As I finished up my Christmas dinner with my family, I pulled away for a bit to check out what was going on overseas in Asia.
Two key things happened. China raised their interest rates a quarter of a point to slow down inflation and Japan increased their forex-intervention reserves by 5 trillion yen ($60.03 billion) up to 150 trillion yen ($181 billion).
With China trying to put the brakes on their economy a bit in order to slow down the growth of inflation, it will cause the “risk trade” to turn into the “risk aversion” trade early on in 2011. That will be good for the dollar earlier in the year (and likely bad for the dollar later on in the year).
Then when you couple this with Japan building up its “intervention arsenal," this really will encourage the yen to weaken. Therefore, this will be rather bullish for USD/JPY in 2011.
That will bring the yen lower and dollar higher. It will also help to bring the Nikkei stocks higher as well, on the back of a weaker yen.
This will help a lot of the Japanese stocks that have become household names here in America, like Sony, Toyota, Panasonic, Mazda, Honda, etc.
So you’re going to see Japanese stocks (particular Nikkei stocks) rise out of the ashes in 2011 as the yen finally backs off after a three-year bull run.
Just as the yen was the defensive currency of choice during the last couple of years, the dollar will be the defensive currency of choice for 2011. Even the Swiss franc will take a back seat to the greenback in 2011.
So when markets are fearful, the buck will flourish. I believe that will be the course of action that happens in the first to second quarter of 2011. But in the end, by the time the latter two quarters roll around, I believe you will see the U.S. buck quite a bit lower. In fact, within the next 12 to 18 months, I expect the greenback to hit another all-time-low on the U.S. Dollar Index.
The euro will continue to struggle during the first half of 2011 though.
Last Thursday, China said that it is supportive of the euro and they hinted that they may be inclined to grant some aid to the euro area. However, the euro hardly budged. That was a very bearish moment for the euro in my opinion. I mean, if there was ever a chance for the euro to bounce, it was then.
Therefore, early on in 2011, the euro will be toast. In the latter part of 2011, the dollar will be toast.
Since neither one of these currencies aren't what they used to be — ultimately, it’s going to help the Aussie dollar and Canadian dollar to gain more clout through the years since they have superior fundamentals to both the euro and dollar.
Also, more big investors will be more comfortable making investments into the emerging-market currencies as time goes on due to the lack of solid fundamentals provided in many of the biggest major currencies (like the dollar and euro).
So those are the themes that I see playing out in 2011 and beyond.
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