Though the USD has recently strengthened against other currencies and is likely still to strengthen more, I will continue to treat this shift as temporary. In my experience, it takes the US around one and a half to two years to turn things around. While measures are being taken, it takes time for them to fructify and for results to be evident. Keep in mind, elections are also round the corner in the US.

The inflation scenario in the US might help the USD, if the interest rates go up. For now, I do not anticipate the euro going lower than 1.4550/1.4420 agains the USD (this week). Then I expect the euro to bounce to approximately 1.4910, followed by another decline until it settles around 1.41.

While, the GBP is the most vulnerable currency and a lot of cross selling of the pound is going on. I wouldn’t be surprised if the pound reaches 1.75 in the near future. When it comes to the PLN, I would like to revise my złoty target to 2.35 against the USD, but more about that in my next report.

Here are some factors that are making the markets nervous.

1. Russia and Georgia
2. Iran
3. Hurricane Gustav
4. Banks collapsing in the US. Another bank, Integrity went down last week.

Considering these factors, I also want to look at one more market trend to better understand the possibilities for Euro.

Since 2000, global investors have been borrowing low-cost currencies such as the YEN and CHF on a long term basis and selling them against high yielding currencies like STG, AUD, NZD, EUR and others in order to benefit from the yield differential. Due to this activity, high yielding currencies, as mentioned above, strengthened considerably against YEN and CHF until the year 2007.

Now, due to the current financial crisis in USA, weakening global economies like the UK’s, commodity price meltdown and expected lower interest rates in high yielding currencies are all contributing to unwinding of these “carry trades” since the beginning of the year.

As a consequence, we are already seeing the high yielding currencies especially STG dropping heavily against YEN and which may continue for a while. Due to the expected short term strength in the USD, weak UK economy and unwinding of carry trades, STG may drop from the current level of 1.8250 to 1.7450 during the next few weeks. If the economic situation in UK deteriorates further, interest rates may go down, which could push the STG much below 1.74 or more specifically towards 1.60 against the USD.

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

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.

 

It’s a dangerous business to try to predict levels these days. Nevertheless, I have put below my expectations to the year end. I expect the current USD rebound to continue, due partly to the US Presidential elections being held in November. The USD could finish its upward move by around September or the end of October.

New issues will have to be addressed, such as the rising inflation and Pension Fund losses in addition to the current mortgage problem and credit crunch. In adversity, one must search for opportunity as the best opportunities arise then.

Market Overview

Currencies: On Euro/USD, I found the previous week low. It stands at 1.4647, and the Euro might touch 1.4620. I expect the currency to bounce back from those figures to about 1.4980/1.5020.

The CHF, likewise, finds a temporary top at 1.1010. CHF might touch 1.1020. That’s a rise of 1000 points completing one trend. I expect it to retrace to 1.0740/20. The trend would continue after that to approximately 1.1320-1.1380. Euro could come down after the current retracement to approximately 1.4380- 1.4280. It is my experience that once the market is in a trend it ignores fundamental analysis as well as technical analysis; not completely, however. Current movement is more profit taking to me, rather than the opposite.

Eurozone: The Eurozone will be affected, but much less. The Eurozone economies are still not very well integrated and hence imbalances will occur to varying degrees in different markets.

I expect the Pension system to be the latest focus in the months to come and could aggravate the crisis in the future. The following countries would particularly get affected: United States, Canada, Japan, UK, Sweden, Denmark and in the Eurozone, Netherlands. (Source)

US: The pressure continues to raise rates, not only to contain inflation, but also to stop outflow of capital to higher interest rate regions. Looking at current PPI and core PPI data, inflationary pressures seem to be building up in the US. We need to watch further data. US wholesale prices are at a 27-year high measured by the PPI, which indicate rising inflation. (Source: Times of India)

For purposes of analysis and checking what the Feds could do, I have categorized inflation as follows and use this chart to anticipate the Fed’s move:

Growth Push Inflation - Measured by GDP*, Unemployment & NFPR* Figures

Price Push Inflation – Measured by PPI* & CPI* figures

Wage Push Inflation – Measured by Average Hourly Earnings and ECI* Figures.

Demand Push Inflation – Measured by Retail Sales Figures

In my experience, for the central bank to move in and hike interest rates, it is important that out of the above four factors at least three should indicate rising inflation. Even if two of the above four indicate that there is a rise in inflation, there is a possibility that the central bank may move to hike interest rates. With three factors indicating inflationary pressures raising interest rates is almost certain.

BSE: The bounce on the Bombay Stock exchange has been good, but I still expect it to change 11,000 and then 9,000. (An estimate till December 2008.) There are a couple of key sectors one should look at for example the power and infrastructure sectors, especially since India needs to invest about 100 Billion USD in the coming years in infrastructure.

USD/PLN: Should range between 2.05 to 2.20 before touching 2.30.

Gold: Correction was rapid and 770 has more or less been achieved. Might touch 770 in coming week. I expect a bounce from current level. Gold would then test the level of 750. That should be the bottom for resumption to a target of 1150. Here’s a brief history on gold: The last time it peaked was January 1980 at $850 (USD) an ounce. Since then it’s been trading between $400 to a low of $262. Gold touched $1032 in March this year. I would predict the next target for gold to be at $1150. Some factors that will help achieve this goal: Firstly, gold is in a bull run. Global uncertainty in the stock markets and currencies make gold a safe haven. Secondly, it’s a hedge against inflation and against uncertainty. Thirdly, 70 percent of gold demand comes as a result of jewelry. First half of last year saw an 11 percent jump in this demand, despite high prices. This can also be attributed to prosperity in India and China, which like Japan are large buyers of gold. As far as USD goes, I think given the choice between inflation and recession, the FED would choose inflation, which would drive gold up.

OIL: The price for oil might come down to $100 per barrel. For now, I do not see it going lower. Largest producers of Oil in the first quarter of 2008:

Russia: 9.5 million barrels per day (mbpd)

Saudi Arabia: 9.2 mbpd

US: 5.1 mbpd

Iran: 4 mbpd

China: 3.8 mbpd

(Source: Times of India )

Notes:

*PPI = Producer Price Index.

*CPI = Consumer Price Index

*GDP = Gross Domestic Product

*NFPR = Non Farm Pay Rolls

*ECI = Employment Cost Index

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

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.

The markets have recently received positive verbal attention, including actual measures proposed by Mr. Paulson. Here's what I've taken from the announcements.

I continue to expect the US dollar to continue to strengthen. This week might be a range bound market, but we can expect markets to go up another 400 to 500 points against the CHF coming weeks. For the Euro, 1.5520 is a crucial point and the next one being at 1.5280, against the dollar. 

Now, all the comments and measures made to save the housing market and to boost the economy, in general, are welcome and give first signs that the US economy might avoid, comfortably, a similar 1929 disaster. That's good news for everyone.

1. In addition to the dropping US market, the drop in UK and Japan is also likely to be severe because of a close relationship between these economies with that of the US. The UK and Japanese economies are heavy in US assets and over exposed to a drop in the value of such US assets. A 30 percent drop in the value of UK and Japanese assets from current value seems realistic to me.
2. Eurozone is also going to be affected, but much less. The size of the market is big, it’s reasonably solvent and Europe’s exports are still strong despite the strong Euro. This is not to say that Eurozone will not get affected.
3. US is under pressure to raise rates not only to contain inflation but also to stop outflow of capital to higher interest rate regions.
4. Stock markets of emerging markets will be badly hit further as the uphill run was speculative. Hedge Funds were looking for new sources of profits and that drove up the stock markets in such countries including in India, where about 17.2 billion USD has been withdrawn so far. Approximately 56 billion USD was pumped in the BSE over the last few years. Hence not even 50 percent of the funds have been withdrawn so far. Fo me, 9000 on BSE seems realistic.
5. The Feds have sent a strong signal to the markets. They seem serious on bailing out the troubled financial institutions. One has to wait and watch on this. Normally, markets do not respond positively when government institutions manipulate the markets. However, in this case the scenario is different as the global economy needs this intervention. 
6. I can see Mr. Paulson coming out with covered bonds as one way to ease the woes in the housing market, as well as extending government action in credit easing and increased regulation of financial institutions.
7. I expect the złoty to weaken to about 2.30 against the USD as stated earlier.
   

Do you have any questions or comments? You can direct those to my email at m.sharma@interglobalfb.com.pl

 

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.

 

Continuing what I wrote previously, we can notice that the housing situation in the US has not improved. Fannie Mae, Freddie Mac and many others are in troubled waters.

Watching Fed Chairman Ben Bernanke's testimony to the Congress, one can see that the Fed is serious about correcting the situation, and that is a good confidence-building measure in the market. However, my experience tells me that the market always looks at what you do and not what you say. It would be interesting to see what will be the outcome of the proposed measures. I personally assume that the Fed will get what it wants.

In any case, since March 2006 the Fed does not publish the M3 money aggregate, which in effect gives the Fed unlimited power to print as many dollars as it likes. My assumption is that the Fed will react strongly to the situation.

The markets took the testimony positively, with both the euro and Swiss franc moving over 100 points in 30 minutes after the comments. I still think a USD correction is imminent and seeing yesterday's move I feel that soon the USD should start reversing. This is not to say that the reversal is permanent.

 

1. I would see 0.9980 - 1.0005 as the bottom for USD now on CHF and 1.6036 as the high for euro. I would recommend going long with the USD against CHF, JPY and euro.
2. We can also see a temporary correction in the PLN to about 2.30 PLN against the USD.
3. Sometime around the end of the year the USD will start losing value again. The US is happy with a weak dollar.
4. Gold continues to be a good investment. Gold at $1,150 per ounce would be realistic. Silver is also likely to go up and percentage-wise, more then gold.
5. Interest rates in US are likely to rise. Despite a slight correction in oil, I feel the interest rates in US will go up and we will see a scenario of high interest rates coupled with high inflation.
6. By accepting responsibility for the liabilities of Freddie Mac, Fannie Mae and others, the US government has catapulted its public debt from $10 trillion to $15 trillion. That’s an overnight increase.
7. The Bombay Stock Exchange dropped to below 13,000 last week. I expect the correction to continue, with 9,000 being the target. If the SENSEX sheds points rapidly we might see it go past the 9,000 mark. This not a panic situation and nothing is wrong with the Indian economy, which is strong and healthy. It’s a correction which should have happened a long time back. I recommend looking for value stocks and buying.

 

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.

I continue to expect the USD to weaken. For the end of 2008 I would target the USD at 1.75 Euro and against the PLN at 1.60-1.65 PLN. Investors would be well off to look for value stocks in the US and buy them for the longer or medium term.

The Polish economy will remain stable.

The Indian stock market has corrected and will continue still further. However, I advise to start buying stocks from current 13,000 levels. The Bombay Stock Exchange (BSE) is likely to go to 11,000 and worst case scenario to approximately 9,000.

I would recommend the BSE as the real growth market in times to come. That is the market that would give substantial returns. I would expect the INR to grow stronger and settle around 40 by the end of the year. Long term, I expect the rupee to go to 32 to one USD.

Here\'s further analysis of what\'s happening with the market:

1. US finds it extremely difficult to stabilize the USD.
2. A strong dollar is not in the US\\\'s favor.
3. The Fed cannot hike interest rates without upsetting an already a precarious housing market.
4. Elections might give temporary respite to the USD. The long-term trend continues to be down for the USD.
5. Banking failures in the US will continue, with the latest victims being Freddie Mac, Indy Mac and Fannie Mae and also rumors about Lehman Brothers.
6. US external debt is to the tune of 2.2 Trillion USD (read more here - scroll to the bottom). US will pull Japan, China and Europe into this turmoil as well, since they hold large portions of this external debt.
7. Asian economies are hit by falling exports and rising inflation.
8. Stock markets likely to continue south.
9. The Dow is expected to fall further to 10,400 first and just touch below 10,000 before seeing a move upwards. However there is a word of caution. Depends on elections and market might first go to 13,500 before heading down and then finally heading upwards.
10. Oil: Very difficult to analyze. Much depends on the situation in the Middle East but prices might correct to $130 and then to $110 per barrel. Likely trend is upwards and $200 per barrel is a possibility.

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.