Banker's Dozen
Date: 01/23/2006International Living Postcards-- your daily escape
Tuesday, Jan. 24, 2006
Copenhagen, Denmark
Dear International Living Reader,
This will be an exciting year for the currency markets. On my radar right now are the following 12 currencies…the ones you should pay close attention to in 2006:
The Japanese yen depreciated from 104 to 120 in 2005. I expect it to make a strong recovery and move toward 100 in the course of the next 12 months.
The impressive rise of the Nikkei 225, and the budding economic upswing ought to have resulted in a stronger yen, but many Japanese investors did not hedge their investments, or unwind their existing hedges in the U.S. (by selling the dollar/yen). That was because the monetary policy pursued by the U.S. meant significantly higher interest rates and a general dollar appreciation. As mentioned, the Nikkei is still far away from the record high and a potentially good bet would be to buy a Nikkei stock tracker or a mutual fund investing in Japanese shares.
Norwegian kroner could become the darling of the foreign exchange markets in 2006. Norway belongs to the exclusive club of creditor nations, plus the country's petroleum fund holds in excess of 1,200 billion kroner ($180 billion) allowing Norway to use its fiscal policy to stimulate the economy (and this will grow year by year as the fund swells) regardless of a general slowdown in the world economy. Norwegian kroner appreciated 7% against the euro in 2005, and if Norwegian interest rates go up this year, as is generally expected, the kroner may be much stronger vis-à-vis the euro and the U.S. dollar in 2006.
The Swedish krona has always been volatile, as the central bank pursues an aggressive monetary policy. Given the pace of the economy, the krona is very undervalued--due to the low level of interest rates; a likely narrowing of the interest rate gap would be very positive for the Swedish krona.
The commodity currencies of New Zealand, Australia, and Canada have performed impressively and are all trading at very high levels against the euro and the U.S. dollar. Investors should note, however, that we may see some profit taking and set backs. High commodity prices and high interest rates still support these currencies; nevertheless, watch out.
In the emerging markets, currencies could experience much higher volatility in 2006, if the Fed continues its interest rate hikes. The tightenings last year were absorbed without any problems, but combined with a potentially stronger U.S. dollar (although my outlook for the dollar is negative for 2006), we could see much higher volatility. Countries such as Iceland, Hungary, and Turkey become increasingly exposed in times of rising global interest rates, and their currencies are likely to depreciate against the euro and U.S. dollar.
There are few emerging market countries that can stand higher interest rates, whose economies are more robust and less vulnerable to monetary tightenings from the U.S. Fed: Brazil, Poland, and Mexico. None of these countries struggle with budget or current account deficits, and therefore their currencies will be less volatile over the coming 12 months. (In Brazil, a parliamentary election has been called in 2006 which means a potential political risk, although the high level of interest rates still supports the Brazilian real.)
Good luck and good hunting,
Thomas Fischer
Editor's note: Thomas Fischer is manager of international client relations at Jyske Bank in Copenhagen, and is on The Sovereign Society's Council of Experts.
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