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.
