Near-term Currency Outlook in the Post-Crisis World

U.S. dollar (USD) - The safe haven trade is being unwound as it hit its recent low against the EUR at 1.2886 on April 22, up nearly 10 percent since then to 1.4150. But the real move has occurred in the GBP, AUD, CAD, NZD, NOK and several EM currencies as the risk appetite has grown for non-U.S. assets. The key factors for the U.S. include global investors' acceptance of budget deficit exceeding 12 to 13 percent of GDP. In short, should there be a poor or worse, failed Treasury auction, the USD will be in a tailspin downward. Conversely, the USD might be oversold against the AUD, CAD and NZD given their recent strong gains.

Euro (EUR) - The best range to plan for is 1.35 to 1.48. Manufacturing, demand and tax receipts are all off; however, the EUR is benefiting from the USD risk aversion unwind trade. EUR is up 11.8 percent since February 2009, which is having the wrong effect as it is hurting European exporters as reflected in FX losses affecting earnings for the likes of Adidas to Koening and Bauer AG. In addition, the continued fiscal crisis for Poland, Hungary and Czeckslovakia is potentially hurting the EUR. The ECB has moved late and not often with regard to fiscal stimulus and quantitative easing. EURUSD is likely to test one-year highs as the USD winds down lower. There is a very strong resistance level at 1.4220 in the near term and if breaks, then 1.48 and 1.59 would be longer term upside targets (the latter number is unlikely). Downside tests of 1.3090 would be the aggressive low end of the range.

Japanese yen (JPY) - All signs point to a 95 to 100 level at which the JPY will remain for the next few months. The issue is that there is strong appetite by both Japanese institutional and retail investors for higher yielding foreign assets, keeping the JPY on the defensive. As a result, the carry trade is likely to return, as it has over the past three weeks, as an important negative for the JPY.

British pound (GBP) - Risk is still upside to 1.72. The pound has benefited greatly from the risk aversion sell-off in the USD, recent appetite for gilts and the notion it has been far oversold. However, with little improvement in their economy - production, lending, home sales and pricing are still depressed - gains could be capped soon.

Chinese renminbi (CNY) - No appreciation below 6.82. CNY continues to have consistent pressure on the upside as a result of the PBOC managing the currency more on a trade weighted basis, versus the U.S. This means that the nominal effective exchange rate (NEER) is very strong. Add to it that China is already out of its recession, export driven again and is able to buy USD (Treasury assets) to cap its rise in CNY.

Indian rupee (INR) - 46.00 would put it back to pre-crisis levels. After the election, much pressure is off the currency with it heading towards a 44 high. Much of the sustained move will depend on foreign direct investment flows but with its high savings and investment rates internally, should support the longer term economic growth.

Korean won (KRW) - Consolidation around 1230. The nuclear situation in North Korea will put downward pressure on the KRW for the foreseeable future. However, with underlying economic backing - exports increases and the recent 12 day buying spree of local stocks - there will be upward pressure on the KRW. If the situation defuses somewhat, as it has in the past, we could see a test of the 1,200 level.