In the absence of a major stock market decline or another financial institution blow-up this summer, it’s a safe bet to start nibbling at foreign currencies again.
For starters, we have the perfect environment for a weaker dollar. The U.S. Dollar Index (see the chart below) broke below important support levels last month. This means any dollar rally at this stage of the economic cycle should be tepid at best.
Also, the economy is stuck in a de-leveraging process that will take a few years to unwind. We also have scant bank lending and investors hoarding cash. This is not a macro environment that will boost U.S. short-term interest rates any time soon.
All Is In Place for a Lower Dollar Summer…
The United States and probably China, to some extent, desire a weak U.S. dollar to boost domestic inflation. U.S. consumer price inflation (CPI) is still contracting. In May, CPI declined for the third straight month to its lowest level since 1955. A lower dollar helps to grow inflation – a desperate commodity right now.
On Friday, China launched another currency salvo claiming the world should look “for alternatives to the U.S. dollar.” Such utterances won’t boost the buck but instead likely help facilitate a decline. Interesting how China would slam the dollar when she holds about 35% of all Treasury bonds in circulation.
(Of course, over the weekend, China did an about-face when Bank of China Governor Zhou Xiaochuan said, “our foreign exchange reserve policy is always quite stable,” which calmed speculation about the dollar for the moment. But I still see China wanting a weaker dollar going forward.)
Three Plays I’m Starting to Nibble At Now
On Tuesday, I began buying small positions for my managed accounts in Canadian dollars and Norwegian kroner. Gold remains 5% of my portfolio for now.
Though I remain cautious about commodities this summer, including oil and gold, I like the Canadian dollar and the Norwegian kroner because both currencies have relatively stronger balance sheets.
Norway, in particular, boasts a 10.5% budget surplus-to-GDP ratio – the highest among industrialized nations. This compares to rapidly rising or skyrocketing budget deficits across the major economies since late 2007. And Canada, though now in budget deficit, sports a small deficit compared to its overall economy.
What about the euro? The single European currency is probably better than the dollar but not by much. I prefer gold, NOK and CAD.
Several peripheral Eurozone economies are now in deflation and major trading partners to the East are in desperate need of bank capital. I’m still predicting some sort of blow-up in the Baltic Republics or the Balkans this year. Any macroeconomic collapse in these regions will hit the euro and the emerging markets new “bubble” hard.
The precious metals should rally if the dollar continues to weaken. But, like I said earlier, I’m just “nibbling” at foreign currencies here to build fresh positions that are part of a long-term accumulation strategy for my dollar-based accounts.
Any sell-off in risk-based assets this summer – highly likely ahead of earnings guidance and a 40% post-March rally – will drive the dollar higher.
That’s when I’ll add to my existing foreign currency holdings.
Another Exciting Summer Especially With China Involved
Gold and silver, however, remains hostage to traditional summer weakness in the commodities complex; gold is especially vulnerable near-term because jewelry demand has collapsed and any outflows from gold-related ETFs will drive the price sharply lower. I’m looking to re-enter gold around $875 to $850 and silver around $14.
It strikes me as fascinating that China is denouncing the dollar
again. Something is cooking in Beijing and Washington. I’m thinking
policymakers will probably welcome a weaker dollar.
This should
be another very exciting summer marked by renewed volatility,
especially in the currency markets, which have been largely range-bound
for the last four weeks.
Best Regards,
Eric Roseman, Editor
Commodity Trend Alert
EDITOR’S NOTE: For 20 years, seasoned investment veteran Eric Roseman has been recommending the most contrarian investment plays at packed investment conferences, to hundreds of thousands of daily readers, and at his own asset management firm in Montreal. Six years ago, he launched his own commodity investment research service, Commodity Trend Alert. Ever since, he’s helped regular investors grab profits as high as 70%, 124%, 131% and 274% playing gold, silver, energy, agricultural commodities…and yes, even currencies. Get more details on his latest Commodity Trend Alert play here.
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