Fx and Interest Rate Monthly - March 09
- We forecast that the euro will hit new lows against the dollar...
With the euro re-testing last year’s lows against the US dollar, euro weakness remains our key call for 2009 . We forecast that: economic outperformance will be replaced by underperformance; its yield premium will be cut as a consequence; and its status as a safe haven will be under pressure as member countries' credit ratings are downgraded. The US dollar is set to be the key beneficiary of these trends. - …as de-leveraging remains the key driver of markets...
Capital flows will remain key to FX markets , as de-leveraging remains the dominant force in capital markets in 2009. This is especially the case for emerging market currencies and we would anticipate further currency crises, with Eastern Europe appearing the most vulnerable region given high levels of foreign currency loans to both consumers and businesses, trade deficits and a dependence on overseas financing. - ...though quantitative easing is an offsetting factor.
However, quantitative easing adds a complicating factor to these trends , targeted as it is at offsetting some of the effects of de-leveraging. Although the US has led the way in quantitative easing, we believe that it is more likely to prove a potential negative for the yen, since it lacks other supporting factors, and this vulnerability tempers our forecasts of further yen appreciation. There is a risk that quantitative easing becomes the instrument of competitive devaluation, dislocating economies and FX. - In a global recession, the interest rate cycle also converges...
Interest rates are being cut to emergency levels – as close to zero as is appropriate for the functioning of the local banking system. We believe that this process is well advanced and that we are within three months of the low point for global interest 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 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.
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