Tuesday, October 20, 2009

US Dollar to 50 Yen, Says Sumitomo Strategist

and the U.S. economy to double-dip in 2010.

Somehow I missed this cheerful news when it hit the wire, but here it is:

Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says
(Shigeki Nozawa, 10/15/09 Bloomberg)

"Oct. 15 (Bloomberg) -- The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

"“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”

" “We can no longer stop the big wave of dollar weakness,” said Uno, who correctly predicted the dollar would fall under 100 yen and the Dow Jones Industrial Average would sink below 7,000 after the bankruptcy of Lehman Brothers Holdings Inc. last year. If the U.S. currency breaks through record levels, “there will be no downside limit, and even coordinated intervention won’t work,” he said." [emphasis is mine.]

If anyone in the world knows about the futility of currency intervention, it must be Japanese. Bank of Japan's massive intervention to stem the rise of yen against U.S. dollar only profitted the currency traders.

According to the article, Mr. Uno bases his prediction on the Elliott Wave theory that tells him the dollar is heading for the trough of a 40-year super-cycle that started in 1971:

"The dollar is now at wave five of the 40-year cycle, Uno said. It dropped to 92 yen during wave one that ended in March 1973. The dollar will target 50 yen during the current wave, based on multiplying 92 with 0.764, a number in the Fibonacci sequence, and subtracting from the 123.17 yen level seen in the second quarter of 2007, according to Uno."

(You can read the entire article by clicking on the link above.)

I don't profess to know enough about the Elliott Wave theory, but I think "wave five" is the last wave before the new cycle begins. What's interesting to me is that Robert Prechter, president of Elliott Wave International called for a multi-year rally of the dollar back in August, looking at the same wave five. Mr. Prechter thinks wave five is already over, and Mr. Uno thinks it continues.

If you look at the long-term monthly chart of the U.S. dollar index, the target price seems to be even lower than Mr. Uno's. The chart is from the post I wrote back in May. It looks to me like a massive "head and shoulders" formation with neckline at 80, with the "right shoulder" already formed from 2004 to 2007 and the neckline is already broken once in 2008. A technical rebound from that low of 72 was to be expected, and it did happen. The neckline was broken again in July, and the index has never regained 80 since.

The price target of this head and shoulders pattern would be the neckline minus the height of the head: 80 - (120-80) = 40

By the way, the U.S. dollar index's current decline, which started in early March, coincides with the stock market rally. Almost a mirror image. Also, the dollar index decline (and stock market advance) seems to coincide with the unwinding of the Fed's central bank liquidity swaps. (See my post.)

Today, U.S. dollar is having a sharp rebound, as the stock market is dropping fast. Currently, Dow Jones Industrial Average is down 87 points, threatening to break 10,000-mark. Nasdaq is down 17 points to 2,158, S&P 500 down 9 points to 1,088. The U.S. dollar index is up 0.235 point to 75.745.


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