diets change.
6. Corporate entities want to increase market share
7. Corporate entities are comfortable operating in multiple jurisdictions
8. Corporate entities want to diversify operations to preserve stable earnings as well as offering segmental market focal advantages

The leaders in this process are likely to be:
1. Investment bankers, eg. Rand Merchant Bank, Macquarie Bank, Elders
2. Resource-retailers, eg. Wesfarmers, Woolworths looking for vertical integration
3. Some more wealthy and commrcially astute farmers
4. Existing listed agricuktural companies, eg. Australian Agricultural Co (ASX.AAC), Australian Wheat Board (ASX.AWB), etc.

Its actually interesting to see how events transpire because currently farmers are being squeezed by rising costs, stronger currencies, low prices, and even droughts in some markets. This is why I think we are starting to see take overs of agricultural assets, eg. Namoi Cotton in Australia. Who is next? Dont forget the baby boomers sitting on productive (but small) farms are likely to be considering selling off in preparation for retirement. They will be looking at the relatively high prices for land and saying its too hard, my kids are not interested in farming, its time to sell-up and move to the coast and retire on a waterfront. Farmers looking to expand their interests will be in acquisition mode. Other targets are likely to be farmers reeling from drought, low prices or hedge contracts that went wrong. This is all fertile ground for the investment banker.

So looking at the NZ dollar....we need to consider:
1. Central banks need to control inflation
2. Loss of competitiveness of a strong NZD
3. Weakness of NZD due to a subdued global economy (USD)
4. The seeming intent of the Fed to push for lower interest rates - forcing the hand of the European Central Bank (ECB) to follow suit, or again sustaining the unhealthy US economy
5. Weakness of the NZD if the Japanese carry trade unwinds

I dont see the Reserve Bank of NZ increasing rates at this time....I see it holding current rates. If the ECB follows the Fed, and there is another cycle of easing rates, the NZ will remain strong, undermining any need for a rate rise and the NZD will anyway be supported by stronger exports. If the ECB doesnt follow the Fed, and the Fed waits (as I expect), then we can expect the status quo (thats short term trading conditions...you needing to sell into rallies). Eventually of course inflaiton will unwind the carry trade.

- Andrew Sheldon www.sheldonthinks.com

The $AUD looking at parity with the USD by Jun'08

2007-07-26T01:12:00.000-07:00

The AUD has been one of the strongest performing currencies this year, and there is no evidence of that changing soon. In fact there are good reasons why we can expect the AUD (currently at 0.86USD) to reach parity in the next 12 months. This is likely to occur on the back of strong export price settlements next year, which will likely coincide with a rise in the Reserve Bank's rate.
The $A is performing well because of the very favourable terms of trade, as the economy continues to benefit from strong export prices for mineral commodities, as well as an improving outlook for the farm sector. We can expect a breaking in the drought as well as higher global food commodity prices. On the domestic front, production capacity and labour markets are very tight, so there is every likelihood of strong business investment to lift productivity. A number of businesses and state governments have flagged the need for greater infrastructure spending. The long (100 bulk carriers) queues off Newcastle port are a testimony to the shortage of export capacity at Australian coal ports. Housing vacancy rates are also very tight, and whilst interest rate increases can be expected, there are several reasons why a strong AUD will be prompted by positive developments:
1. The stronger AUD will help reduce inflationary pressures - since imported items will be cheaper in AUD terms
2. The stronger will support alot of portfolio investment - particularly in mining and agriculture
3. The high levels of debt will discourage government from lifting interest rates significantly
4. Growth in incomes will fuel a 2nd rally in the property market

- Andrew Sheldon www.sheldonthinks.com

Aussie dollar - looking weaker

2005-08-18T02:39:00.000-07:00

The Australian dollar is likely to fall off in the coming months as a softer Chinese and US economies tranlates into lower commodity prices. The highly indebted household sector will prevent the government from raising interest rates, though a weaker $A and tight labour markets suggests some upward move in interest rates will be required to quell inflation. There are already signs that retail sales and business confidence is weaker in the retail sector, so consumer spending should fall, but $A dominated mineral revenues will offer a sound buffer until inflation needs to be addressed. The 'staunchly independent' Reserve Bank (central bank) will have a chance to prove its meddle. We have already seen food prices moving up 7-15%, so that will eventually lead to wage pressures.

Strong commodity prices was recently the reason for a strong $A, but it appears to have been a speculative commodities play rather than reflecting real demand. Economic activity just was not that strong.

This set of affairs means that Australian gold stocks will out-perform.

Japanese Yen - subdued for now

2005-08-18T02:36:00.000-07:00

The Japanese yen is a side-show compared to the $US as the US economy powers ahead and the Fed fight inflation fears with higher interest rates. The Yen will however out-perform the Euro since its economy is growing stronger. There is also considerable interest in the Japanese equity market as it benefits from a property-inspired boom.
- Andrew Sheldon www.sheldonthinks.com

Euro - nothing happening

2005-08-18T02:33:00.000-07:00

The Eurozone remains a disappointment - given the slow growth and lack of resolve to establish a unified monetary policy framework. Progress with labour reform is also slow.

The Euro will be weak as the US and Japanese economy strengthen, particularly since the Eurozone will not want to raise interest rates.

- Andrew Sheldon www.sheldonthinks.com

US Dollar - range bound

2005-08-18T02:27:00.000-07:00

The $US has broken out of its long term downtrend, though its likely to test its lows as oil prices and Asia`s mercantilist policies conspire to boost the US deficit. In the short to medium term however the US economy is growing strongly and the Fed is raising rates, so with the Eurozone recording subdued growth - except a stronger $US. The Japanese economy is looking stronger, however the Yen will look weaker as long as the rate differentials with the US remains substantial.
Higher deficits or lower interest rates could eventually bring the $US back to its Y86 low. For the meantime, the US remains a growth story. Nevermind that the bulk of the jobs created are in the service sector and will disappear with the forthcoming collapse in household consumption.

- Andrew Sheldon www.sheldonthinks.com

Indonesian Rupiah - up on growth

2005-08-16T06:31:00.000-07:00

Ever since the current president of Indonesia was elected, I have been very excited by Indonesia`s prospects. The reasons are thus:

Leadership: The values and leadership style of PM Dr Susilo Bambang Yudhoyono are conducive to stable government. The PM is US-educated so there is some hope that he will embrace western values. He has also been concillatory with US and Australian governments.
Tourism: The tourism industry was hit by terrorism, and less so by the tsunami. It appears that Indonesian police have had greater success rooting out terrorism than the Philippines.
Values: Indonesia has long been divided by different values (religions) and ethnic groups that have fought over control of resources > mining revenues. This and corruption has undermined the rule of law.
Infrastructure: there is some hope that Indonesia will be able to develop basic infrastructure to service industry.
Industry: Certainly the Indonesian coal & minerals industries will benefit from renewed investment. Oil & gas exploration and development also will boost national income since indonesia is a net energy exporter.
Civil Unrest: The government is close to negotiating a peace agreement with the Free Aceh Movement in North Sumatra. This region controls a significant share of the country`s oil production capacity, so will aid further investment.
Trade: Exports are up 30% in the last year since Dr Y`s election.

There is every reason to believe that Indonesians will be less prone to embracing terrorism if their prospects for employment are raised. but it only takes 1 to set a bomb. Given the stronger terms of trade of Indonesia (from net energy exports) and its stronger leadership, it seems to have less upside than the Philippines peso, but represents a safer bet.

- Andrew Sheldon www.sheldonthinks.com

Philippines Peso - down on reform uncertainty

2005-08-16T06:07:00.000-07:00

The Philippines peso is not one of the easist currencies to trade, but having visited the country in recent weeks, the country strikes me as an emerging good story. There are a number of dynamics shaping up to propel this country:

Constitutional crisis: The Arroyo government was close to impeachment in recent weeks, and though it looks like she will have a reprieve, a strong consensus emerged for reform. The Philippines is considered the 2nd most conrrupt country after Indonesia in Asia.
New cabinet: During the crisis, Arroyo moved to appoint several ministers who were well received by the Makati Business Club. eg. New finance minister, etc
High oil prices: The Philippines is strongly dependent on imported oil. This dependence has eroded government activity.
Expat income: The Philippines has the good fortune of having some 5mil expats working overseas, mostly in the USA, Japan and the Middle East. In times of crisis these Filipinos repatriate more funds to the Philippines.
Terrorism: The Philippines comprises 3 island groups. The southern island group of Mindanao/Sulu hosts a large number of Muslims, some of whom engender extremist views - the Abu Sayef - and resort to kidnap and ransom demands, assasinations and bombings of key infrastructure. Their activities have impacted on investment in the Philippines and the southern islands in particular.
Values: The Philippines has embraced the worst elements of western thinking - populist democracy, Catholicism and the hypocrisy that accompanies such subjective values. This aspect of the Philippines remains the most enduring and the most scary. Chile proved that it can be done - though it did not have the same democratic foundation given that Pinochet maintained control of the military.
Investment potential: The Philippines remains (along with Indonesia) the poor bed-fellow in Asia. There are 3 sectors of the Philippines economy that hold particular promise:

a. Mining: The Philippines is very rich, so is likely to benefit from a future mining boom. It will be greatly advantaged by expat miners returning home.

b. Tourism: More than most countries in Asia, the Philippines offers an attractive archipelago for developing tourist resorts for Asians. Part of the appeal is the allure of the Filipino, though improvements in diet, infrastructure, service, security and safety are needed.

c. Property: There are currently significant constraints on foreign investment in property in the Philippines. Foreigners are for pure investment purposes are only allowed to invest in condominiums starting from $US40,000.

In recent weeks the Peso has fallen to P42 against the $A and $56 against the $US. Uncertainty over the constitutional process and higher oil prices and the collapse of Asian exports can be expected to see the peso trade lower in future, but that will present an attractive buy opportunity.

- Andrew Sheldon www.sheldonthinks.com