All publications were correct at the time of going to publish
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May
Inflation risks push QE temporarily out of favour…
There has been a distinct change of tone from the central banks of the Group of Four (G4) economies over the potential provision of further monetary policy stimulus. This follows a busy first quarter for central banks, which saw quantitative easing (QE) in England and Japan, a second long-term refinancing operation (LTRO) in Europe and further rhetoric in the US on the likelihood of more policy action. By contrast, recent comments and meeting minutes have shown a shift away from further measures. There have been a range of drivers: growth has been better than expected, especially in the US; inflation has risen (of particular concern in the UK); and there has been a natural desire to allow more time to fully assess the implications of such unconventional policies, especially Europe’s LTRO.
April
The shift out of crisis mode places greater emphasis on the economic outlook
There are clear signs that the global economic outlook has stabilised. The US recovery appears to have gained momentum, with unemployment falling sharply from 9.1% to 8.3% over the past six months. Chinese economic activity may be slowing, but we still expect it to deliver 8% growth this year. Even the outlook for the euro-zone has improved slightly, with Germany remaining resilient, though peripheral economies continue to contract. This greater stability has allowed investors to shift out of crisis mode – when the risk of contagion made it less important to focus on individual economies – and for currencies to become more responsive to domestic economic news-flow. This move should be to the benefit of faster-growing emerging economies, as well as those developed economies that are outperforming, including the US.
March
Zero rates means improved US economy benefits emerging and commodity currencies, not dollar
The US Federal Reserve (Fed) said after its latest meeting that, given inflation remained subdued, further monetary policy measures were being considered to help return the economy to “full employment”. If recent improvement in economic activity is insufficient to shift Fed policy from its current stance of near-zero rates until the middle of 2014, then it is similarly unlikely to provide any significant support for the dollar.
February
UPDATED - Lack of euro crisis solution puts pressure on ratings
Standard & Poor’s lowered it credit rating on nine eurozone countries on 13th January, citing a credit crunch for both private and public sectors that is weakening the region’s economy as they simultaneously pay down debt. The problems are compounded by the open and prolonged dispute over how to address them and a misplaced focus on fiscal austerity. Actions announced and taken were deemed inadequate to tackle the financial crisis. This is in line with our long-held view of the structural weakness of the eurozone and risks to the currency. However, with the tradeweighted euro already at a seven-year low amid widespread negative sentiment, short-term weakness looks limited. While a break-up is no longer inconceivable, the euro could rally yet again ahead of the next summit of European leaders on 30 January, given pressure to produce a solution.
January
Politics likely to be more significant than economics and capital flows in 2012
The underperformance of developed economies, with debt encumbered voters and governments, adds to the pressures on their political systems. The euro’s peaks and subsequent troughs have aligned closely with European Council summits for over a year. Repeated failures to come up with a convincing or workable solution have contributed to the credit downgrades and looming recession that will complicate the resolution of the euro debt crisis in 2012. We still expect that a closer fiscal union will be the eventual solution, supported by European Central Bank intervention, but the risks of an uncontrolled break-up are no longer insignificant. And political risks are not confined to Europe – it is now clear that only the November Presidential election can resolve US gridlock.
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