At this stage in the financial market crisis one can look at the state of affairs. If one looks at one set of figures, it’s evident that the United States is heading for a recession. On the other hand, another set of indicators show that the US is promoting manufacturing and growth.

Former President Bill Clinton had wiped out the American account deficit in about four years and I see no reason why it can’t be done again. However, at this point, I can only provide a scenario based on the present market conditions, and anything else would be speculation. In my humble view, the end of 2009-2010 US economy will be booming again, and I also think that the American dollar might not be the same.

A bit about the US crisis. First off, interest rates are low and the FED is following an expansionary money policy, which will eventually ease credit woes. Simultaneously, inflation will go up maybe even doubling, which will eventually force the FED to start hiking interest rates.

Now, a thought crossed my head. I wonder where the billionaires of the world are investing their money. Warren Buffet has invested in Goldman Sachs and GE. Anil Ambani has invested in the US entertainment business. Other billionaires investing in the US include Steven Spielberg, American Fund Manager John Paulson, Hong Kong billionaire Li Ka-Shingh, Russia’s Alexander Mamut and Mikhail Prokhorov, Thailand’s beverage tycoon Charoen Sirivadhanabhakdi and Mexican magnate Carlos Slim Helu. I guess they know what they are doing with their money. And to me this is an indicator that the US economy, despite its problems, is set for a recovery.

The weakening dollar

The dollar has been weak since 2002. Therefore, a slight recovery, as we are witnessing now, is not surprising. I believe the US wants a weak dollar and eventually the USD will weaken again. A weak USD has helped make US products more competitive.

However, the stock markets in the US will continue downwards. Temporarily, they might go up, but when more and more financial institutions write off over inflated assets the paper value will come down and with them the markets. I think this is good for the US in the long run.

On the negative side

Here’s what the US has to deal with:

• Excessive USD in the market: Excessive currency has forced the breach of the US dollar index for the first time below 70. Hence, USD is losing value continuously in terms of purchasing power.
• Regulation: Regulation is in need so that what has happened now does not repeat.
• Big Daddy attitude: The US is sending a signal to the general public and financial institutions that it is always there to get them out of trouble.
• Bad debt takeovers: Taking over of banks bad debts and resale, so the banks that made mistakes in the first place don’t gain unreasonably and the tax payer does not lose unreasonably.
• Confidence: The need to rebuild confidence in the free market and the financial markets.

Disclaimer: Any opinions, news, research, analyses, prices, or other information provided by the author are provided as general market commentary, and do not constitute investment advice. Neither WBJ nor the author is liable for any loss or damages, including without limitation, any loss of profit which may arise directly or indirectly from use of or reliance on such information. Investors are advised to consult their broker before making a decision on buying or selling a particular security, product or currency pair. These articles are opinions and should be treated as such.

Funds returning to the US: For the last few years, investors have been selling USD and buying euro and other currencies, hence funds were going out of the US. Now, the reverse is happening, which means that the USD is being bought and other currencies are being sold. If an investor would have 1 billion USD, which he would wish to invest, I am sure the United States would be the place the investor would choose. Since everything in US is cheap now, chances of the business doing well in the country are better than compared to other parts of the world. In my opinion, I believe funds will start returning back to the US.

In order to bring a business to the US, foreign investors will have to start buying back the American dollar in order to buy USD denominated assets. Secondly, currently, the United States is the most transparent economy, and hence it seems the US is not doing well because the economy is going through an internal house cleaning, called Mark to Market.

When Europe, China, Russia and the rest of the world will follow suit and conduct their own internal cleaning, it will seem the US is doing the best among all. The problem is that this house cleaning does not happen transparently in various parts of the world. I cannot say when, but I believe after a year or two, the global economy will boom thanks to this house cleaning happening now.

Mr. Bernanke acted calmly when dealing with AIG last week and he has made some good moves, for example by taking over Freddie Mac and Fannie Mae and now AIG, as all these institutions would affect the global economy. At the same time, he has let Merrill Lynch go. He further acted well in keeping the interest rates steady. A rate cut in my opinion would have sent a negative signal to the market.

I will still stick to my target of 1.75 to 1.77 EUR/USD for December 2008, as I do not see any fundamental changes in the US economy to warrant otherwise. Many more problems are likely to surface, which will affect investor confidence. I believe that the USD will remain strong during the year, with slight weakness during US elections. But then again, one needs to be cautious when it comes to the USD strength.

Having said that, the fact remains that USD’s status as a reserve currency has diminished, a status I believe will remain. Oman pulled out of the peg against the USD last year and Kuwait has also shifted to a basket of currencies. If other countries follow suit, it could be a bad sign for the USD. I see no fundamental reason for now to believe that the USD will continue to strengthen, though the USD is a natural buy for now.

Gold: I target gold at 1150, as stated previously in August. I had expected gold to go down again, but not lower than 750. However, gold went down to around the 730 levels.

Silver: Is also a good buy and percentage wise has more room to move than gold.

EUR/USD: Is a sell now for a target of 1.3720.

USD/JPY: A good sell due to carry trades and repatriation of funds to Japan by Japanese firms. I would expect Yen to get strong to 101, then 97, 95 and finally to 92 (against the USD). This move could be rapid.

Stocks: Globally are going down and will continue to remain that way.

USD/PLN: Will remain weak for now. I would now target 2.50 PLN. On the downside, I think USD/ PLN would comfortably stay above 2.30.

EUR/USD: I feel the EUR/USD has most certainly bottomed. I will be a bit surprised if last week's low of 1.4193 is broken. However, this can’t be ruled out as GBP might fall once again and consequently it might pull down the EUR/USD a bit. If today the low is not broken, then the bottom is confirmed. From here the euro would move to the following targets: 

1st Target – 1.4583

2nd Target – 1.4852

USD/CHF: This might rise to make a high of 1.1220.

The targets are:

1st Target – 1.0930

2nd Target – 1.0750

GBP/USD: This is more difficult to predict, due to cross-trading activity. However, for now carry trade activity seems to have stopped. The GBP might try the low once again to make a bottom of 1.7480, however I doubt this. It's better to be cautious. Targets would depend on where the bottom is, but taking the current bottom of 1.7533, the targets are as follows:

1st Target – 1.8362

2nd Target – 1.8925

USD/JPY: it seems to have already topped, but due to cross activity it is difficult to predict. It might rise to 109.50.

As promised, here are my predictions and expectations of the Euro/PLN movement during the next few months, based on technical and fundamentals.

Due to the Russia-Georgia conflict, economic slowdown in Western Europe and the main market for Western European exports being the US, most of the European regions currencies, including the regions best performing currency PLN, are on downward pressure.

However, the Polish złoty may remain firm for a while on expectation that the key interest rate, which currently stands at 6 percent, may be hiked one more time due to strong second quarter economic growth and labor market results.

One has to look at the PLN in conjunction with analysis of the USD. If problems in the US aggravate, then the PLN might start getting stronger once again, but this also means that the euro will also gain ground. For now, the PLN is likely to weaken to 2.35 against the USD.

Now, let’s take a look at the exchange patterns of the euro to the złoty. Between June 2001 and March 2004, the euro was up from 3.3407 to 4.9429. Then things changed and between March 2004 and July 2008, the euro started to go down from 4.9429 to 3.1940.

The euro/PLN exchange seems to be bottoming at 3.1940, for the time being, and will continue to move up as long as the euro moves down against the dollar.

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Comments can be directed to my email at m.sharma@interglobalfb.com.pl