Weak euro likely in 2012

By yearend 2011, the euro had fallen to US$1.32 from the US$1.37-US$1.44 level it had traded around during the previous 11 months. Most global money managers and strategists expect continued weakness in the euro until there’s a satisfactory resolution of the European sovereign-debt crisis. Jean-Guy Desjardins, chairman, CEO and chief investment officer of Fiera Sceptre Inc. in Montreal, believes the crisis will be a memory by mid-year. He recommends buying euros, as he expects the currency to rise.

Others, however, don’t think the euro will necessarily appreciate. The euro needs to be lower to make European exports more competitive and encourage tourism, a major economic driver in many European countries, says Charles Burbeck, head of global equities at Barclays Bank PLC’s wealth-management arm in London.

The greenback is the wild card. So far, financial markets have remained patient in the face of the U.S.’s delays in dealing with its fiscal problems. In part, this is because they have been distracted by the European crisis, but it’s also because the U.S. economy is still growing. Most analysts expect real gross domestic product growth of 2%-2.5% in the U.S. this year. But some think U.S. GDP growth will falter; if that happens, the US$ could plunge.

In the meantime, the Chinese yuan continues to appreciate slowly and the Japanese yen remains strong.

China is under pressure, particularly from the U.S., to appreciate the yuan, and is doing so gradually. That appreciation is expected to continue this year, assuming China’s economy avoids a hard landing. If the economy slows too much, the yuan’s appreciation would probably be put on hold in order to keep exports, the growth of which are already slowing, as competitive as possible.

Japan wants the yen to drop in value, which would increase the competitiveness of its exports, the main driver of its economic growth. But Japan’s large trade surplus keeps demand for the yen up, and that situation is expected to continue.

Japan isn’t alone in wanting its currency’s value to drop. All industrialized countries would like to see declines, including the U.S., which is counting on exports to keep its economy growing, and Canada, because the high C$ hurts domestic manufacturers, particularly in Ontario, that are reliant on the U.S. market. There isn’t much hope of a lower C$ for an extended period, though. The loonie is a petrodollar whose value tracks the price of oil, and most analysts expect oil to remain strong over the medium term.

There could be some weakness in the first half of 2012 as markets worry about whether China, a major oil consumer, will be able to avoid a hard landing. But that’s expected to be reversed in the second half of the year, when it’s expected to become clear that the country will keep growing at a healthy pace.

There is also additional support for the C$ coming from financial markets’ increased awareness of Canada’s fiscal responsibility, which stands in contrast to that of the U.S. and Europe. Several global money managers outside Canada are overweighted in Canada — and not just in our resources equities. In particular, they also like our banks and government bonds.

The question for retail investors is whether they should hedge their foreign-currency exposure or invest with money managers who hedge. Some mutual fund portfolio managers always hedge; some never do; and some are opportunistic.

Norman Raschkowan, chief North Amer-ican investment strategist for Mackenzie Financial Corp.’s Maxxum funds in Toronto, says you need to know the hedging policies of the funds your clients are invested in. Maxxum is opportunistic; because Raschkowan thinks the C$ will trade in the US95¢-US$1.05 range, Maxxum funds tend to hedge US$ investments if the C$ is close to US95¢ but not when the C$ gets much above par with the US$. IE