Which major currency will do best in the months ahead?

Right now, it’s hard to be bullish on anything. I hate to sound negative, but I have – and have had for some time – sell signals across the board. My own stance is to hold cash and gold, and take cover.

But which form of cash is going to prove least ugly for investors in the months ahead?

It’s been a while since I’ve done it – and it’s something I always enjoy doing – so I’m going to take a look at the foreign exchange (forex) markets in today’s Money Morning.

In particular, I’ll be considering charts of the euro, the US dollar and our once-great British pound…

The euro could still surprise everyone

Let’s look first at the euro against the US dollar.

Given that the world will end if Greece leaves the eurozone (or at least, that’s what some would have us believe), you would have expected the euro to be in some horrible dark place. It should be following the path of the Italian lira or the Greek drachma in the 1970s.

However, it’s not been quite the outright disaster you might have expected. The euro is in a downtrend, yes. It’s in a bear market, yes. But for all that, it’s still in better shape than it was when it first launched in the distant days of 1999.

That’s not to say it can’t go lower. I’m sure it will. Look at the chart of the euro versus the US dollar below. The rate is in a clear downward channel, as defined by the blue lines.

There seems to be support in $1.20 and $1.25 areas, where I have drawn the two horizontal red lines. But the $1.05 – $1.10 area beckons.

Euro index currency chart

The view from my humble corner of cyberspace is that the only solution for Greece, short of prodigious money printing by the European Central Bank, is for it to leave the euro. (The same goes for Spain, Portugal and, probably, Italy).

The sooner they do so, the sooner this euro bear market is likely to end. But while the political path of these nations is unresolved, the euro’s downward march will continue.

How a stronger pound could hit London house prices

That said, there is so much short interest at the euro, it really wouldn’t surprise me to see some kind of snap back rally as shorts cover. Perhaps a Greek default would do it.

This would cause it to rise against both the dollar and the pound – which we consider next. Amazingly, given the amount of quantitative easing that has gone on here, the pound looks very strong. It seems to enjoying some kind of safe haven role, which makes me snigger.

Here’s the euro against the pound since 1999. There is a similar channel in place, as defined by the blue lines. The euro seems to be quickly giving back all the gains it made between 2008 and 2010.

Given the clarity of that channel, it wouldn’t surprise me to see the euro below 70p – back in the range where it traded between 2003 and 2008 – by sometime in late 2013.

GBP index currency chart

One of the odd side-effects of a stronger pound will be that central London property will no longer be so enticing to foreign buyers. Meanwhile, property in southern Europe, particularly Spain, will start looking very attractive to British buyers in want of a holiday home.

The American housing market is near the bottom

But what about the US? Is it time for us to start looking at real estate there?

I think the bear market in US housing is at or near a low. In some places it has probably already bottomed, or is bottoming. In others, there might be further declines. But the big falls have already happened.

For that reason, the risk to buying now is comparatively low, if your time frame is over several years. However, in some parts of the US, housing was actually cheaper to the UK investor back in early 2008. This is simply because of currency strength. Back then the pound was worth two US dollars. Now it’s more like $1.60.

So where’s it headed next? Below is a chart I’ve used here a few times before. For those with longer-term horizons, the pound versus the dollar is a pretty simple trade. You sell the pound at $2 – or just above ideally – in the red zone. And you buy at $1.40 or just below – in the green.

Euro v GBP currency chart

I’ve painted that central zone in the dubious choice of colour common in so many houses, magnolia. That zone has proved support during periods of pound strength, such as in the late ‘80s or early ‘00s. It has proved resistance during periods of pound weakness, such as in the ‘90s and post-2008.

After the 1992 crash, it was ten years – 2003 – before it got through the magnolia zone.  Based on this, it wouldn’t surprise me if we don’t get through $1.70 for another five years. 

After the 1984 collapse in the pound, however – when it went almost to parity with the US dollar – it only took about two years to get back above $1.70. So maybe we won’t have to wait so long.

But I wouldn’t bank on it. As I’ve argued before, I think the bear market in the US dollar ended in 2008. It looks like another deflationary wave is well and truly upon us in which case, the dollar should do well.

In the short term the pound has turned down against the dollar having run into resistance in that magnolia zone. In fact, just about every equity market and commodity is in a downtrend now.

The pound tends to fall with equities, while the dollar tends to rise against them. So I see the pound continuing its fall. First stop $1.55. Longer term I expect some kind of range trade between the pound and the dollar, with $1.66-1.70 the cap and $1.40-1.45 the floor.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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  • Bob

    A timely article. I am looking to buy some Nokia shares and am weighing up the pros and cons of buying them as Euros or as Dollars – you can buy NOK and NOK1V in both. The Pound is strong against the Euro at the moment, so I get more Euros for my Sterling, and is likely to get stronger short-term. But now looks a good time to get into Dollars? Hmm… something that is very much on my mind at the present. No hurry, NOK looks like it has further to fall yet – famous last words :)

  • Jonathan Harrison

    BITCOIN will be the least ugly currency because nobody can print it. It’s a no brainer.

  • Tony

    Nice article. I think Europeans who bought London property last year are already looking at healthy profits due to the fall in the Euro. I doubt they will cash-in yet though, while uncertainty persists. As soon as the Euro looks good again,however, they will surely take profits and sell up in their droves – and that’s when the London market will collapse.

  • Nick

    If UK is the next on the line of fire from markets perspective ? if yes, then surely from the moment EU gets its act together, GBP would suffer?

  • Keiron

    So where does this leave me? I am paid in Euro, have per diem expenses paid in US Dollar and bank accounts in UK for Sterling and Euro. To confuse matters further I live in another country who’s currency is closely linked to Euro.

    I have an option to open a USD account alongside my Euro and GBP one so should I spread the load or just keep it all under the mattress ;-)

  • Mark

    Dominic

    Are we counting Gold as a currency…. or is that just a joke!

  • MissBeckysharp

    Dominic – apart from a few rare offtrends (about 1987 and around 2000, the limits for £/$ over the last 25 years or so have been $1.66-1.70 the cap and $1.40-1.45 the floor. This is business as usual!

  • Richard

    I enjoyed the article but thought it could encompass more currencies, eg Norwegian Kroner (petro driven with huge oil fund reserves and one European country that is actually enjoying a mini boom) – Swiss (safe haven perhaps) etc, etc.

  • Ducati

    Case Shiller thinks that there is another 20% fall due in the USA housing market!

  • Boris MacDonut

    Dominic asks the question,then doesn’t answer it. Which major currency will do best in the next few months?
    The fact that he says Italy will leave the Euro reveals how ridiculously out of touch he is. The Treaty of ROME started this political alliance .I really do not think that self respecting Italians would leave the party.

  • JREwing

    In the paper currency “market”, the US Dollar is the only temporary “safe haven” there is. I converted all my Sterling into US Dollars a few weeks ago (as I mentioned in an earlier post).

    The basic strength of the Dollar is that the global commodity trade (including the trade in oil, among other things) is almost completely Dollar denominated and the market still regards (erroneously) the US Treasury market as the ultimate safe haven. Until this situation changes, the Dollar will rally whenever people start liquidating in fear.

    Gold, which is actually the only true safe haven currency there is, is currently getting whacked because people are facing US Dollar margin calls (ergo, Dollar demand goes up and demand for everything else goes down). Lehman was the classic US Dollar rally. The Dollar will go through many such rallies before it collapses. It is absolutely the LAST paper currency domino to fall. All other paper currencies will go down before it does.

  • Jim

    To 11. JREwing does that mean sell gold buy dollars.

    I’m rapidly coming to that conclusion, either that or buy physical gold and that, so I’ve been given to understand, has been in a gold rush for awhile now.

  • Tania

    Hi there! Would really appreciate some advice here. Just moved back to the U.K from Italy and luckily sold my flat just in time before property prices plummet even further! I have Eur.8OK waiting in a euro account to be exchanged into sterling & then to buy a property here in about 8 mths time once i have a job again. I am quite into the idea of doing my first forex trade & buying either swiss francs or dollars for a short term investment to hedge the fall of the Euro in order to get a decent amount of sterling. Is this a good idea? Any advice or tips would be really appreciated! T

  • James

    We can only hope that all the Brit and other foreign speculators that are trying to buy property in Greece and Spain to cash in on the workers misery will end in disaster. I also believe that the UK shouldnt allow overseas people to purchase property and sell for speculation in the UK. If they are not resident, they should be larger property taxes and substantial capital gains should be withheld at point of sale. It is speculation in the UK property market that excludes so many UK nationals. I also believe that government subsidized and assisted purchases should be for UK residents and not foreign buy to let. Lets get some protectionism before it is to late, or is it already?

  • Frank

    I am an English/Italian that transferedback to Italy to help and support my elderly father who is now deceased. After living in England for 52 years . My income comes from the UK in pounds Sterling. In 2002 when the euro first existed the pound was very strong, but over the years it has become very weak almost par. this makes a big difference in the income I receive. Will the pound ever become stronger against the euro in the next few months, as in the last 2 weeks it has gone down by as much as 6 pence. Each day that passes it is getting worse

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