Today’s weakness in the US dollar is a good opportunity to buy the dollar and sell commodity related currencies against it. We have seen some weakness in the dollar and a rally in equity markets across Europe today due to market calming moves in China.
However any weakness in the US dollar should be viewed as an opportunity to buy the US dollar.
Guest post by Ronnie Chopra of Tradenext.
AUD
The US dollar has had a remarkable run over the last few months against the Australian dollar, with the greenback gaining over 10 per cent in the space of two months. The Australian dollar was trading above 1.03 in April and is currently trading at 0.928. Although the Australian dollar has fallen substantially in a short period of time, there is still room for further falls.
The currency is extremely reliant on what is happening in China and the over-dependence on commodities. With growing concern over China and its growth rate, high inflation and interest rates – these are all negative factors on the Australian currency. Commodity prices have plummeted this year and are forecast to fall even further. Copper is at a 7 month low, gold is currently trading at $1280 – a far cry from $1920 in September 2011 and silver is over 60% off its peak at $19.50.
With predictions of further falls in these commodities, there is going to be further downward pressure on the Australian dollar. The Australian government cut interest rates last month and are forecast to cut again later in the year as they would like the currency to depreciate as is still very strong on a historic basis as well as from a purchasing power point of view. All these factors make the AUD a currency to sell into strength and a level of 0.90 should be reached in coming weeks against the Us dollar.
CAD
Another commodity related currency which should fall significantly against the US dollar is the Canadian dollar. In recent days we have seen strength in the US dollar against the Canadian currency as it has moved from 1.02 to 1.05.
However, although a strong move by the US dollar in a short period of time, there should still be room for further strength for the US currency. Historically, the US dollar has been 20-25% stronger than the Canadian dollar.
Today, it is only 5% stronger. Once again, as with the Australian dollar – the Canadian dollar is a commodity related currency and with continued weakness in commodities and much more expensive goods compared with the US (people from Canada (not living far from the border) are known to cross the border to buy their petrol and other goods from the US) – there is plenty of room for at least a further 5 per cent fall in the currency over the next few months. From a purchasing power point of view, the currency is extremely over-valued compared with the US.
The US dollar has safe haven status and with many negative global issues taking place such as high inflation, interest rates in China (bubble in property market), falling equity markets, riots in Brazil, geo-political risk in the Middle East (notably Syria), very weak European economies, unemployment rates above 50% amongst 18-30 year olds in Greece, Portugal and Spain, possible civil unrest in European cities, weak metal prices and most importantly the end of QE in the US there are many reasons why the US dollar is the currency to be in.