This past week, central bankers from all over the world met in Jackson Hole, Wy. Those attending from the U.S., Europe, and Japan seemed to paint the same picture overall of a global economy that is recovering.
It appears the central bankers agree that the worst is finally over, although it will be a bumpy road ahead, according to European Central Bank President Jean-Claude Trichet.
I, too, see a recovering global economy that will have to deal with an inflating world. I think U.S. stocks will recover more and have more upside. But you will see commodities outperform stocks in the end because commodities deal better with inflation than do stocks.
Stocks do fine with some inflation for a while, but as inflation becomes too high the rise in prices cuts into their profits. The higher interest rates that result make it difficult for corporations to borrow and expand.
Commodities, in comparison, thrive off of inflation. After all, that’s what inflation really is,rise in asset prices.
That has a lot to do with currencies.
As global economies recover, their economies (GDP) will expand once again. You can’t have an economy expand without putting a demand upon energy resources, such as oil.
Therefore, I see a rising demand coming on the oil supplies. Prices will respond to this by rising further.
As for which currencies will benefit from this and which will be hurt, Canada is the first that comes to mind since they are such a major exporter of oil to the world.
The U.S. dollar and the yen will be the primary currencies that get hurt. As economies expand and stocks flourish, money will pour out of the defensive posture that it’s been in which caused the dollar and yen to flourish. It will go into riskier currencies that have more upside potential in an expanding economy.
The euro will also be one that flourishes due to it being the anti-dollar. It has that nickname because if investors are fleeing the dollar, Europe has the next most liquid currency to go into. Therefore, as large institutions become dollar-haters, they fall in love with the euro by default.
Therefore, as the dollar falls as oil rises, the euro will, by default, rise. This causes the EUR/USD and oil to head in the same overall direction.
I think you will see the euro and Canadian dollar rise and the greenback and the yen fall off in the months ahead as investors all over the world have their fears calmed by central bankers all coming into agreement that the worst is finally behind.
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