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Thursday August 19, 2010
Aden sisters: 'Resourceful' currencies
by Mary Anne and Pamela Aden, editors The Aden Forecast  The commodity currencies and economies are doing very well. Global growth and the rise in commodity prices have provided a huge boost and we expect this will continue. Here, we review the outlook for the currency markets along with our recommended currency funds. China’s economy is still booming and so is India’s. These countries are two of Australia’s largest trading partners and their demand for resources keeps growing with no end in sight. This has resulted in Australia’s largest trade surplus on record and, combined with investor’s appetite for riskier assets and its high interest rates, it’ll keep upward pressure on the Australian dollar. Since Australia’s interest rates are much higher than rates in other countries, it’s especially attractive during these times when investors are starved for income. Interest rates, however, are bottoming. 
Canada raised its rates this month and other countries are doing the same. Still, Australia has this big advantage and that makes it special. In Canada’s case, the high oil price has provided a tremendous boost. Oil production is a big part of Canada’s economy. When oil rises, so does the Canadian dollar. And with oil now at a three month high, it’s very bullish for the Canadian dollar. So all things considered, it’s nearly certain that a big shift is taking place in the currency markets. The U.S. dollar is being dethroned from its top position, which proved to be temporary. This will be fully confirmed once the dollar index declines and stays below 80. At that point, we can be sure that a full blown bear market is indeed underway and the dollar is going to fall to much lower levels. The Japanese yen has been a safe haven too. But here we also have a clear case of the fundamentals and the price action being totally out of whack. Nevertheless, the yen recently hit a 15 year high and it’s clearly bullish. Despite these positive factors, we do not recommend buying the yen. It’s simply too risky and eventually it’ll likely go the way of the dollar. The currencies we do like are the Australian and Canadian dollars. We also now recommend buying the Swiss franc and the euro, which have good potential. Our recommended currency funds should head higher, along with the currencies. The bottom line… if you’re holding the currencies and/or funds we’ve been recommending, keep them. If you have U.S. dollars, we’d sell them, or switch out of your dollars and use the cash to buy new positions in the Australian and Canadian dollars, the euro and the Swiss franc. If the dollar heads lower as we suspect, we don’t think you’ll regret your decision. Among our specific recommendation, we continue to like Franklin Templeton Hard Currency (ICPHX), the CurrencyShares Australian Dollar Trust (FXA), Merk Hard Currency Investors (MERKX) and the CurrencyShares Canadian Dollar Trust (FXC). Learn more about this financial newsletter at Mary Anne and Pamela Aden's The Aden Forecast. |
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