From the September 01, 2010 issue of Futures Magazine • Subscribe!

Forex outlook: Has the euro bottomed?

Hot commodity currencies

While the rest of the world has kept interest rate policies on hold, continuously delaying exit strategies, the commodity producer countries, Canada and Australia, have raised rates, with Australia hiking rates several times starting in October 2009. And for the most part, analysts expect the outlook for commodity currencies to be bullish.

"I’m looking for more gains in the Aussie and the loonie. [In July], Canada raised interest rates for the second time in a row [and] it’s really going to help the Canadian dollar in the long run," Lien says. She expects the Australian dollar to reach 90¢ by the end of the year and the Canadian dollar to hit 1.02.

Wilkinson says the Canadian dollar should reach parity with the U.S. dollar by the end of the year due to demand for minerals and resources from Canada. "The Canadian dollar will strengthen as the global economy gets back on its feet," he says. However, he says that the Canadian central bank signaled it’s not going to raise rates much more, which could be a counterargument against the loonie.

Dolan says the Canadian dollar could be between .98 and $1.08 at the end of the year, while the Australian dollar could run into some limits above 90¢.

Canada will continue to recover faster than the U.S., Cook says. However, he adds, "If things are bad in the U.S., that automatically slows Canada’s growth. The value of CAD is so linked with the profitability of oil that if we see demand start to slow in the U.S., that keeps the value of CAD in check. Parity is a possibility."

Both Wilkinson and Cook expect the Australian dollar to reach 94¢ by the end of 2010. "There are some concerns about how much China decides to tighten, as well as India. [For] commodity-related currencies, if there’s not demand from China, [there’s trouble]," Cook says.

In June, China announced it would revalue its yuan but there was no timetable attached with the announcement. "In terms of the yuan, there’s only one way it’s going: up. It’s just a matter of the speed in which it’s going up," Lien says.

Dolan says there’s potential for a more drastic slowdown in China. "That would seriously undermine the global recovery and [be] a negative for risk and a positive for the dollar," he says.

Higher commodity prices could happen as a result of yuan revaluation, Cook says. "We’ll see a very slow, very controlled, very tentative float," he says. "One of the big impacts on the dollar won’t be the yuan float but how much U.S. debt China is picking up at any given time. If things turn south in Europe, we’ll see China move to pick up more U.S.-denominated debt as a safe-haven play and then eventually get back to the euro buying. The world is hinging a lot on Europe right now."

Looking for direction

Central bank action could provide clues about where currencies are headed. "What central banks are and are not doing will determine which currencies outperform and underperform for the rest of the year. The ones that are being proactive in terms of normalizing their monetary policy will see their currencies strengthen and those that are being passive will see their currencies weaken," Lien says.

Dolan says traders should focus on the European and UK growth outlooks and the implementation of their deficit reduction measures and how the market is pricing in the impact of those spending cuts and tax increases. He also says that the U.S. elections could have an impact on the currency market (see "Trading the dollar on election results"). "If the elections can result in a gridlocked Congress, we might see more of a rebound through the end of the year. Major government initiatives would be less likely to materialize over the next two years and markets tend to like that."

The world has focused on Europe’s debt problems for the first half of 2010 and here in America we tend to shake our heads, but our reality is not that different. When the world’s markets turn their focus back to the dollar, things could change. There have been no strong currencies of late, only less weak ones. And once the world is able to accept risk, the dollar may be in the hot seat.

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