In the week ahead, MoneyShow's Jim Jubak is focusing on the currency markets, as the value of the dollar has an important impact on many of the markets.
For the week ahead, watch currencies. The US dollar has been weak against, both the Japanese yen, and the euro, for different reasons, we will get to that in a minute. When the dollar is weak against those, it is usually an expression of concern, worry, etc. in the market, but whatever the cause, it has a negative effect on bonds, a weaker dollar. If the dollar is going to be worth less in the future than it is today, investors want higher bond yields, which means, lower bond prices. Lower bond prices then, in this environment at least, seems to extend over into the stock market, and pushes the stock market down, so basically, a falling dollar at this particular point, not always, a falling dollar at this point, against those two currencies tends to drive down US stocks and bonds at the same time, so we are getting weakness toward the end of the year. A lot of that is just worry because we have a big Fed meeting coming up on December 18, and no one is exactly sure what the Fed is going to say about, whether it is going to taper, when it is going to start tapering, how much it might taper. Remember, we are talking about a program to buy $85 billion a month in Treasures and mortgage-backed securities and the thought is that, at some point, the Fed will actually cut that, initially to probably like $75 billion or $70 billion. The question is, when is the first cut? And that is what got the market nervous.
There are other things going on though with the yen, and the euro, and really, two different things. One is, the yen tends to be the currency where people go when the market gets kind of worried. It is a very, very liquid market. It is a very easy market to borrow in, so you get a lot of carry trade. All of those things are going on and the yen, really has, sort of, appreciated against the dollar to about 102.5. It looks like that is where the dollar is going to sort of stabilize for a while, and I think it is likely to stabilize there, because there are a couple of economic reports suggesting that the Japanese economy is really weaker than expected, which means the Bank of Japan may go back into the market and start buying assets again, push the weak yen policy, so that is probably stabilizing the dollar.
On the euro, a totally different scenario, which is that as long as investors don't think the European Central Bank is likely to cut interest rates again, the euro is a pretty attractive currency. It is a little stronger. It is generating more interest and so you have the euro at like 138, which is higher than it has been for like a month and a half against the dollar, and that will depend on what we hear over the next couple of weeks about the state of the European economy.
If we are looking for sort of a scenario, a calendar, the date to look at is December 18, because that is when the Fed decides on taper or no taper, and then we move into the end of the year and if we get a weak dollar, I think we are sort of looking for US stocks to drift lower through the New Year.
This is Jim Jubak for the MoneyShow.com video network.
