Currency View
??? US dollar to continue to decline
??? Yen has a chance to hold on
??? AUD and NZD set to accelerate
The US dollar had a good run at the upside over the last week, as did the Yen, but while the Yen clings to some gains, the US dollar is set to fall sharply.
The fundamental backdrop to the US dollar has not altered at all over the last several weeks. All that has happened is that the market has occasionally chased an individual piece of paper fluttering in the wind from various economic releases. On a trend basis the US economy will be confirmed to be a weak performer with the GDP data. The number may in fact be a little better than consensus. The consensus is around 1.8%, but 2.0% is a possibility I would think.
If US GDP comes in at 2.0% to 2.1% then we may see a momentary bounce in the US dollar, but the market will quickly recognize that even running at 2.0% to 2.5% the US is under-performing, and the fate of the US dollar remains sealed. The perhaps repetitive but nevertheless valid story of the US current account, trade, and fiscal deficits continues to weigh upon the dollar in relentless fashion. The real story of course is that we are in a new global economic era, one where competitive price pressures are greater than the world has ever before experienced, and where global capital flows are more balanced (less US centric) than ever before.
The combination of the deficits and more balanced global capital distribution inevitably leads to a further 20% decline in the value of the US dollar in coming years. Right now we are in the midst of an impulse wave in that downward direction for the dollar. The Euro??™s break to fresh highs confirms the extreme and precarious nature of the US dollar at this immediate point. The Euro can be expected to kick on to 1.3650 and 1.3900 quite quickly from here.
The Yen carry trade story is also still alive, but I believe on it??™s last legs. There is a chance of one last gasp rally in the USD/YEN relationship, but any further weakness toward 118.00 from here will probably shake every one out of any long position there. The carry trade will live on, but metamorphosis into say an Australian or New Zealand dollar buy and US dollar sell trade. As the falling US dollar trend confirms itself over the next few weeks the market will increasingly recognize that the best carry trade is to be short US dollars and long almost any high yielder.
The Australian dollar will benefit from it??™s recovery so far seen from the CPI data, reassuring global investors that the trend is up for this commodity producer on the doorstep of Asia, that has a good yield whether there are further hikes or not. The Australian dollar does not need higher RBA settings in order to maintain the up-trend. Targets remain 86 short term, 89 this year, 96 cents in 2008 and then finally parity again late 2008 to early 2009.
The New Zealand dollar has a fantastic yield, has just achieved a trade surplus, albeit marginal, and has the potential to be a safe haven currency due to geography and western regulatory environment. The NZD is currently targeting 80 cents, and may well achieve 90 cents in 2009.