Nicole Elliott on Currencies

Regular readers will know my respect for Nicole Elliott, technical analyst from Mizuho in the UK. She has a regular appearance on CNBC Europe on Tuesdays right before the European equity markets close.

Today she gave an outlook of sorts for the currency markets to start 2005. Three of her favorite currencies are the New Zealand Dollar (Kiwi), British Pound, and the Euro. Her least favorite is the US Dollar. This ties in with what I have been writing about for a while. There is a demand problem for US dollars. This will act as a headwind for US equities. Not that US stocks can’t go higher, this is just an obstacle that will need be to overcome.

To add some fundamental color to Nicole’s technical opinion, both the Pound and the Kiwi are high yielding currencies (that is interest rates are higher because of recent economic strength). This creates demand for those currencies. I believe that one of the reasons for strength in the Euro, which has not had much of an economic tailwind, is there are no real threats of serious changes to the economic landscape in Euroland. Growth is slow, unemployment is high but there is not anywhere near the uncertainty in Europe these days as in the US, so the Euro gets stronger against the dollar.

Another cross rate that has had a lot of attention lately is the US Dollar/Swiss Franc which has the dollar close to nine year lows. There have been more Petro dollars available to invest because of the high price of oil. I think a lot of the dollar’s slide against the Swissi can be explained by Petro dollars (remember oil is denominated in US dollars) being sold in favor of Swiss Francs. The flaw in that thought is that the S+P 500 has outperformed the Swiss market over the last six months, which means if the Swissi is being bought with Petro dollars those Francs are not going into equities.

Against this backdrop I continue to have a heavy weighting in foreign stocks, about 30%, and other assets that will benefit if the dollar continues the trend. I think that a reversal in the dollar, meaning more global confidence in the US, would be good for all markets so I don’t expect to be left behind in the event of a huge US rally.

Anyone else wonder if next week we will hear that the pounding in the bond market was a hedge fund or maybe Pimco unwinding some trades?

One last tidbit. On Sunday night on CNBC Asia Mandy asked me about the rumors of China selling US bonds and what that would mean. I said that the bigger concern to me is not do they sell, I don’t think they will in any size, but do they stop buying? That seems so obvious that I can’t imagine I thought of it first, but yet I’ve never heard anyone else talk about the issue in that way before. Until today. Rick Santelli said the same thing on CNBC in his regular report. Hmmm.

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