- Posted December 20, 2011 by
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US Dollar may rise in 2012
US Dollar may rise in 2012
The world economic outlook for the year 2012 will be negative and highly uncertain. Persistent high Unemployment, Debt crisis in the Euro Zone countries which triggers austerity measures, will push already slow economic growth in to recession. Considering the present situation and looking at the impeding financial disasters expected to unfold in the banking sector and Sovereign Bonds it is quite clear that 2012 will be a Make-or-Break year for the EU. The ratings of all types of government bonds and even the bailout package will be south bound while the large European Banks face liquidity issues. The combined efforts of the European Central Banks and the Federal Reserve Bank of the United States to maintain higher levels of liquidity may prevent a catastrophic collapse of the European Banks and other financial Institutions but these measures will never be able to bring the European economic meltdown to a complete stop.
Thus far negative Europe will have negative effects to the US Economy as we hear from policy makers and politicians repeatedly; hence EU is America’s largest trading partner. Americans already suffered its first casualty when MF Global declared bankruptcy due to its over exposed, highly leveraged Euro Bond portfolio. It is impossible at this moment to know the exact depth of the European problem. It may be much larger than we ever thought. However against all odds I expect US economy to grow, slow and steady, more than many copy book economists expect, during 2012 and show evidence of much stronger growth in 2013. Most importantly I expect the US Dollar to rise and stay north bound.
My forecast is primarily based on many technical points especially on the Dollar against the Yen and Swiss Franc. In addition I have identified a few important fundamental reasons for a Dollar rally. Uncertain global economy would make most investors to make huge capital shifts during the next year. These capital shifts would finally result in massive changes of exchange rates while making profound impacts on American Economy. Every crisis avail opportunity. Many of us lost or lost opportunity in the past few years. The Dollar rose to 147.8 Yen in 2000 before it descended and now it is about to reverse. It is time we take advantage of this movement of the Dollar to make profitable trades in the new year.
I expect to analyze the Dollar movement from both Investor’s perspective and trader’s perspective. If you have large sums of money in liquid form today it is huge problem. You have no safe place to park your funds hence many large banks have become not safe. Who could ever expect Lehman Brothers to fall? MF Global to fall and to have over a Billion Dollars of client’s money unaccounted for? European banks have humongous problems which will come to light in the coming months. Failure of policymakers in Europe to prevent sovereign debt distress and financial sector fragility from escalating has turned many European countries in to high risk zones making US Bonds attractive for most investors. Most European economies are on the brink of a downward spiral enacted by four weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand (associated with high unemployment and fiscal austerity measures) and policy paralysis caused by political gridlock and institutional deficiencies. It is a long and difficult list of problems to fix which would take a long time. America is not completely out of woods but compared to Europe US Bonds are definitely safer. The Investors would first look at safety of the investment over return. Therefore most certainly there will be capital shifts from Euro Bonds to US Treasuries in large quantities in coming months.
The outlook for the US Stock market is the same. The inconsistent performances of the US consumer sector and the corporate profits do not make American companies as a supper “Buy” right now but compared to European Companies American Companies have better Balance Sheets. Hence the US stocks would definitely have better demand in 2012. This would push Dow Jones Industrial Average over historical high next year. Dow is over twelve thousand even now and this is an encouraging sign for the Bulls next year.
American Real-estate market is still nursing the wounds sustained after facing the worse fall which crumbled not only home owners but also banks and mortgage underwriters. Prevailing unemployment and credit crunch has made the US house prices to stay low after the collapse. Almost 23% of the American houses are under water (foreclosure) and with the present employment numbers alone with lending policies of the banks; it is not possible to see a recovery of this situation any time soon. However the US Rents are on the rise. This situation gives a green light for block sales of houses and with the prevailing price range US Real-estate will attract investors from a wide spectrum of countries. When the existing home sales move higher automatically New Home sales and building permits will start increasing pulling the construction industry higher.
While attractive prices, Yields, corporate profits and increasing rental income draw attention of the investors to America the weaker Dollar offers a win-win situation to whoever switch investment to USA. At present you can sell your Euro, Swiss Franc, Cable (British Pound) or Japanese Yen and buy cheap US Dollar and buy cheap US Assets where there is relatively higher safety and higher possibility of growth. This trend will catch on and it will create a huge demand for Dollar. Among the few other reasons I see why the Dollar will be well bided next year I rate the Global Capital Shifts as the most important.
The bipartisan bill, presented by Senators John McCain, R-Ariz., and Kay Hagan, D-N.C., known as the Foreign Earnings Reinvestment Act, aims to trigger a flow of $1 trillion from the foreign subsidiaries of U.S.-based multinationals at a reduced tax rate of 8.75 percent, as opposed to the statutory corporate income tax rate of up to 35 percent. Most US based companies which has foreign operations usually do not repatriate their corporate profits due to higher taxes. Over a period of time these corporate earnings have accumulated to a staggering 1.5 trillion Dollars. The figure could be even much bigger but the records show as stated. The subsidized tax rate would definitely attract these funds to US and with the prevailing uncertain economic situation American companies will favorably look in to repatriate these funds and once they bring it back these funds eventually will be deployed in various business ventures creating employment while filling State’s coffers. This is a smart move by the American politicians and if and when the repatriation starts there will be substantial increase in demand for US Dollar. At present market conditions 1.5 Trillion Dollars may not sound a huge amount but we have experienced many times what repatriations could do to the Foreign Exchange market. In 2008 when many investors repatriated Australian Dollars back to Japan, Aussie/Japanese Yen pair moved over 10 yen (one thousand basis points) in a few minutes. This is the nature of Foreign Exchange market. Traders who are in it for the long haul take many steps to protect their open positions. Placing stop orders at various technical levels or hedging with options are some of these measures and all these finally result in making a demand for some currency at a given price level. Once these technical levels are breached stop orders start triggering worldwide at the same time creating big volatilities, making the market choppy and widening the spreads. All these happen in seconds and once the Repatriation Bill is in place, if two or three large US corporations decide to repatriate their holdings from elsewhere back to USA, you will see such action. It could be from Germany to US moving the Euro/Dollar or Japan to US moving the Dollar/Yen and when this happens it will change the major trends of Currency pairs throwing all the long term forecasts out of the window. At one stage when the Dollar/Yen started moving down it took only couple of minutes to move from 124 to 111 which is 1,300 basis points. Therefore no one should underestimate the power of repatriation when discussing currency movement. This is the second reason that I find why the US Dollar would strengthen in the coming year.
Japan has to worry about many issues; Starting from nuclear meltdown to ever weakening domestic demand. Above all strengthening Yen which created more trouble to the Japanese economy than any other over the past decade. The Japanese has built a huge export market during post world war II period, which made them extremely wealthy; but now losing ground to Chinese. Dollar/Yen reached a high of 147.50 per US Dollar in 2000 and from that point it has been descending for the past eleven years. Principle contributor to the excessively strong Yen is the weakness of the US Dollar. Extremely weak Japanese domestic market added more worries while weaker Dollar helped the Americans to somewhat control the Japanese imports to USA. Never the less Americans had no chance in using the weaker Dollar as a tool to control Chinese imports hence Chinese Yuan is not a free floated currency. The exchange rate between US Dollar/ Yuan is decided by Bank of China which is the Chinese Central Bank and not by the market forces. In a now familiar political ritual, Japan's ruling party on August 29th this year picked a new prime minister -- the sixth in five years -- to lead the nation past a host of domestic ills, including a stagnant economy and a lingering nuclear crisis. In a tense runoff vote, Priminister Yoshihiko Noda, known as a tight-fisted fiscal hawk, defeated his closest rival, Trade Minister Banri Kaieda. Noda is expected to resurrect the ailing export market and improve the domestic consumption. The most difficult hurdle for Japanese to export their products is the strong Yen which does not reflect the economic fundamentals. Bank of Japan (Central Bank of Japan, BOJ) always intervenes on the Dollar/Yen exchange rate to support Japanese exporters. BOJ is the highest intervening central bank in the world but at present time Forex (Foreign Exchange) interventions are not as successful as olden days due to increased currency trading volumes and many cross currency trading activity. BOJ s delay in holding the Dollar/Yen falling below key support levels finally pushed the pair down to historical lows and as the rate goes down further, pushing it up by intervening will get more and more difficult and expensive. Mr. Isuki Sakakibara, ex Japanese Finance Minister who is also known as Mr. Yen, well known for his extremely successful Forex interventions in his days, in an interview with Bloomberg Television stated that Dollar/Yen might even drop as low as 60 Yen per Dollar. If that becomes a reality Japanese economy will surely experience depression. Finance Minister Noda is well aware of this fact and it is now very obvious that BOJ is defending 76 Yen level against the US Dollar. Technically 76.00 has become a major support zone for the pair and this rate will keep going up during next year against expectations of many Currency Strategists. When the Dollar/Yen moved up in 1999/2000 many expected it to reach 160 level but Technically it was very much over bought. The pair plummeted once it just touched 147 level. The same Technical outlook on the reverse side has appeared now and my expectation is that Dollar/Yen is oversold and it should start moving up from current levels. Activity of BOJ, repatriation and unwinding of cross currency positions will make the Yen weaker in 2012 making the US Dollar stronger.
The events taking place in Tehran is pointing to a military engagement in coming days. Fall of diplomatic ties between a few European countries including United Kingdom has increased the tensions between Iran and the rest of the world. Ahmadinejad administration does not give any importance to requests made by international community to abandon developing nuclear warheads. Iran also is in the process of expanding the Hisbullah, the religious extremist wing of Iran, and it is learned that they have started recruiting carders in South America. The close connection between Iranian President Ahmadinejad and Venezuelan President Hugo Chavez has given a back door entrance for Hisbullah to South American region. Hisbullah will attempt to infiltrate United States through Mexican border. It is now known Hisbullah is recruiting members in Venezuela and in Argentina and also they have connections to the Mexican drug cartels who could smuggle them to United States. Iran is expected to build a missile base in Venezuela and the reason for such move is none other than to attack US in case if they are attacked by US led forces in the future. On the other hand many powerful countries are under going through tough economic conditions and history shows that when powerful nations experience economic hardships that they tend to take military action against other nations. Iran is making the situation worse by the day, inviting war. This region is a very complicated one with which involves ancient history, tradition, religions and tribes. Majority population of Saudi Arabia, Qatar, United Arab Emirates, Oman, Jordan, Syria and Egypt are Sunni Muslims. Majority population of Iraq and Iran are Shiite Muslims while Israel is Jewish. Sunni Muslims at times feel more threatened by Shiite than from Jewish. Iran wants a war and Ahmadinejad and the clang will do their best to trigger one while such military action could bring massive income to United States on defense based services and sale of weapons. The slight feeling of a war would push the US Dollar rate higher against most currencies hence many people and institutions around the world still trust green back above any other currency to store wealth especially during a period of great uncertainty. This does not sound very civic but defense is big business on any given day.
In addition we can also see the introduction of Boeing’s Dream liner, which has attracted many large scale export orders having a direct impact to the Factory Orders figure and eventually to US Dollar rate. Further, Increasing natural disasters and increasing global demand has pushed world food prices higher giving an opportunity for well managed US Agricultural Industry to profit from exports in 2012. However a recovery of US Dollar against other major currencies may not immediately bring economic prosperity to common Americans but dividends of Dollar driven development of the economy will slowly trickle down to general population with increased employment. The Fed may be compelled to take action if the US Dollar gains excessive strength to help the exporters. American politicians should look in to the ways and means to help the local industry by providing technical and financial assistance to control or reduce cost of production to compete with imports. The current volumes of Currency Trading would not allow any Central Bank to control the direction of its own currency for a long time. If Federal Reserve is expecting to ride the weaker Dollar wave for ever to help the exporters they are mistaken. Most countries in Africa and Asia has huge black economies and almost every businessman who gets involved in such Black Economic activities always store their wealth in US Dollar no matter what the Currency Strategists may forecast. Already the US Dollar/Indian Rupee rate has moved from Rupees 48 to 54 per US Dollar between the periods, August to December, 2011. Sri Lankan government devalued the Sri Lankan Rupee against the USD in November 2011. The move has already started and it will continue. Currency Trading can make substantial profits if done professionally using appropriate risk management tools. The Forex market will have many large-scale movements next year and it is time we all make use of it in 2012.