News Column

Euro, yen and Canada targets achieved

August 4, 2014

Not even German retail sales figures or stronger payroll were sufficient to prevent the euro decline. The Japanese yen is at its lowest since April and headed to a new, lower trading range.

My repeated strategy recommendations to short the euro during the past two months have now been vindicated. Despite a 317 point fall in the Dow, chaos in the Middle East, a new West/Russian Cold War, Argentina's sovereign default, the American dollar is on a roll. So my investment mantra is "Yankee Doodle Dandy", long the Buckaroo against the euro, yen, Russian rouble and the Canadian dollar. The euro is now 1.3380. The Russki roubli is 35.6. The Canadian dollar is 1.09. The Japanese yen has plummeted to 103.

Not even German retail sales figures or stronger payroll were sufficient to prevent the euro decline. The Japanese yen is at its lowest since April and headed to a new, lower trading range. Sterling's bull market is eroded by a rise in US Treasury-gilt spreads, slightly less robust animal spirits on the High Street and the $15 billion litigation sword of Damocles on the sceptered isle's City banking crown jewels. In July 2014, King Dollar was finally anointed by the gnomes of Planet Forex!

I believe 2.44 per cent on UST 10 we saw last month is the peak of the US Treasury debt bull market in 2014. It is obvious that the Yellen Fed is behind the "inflation curve", as a monetary ostrich that ignores data strength to maintain its easy money bias. The Dovish Empress of the Federal Reserve has abandoned the Volckerian anti-inflation regime that ignited a three decade secular fall in the US Treasury bond yields. Like every government debtor since the time of the Pharaohs and Roman Caesars, Uncle Sam's central bank will engineer a "stealth debasement" of its debt. The Fed's two per cent inflation tolerance cap is meaningless under Janet Yellen.

US wage growth is inevitable if the unemployment rate falls below 5.6 per cent, despite untold million Americans on the Costa del Dole. The bond vigilantes in Chicago will do a Rip Van Winkle as the world money markets incorporate an inflation risk premium on long term US Treasury bonds. The Fed Funds futures markets in 2015 expects monetary tightening and the failure of West Texas at $100 support reinforces my view that the dollar strength is for real, the reason I am short oil linked currencies like the Canadian dollar, Russian rouble and Norwegian kroner. The Russian rouble is headed to my 36 target due to higher sanctions, the slaughter in eastern Ukraine and blackballing of Sberbank, VTB and Gazprombank from the Euromarkets.

The Canadian dollar, which I had recommended as a strategic sale at 1.0730 only two weeks ago, has now met my 1.09 intermediate target. The loonie is at two months low as the capital markets realise that Bank of Canada Governor Poloz is content to let the Canadian dollar appreciate at a time of softer West Texas oil prices. The FOMC statement upgraded the outlook for inflation, jobs and economic growth and the end of the taper will lead to wider US-Canada debt spreads. I will use any correction to 1.0860 to go short the loonie, now with a strategic target of 1.0980. The short end of the US yield curve also reinforces my bullishness on the dollar. After all, at 0.6 per cent, the two year US Treasury note is its highest in two years.

I believe the fallout from Russia, Argentina, Iraq, gold, dollar strength and higher US Treasury yields will hit the South African Rand with a vengeance this autumn. This is Argentina's second default in 13 years and a peso devaluation is inevitable.

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Source: Khaleej Times (United Arab Emirates)

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