Euro, yen likely to fall

The Japanese yen has ignored the Ukraine crisis and the bloodbath in the Nasdaq to remain range bound at 102.

Even though I recommended short euro at 1.39, the currency is headed lower to 1.36 as geopolitical risk in Ukraine escalates while the Old World’s central bankers seek to battle deflation headwinds (exacerbated by euro strength, naturally!) and romours that even the Bundesbank president is now in favour of negative interest rates and an easing move. Funny how the Bundesbank’s Weimer obsessed hard money zealotry softens once the Tectonic Fatherlands economic/export growth rate sags. Even though President Hollande has the lowest approval ratings of any Elysee Palace Sun King in the history of the Fifth Republic (this includes Pompidou, Chirac and Sarko!), I find it frightening that the National Front could dominate the French right, once the domain of the Gaullists. This is a formula for social unrest in the banlieues of Paris, Bordeaux, Lyons, etc, and an anti-euro, anti-capitalist, anti-high finance worldview that will only deepen France’s economic malaise. So I reiterate my call for a €1.36 target in the coming month. I simply do not see any euro breakout above 1.40 at this time.

Sterling is still in a tight range but cable could be hit by broad US dollar strength. In essence, the Tories face the Panglossian best of all possible worlds as core CPI is 1.7 per cent even as growth and houses price accelerate. This means the Bank of England does not need to enter any imminent monetary tightening cycle. Still, the short sterling money market curve expects a base rate hike in the next twelve month. So while I am neutral cable, I am definitely bullish sterling against the euro, the yen and the Swiss franc. I expect 1.64 sterling if cable breaks its 100 day moving average.

The Japanese yen has ignored the Ukraine crisis and the bloodbath in the Nasdaq to remain range bound at 102. However, accelerating US growth (the Philly Fed, ISM, retail sales, Empire State, Beige Book all convince me 2014 GDP growth will have a three per cent handle) and potential post sales tax easing in Japan means dollar-yen could trade in the 105-108 range this summer. This has been my highest conviction trade in Planet Forex since October 2012, when Shinzo Abe won the LDP leadership/election and transformed the role of Japan in international financial markets.

The Australian dollar has ignored the dismal state of the iron ore/thermal coal/copper market and rallies to 0.9250, on expectations of a Chinese stimulus and RBA benign neglect. In essence, the Aussie is trading on global growth potential, not China credit risk. However, this cannot continue without tangible evidence that Canberra is comfortable with an Aussie dollar above 0.92, which I doubt. At some point, Aussie dollar strength will fade, making it a credible short against the Kiwi at 1.07. The short Canadian dollar I have recommended in successive columns since 1.02-1.04 has been one of the most reliable trend moves in the global currency market. I am amazed that the Aussie has been boosted by global growth while Canada has ignored the very real, very visible, very accelerating US economic recovery. Oil and gas has left the loonie unmoved, as the markets focus obsessively on the fall in Canadian inflation and a dovish central bank in Ottawa. The easy money on this idea has been made in the last six months. The Canadian dollar short is a crowded consensus trade and the loonie bears are vulnerable to a short squeeze.

Charles Plosser’s forecast for a four per cent Fed Funds rate (OMG, let us send a SOS to Offplan Flipper Central!) means interest rate normalisation. A major rise in short-term US rates will change the economic history of the world. As long as real rates rise and Putin does not invade Antartica to protect Russian penguins, gold is a short on any uptick for a $1,200 target. Too bad the world can no longer buy the Spanish peseta and Italian lira when the Fed tightens!