EUR and JPY weakness to outpace USD debasement

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 AUD and its widening trade deficit

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

Commodity based currencies in play

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

- Andrew Sheldon www.sheldonthinks.com