I love it when a plan comes together. It was just last week that I made predictions about three currencies
In just one week we have seen all three come true. The euro has dropped like a rock in the past few months, but I was confident that it would drop more. And it has. We have seen it drop to below 1.29. While we may see some profit taking and the euro rise back up above 1.30, I suspect that will be a dead cat bounce. I believe there will be a further drop and we might see 1.27 or 1.25 by end of the year if economic circumstances worsen further or inflation drops to deflation.
Looking at the British pound, we have seen a drift lower in the last week and a major drop on Monday morning. For the first time the public polls on the referendum of Scotland remaining with the United Kingdom or separating are showing a majority of people voting for Scotland to separate. This has jolted the United Kingdom as I had predicted. The pound has plummeted. In this case, I do not believe the actual vote will be for Scotland separating. And if that is to happen you will see a significant rally in the pound. For the risky investors out there, you might want to buy some calls on the British pound. Mind you, it could be a very risk bet, but I vote that the pound will recover.
Looking at the Norwegian kroner versus the Swedish krona, we have seen a small move in our favor so far. Not a great move but a move in the right direction. The Sept. 18 meeting of the Central Bank of Norway will be telling on the future of that pair.
Switching topics to India, we are noticing consistent and positive messages emanating from the new prime minister and his cabinet. With the first 100 days of his term over, we have seen revival of the business sentiment, a strong GDP for the second quarter and a move toward a sustained growth pattern, a better-than-normal monsoon season, which will significantly help reduce food inflation, as well as the nice drop in international prices of crude oil, which has helped the balance of payments (oil is the single largest drain on the foreign exchange reserves of India).
As we see a more balanced trade deficit or an inkling of a surplus, we will likely see the Indian rupee rise. Here I suspect the Reserve Bank of India will not allow the rupee to drop much below the 60 mark (remember the Indian rupee is quoted European style so lower means getting stronger). As a result we might not see much improvement in the rupee.
The Indian stock markets are another story yet. Even after a huge rally in the past six months, we are in a definite bull market in India. We can expect at least another 10 percent move upward in the stocks in India. American investors can easily invest in the Indian equity markets through exchange-traded funds on the New York Stock Exchange.
All in all, I am bullish on select emerging market trades. The South African rand is now a screaming buy after the massive decline it has faced. The Mexican peso can also move higher, while the Brazilian real will likely drift lower until elections in October. If the current president loses, we will see a rally in the real as well as the Brazil stocks. But that is for next month.
I would urge diversification of your investment portfolio. Invest wisely and with confidence!
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