Fx & Interest Rate Monthly

Adopting a policy of quantitative easing is a negative factor for one's currency...
Quantitative easing is inherently negative for the country that adopts such a policy. We have therefore revised down our forecasts for the US dollar, sterling and the Swiss franc . There should be a corresponding short-term boost in sentiment for commodity-linked currencies. However, our caution on the timing and strength of the forthcoming economic recovery makes us cautious about extrapolating this trend.
...but we still favour the defensive attractions of the dollar and yen...
Our two main, albeit flawed, favourites are the US dollar and yen . Both labour under economic and yield constraints but have defensive virtues which make them attractive in the current environment.
…remaining cautious on the main European currencies...
We expect further sterling weakness as pro-active monetary and fiscal policy is not, nor is designed to be, supportive of a currency. These comments also apply to the Swiss franc, even if the problem is more the financial sector and less due to its domestic economy. The euro is also vulnerable from cyclical weakness, structural problems in the periphery and newer EU members, while the less activist European Central Bank is likely to be locked into a policy of low interest rates for longer than investors expect.
...and also emerging markets until the economic recovery is established.
We would continue to avoid the currencies of emerging markets . The key risk indicators – overvalued exchange rates, current-account deficits and dependency on external financing – are concentrated in central and eastern Europe. Yet the environment will be unfriendly to other emerging market currencies, and we would look to next year for a recovery.
In a global recession, the interest rate cycle also
Interest rates are being cut to emergency levels – as close to zero as is appropriate for the local banking system. This process is well advanced, and we believe that we are within three months of the low point for global policy rates.
...reducing interest rate differentials.
Although we forecast that we will have seen signs of economic recovery before the end of 2009, it will in our view be well into 2010 at the earliest before growth is likely to be robust enough to require monetary tightening. The fight against deflation will require policy rates to stay low for an extended period.