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FX and Interest Rate Monthy Archive
The new year is forecast to start as 2009 ended - with a weak US dollar...
Zero-yielding US dollars continue to flood the US economy in order to support the recovery. As a consequence, the US currency remains under pressure as investors switch into higher-yielding or higher-risk currencies as part of the ‘carry trade’.
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Zero-yielding US dollars continue to flood the US economy in order to support the recovery. As a consequence, the US currency remains under pressure as investors switch into higher-yielding or higher-risk currencies as part of the ‘carry trade’.
Find out more...
Cheap liquidity continues to flood global currency markets...
Quantitative easing (QE) has pumped liquidity into the global economy to help drive a recovery from the recession. As the Federal Reserve has issued huge quantities of zeroyielding US dollars, investors have sought to switch the US currency into higheryielding or higher risk ‘carry trades’ - so ensuring that the US dollar sold off in 2009.
Read more. . .
Quantitative easing (QE) has pumped liquidity into the global economy to help drive a recovery from the recession. As the Federal Reserve has issued huge quantities of zeroyielding US dollars, investors have sought to switch the US currency into higheryielding or higher risk ‘carry trades’ - so ensuring that the US dollar sold off in 2009.
Read more. . .
The major themes of risk and recovery have dominated FX and other markets over the past year.
The scale of the market collapse in 2008 and recovery in 2009 were sufficient to overwhelm all other factors. A binary trading environment has prevailed, with the US dollar and the yen on one side and practically everything else on the other side. It mirrored the same division between the safe haven of government bonds on one hand and risk assets, especially equities and commodities, on the other. As some stability returns to both the global markets and global economy, there is scope for other, currency-specific factors to regain greater influence over currency moves.
Read more. . .
The scale of the market collapse in 2008 and recovery in 2009 were sufficient to overwhelm all other factors. A binary trading environment has prevailed, with the US dollar and the yen on one side and practically everything else on the other side. It mirrored the same division between the safe haven of government bonds on one hand and risk assets, especially equities and commodities, on the other. As some stability returns to both the global markets and global economy, there is scope for other, currency-specific factors to regain greater influence over currency moves.
Read more. . .
The dollar will continue to depreciate...
Despite talk of 'exit' strategies, the Federal Reserve continues to supply the market with dollar liquidity at close to zero rates in a bid to support the economic and financial market recovery. The consequences for the exchange rate are obvious, with investors and even central banks fleeing the falling US currency.
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Despite talk of 'exit' strategies, the Federal Reserve continues to supply the market with dollar liquidity at close to zero rates in a bid to support the economic and financial market recovery. The consequences for the exchange rate are obvious, with investors and even central banks fleeing the falling US currency.
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The return of the carry trade is negative for the US dollar...
The flow of investors seeking to swap zero-yielding dollars into higher-yielding currencies and/or risk assets is only likely to be halted by a rise in US interest rates. On that basis, we would not expect to see the US dollar strengthen until the second half of 2010 at the earliest. That said, investors may reverse their positions ahead of this time, either in anticipation of the rate hike, or as a consequence of negative developments for the foreign currency assets they are holding. The reversal of this carry trade is likely to be a significant trend, given the size of the position that will have been built up, suggesting that the US dollar could well swing from oversold to overbought territory.
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The flow of investors seeking to swap zero-yielding dollars into higher-yielding currencies and/or risk assets is only likely to be halted by a rise in US interest rates. On that basis, we would not expect to see the US dollar strengthen until the second half of 2010 at the earliest. That said, investors may reverse their positions ahead of this time, either in anticipation of the rate hike, or as a consequence of negative developments for the foreign currency assets they are holding. The reversal of this carry trade is likely to be a significant trend, given the size of the position that will have been built up, suggesting that the US dollar could well swing from oversold to overbought territory.
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A recovery in risk appetite has been negative for the US dollar.
The US dollar has continued to decline towards its trade-weighted lows for the year. In the absence of obvious negative economic data this seems, at least in part, to be a resumption of the carry trade, as investors borrow dollars at increasingly attractive rates to invest in higher-yielding or riskier assets around the world. We believe this will continue to drive the US dollar lower in the short term.
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The dollar is oversold and poised to rally on any better news.
When sentiment is very negative, currencies can rally even if the news, on the face of it, is poor. We believe that the current weight of negative expectations is likely to constrain any further weakness of the US dollar. We remain cautious on the outlook for the US economy, which faces problems left over from the liquidity crisis. Yet we calculate that the US dollar is clearly undervalued and so will rally as the economic recovery is confirmed, however weak and hampered by US consumers' woes that recovery proves to be.
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We continue to expect a weak recovery – a view with which the IMF concurs.
‘The good news is that the forces pulling the economy down are decreasing in intensity,’ commented the IMF’s chief economist in the latest revision to its World Economic Outlook. ‘The bad news is that the forces pulling the economy up are still weak. The balance is slowly shifting, and this leads us to predict that, while the world economy is still in recession, the recovery is coming. But it is likely to be a weak recovery.’ That is pretty much in line with our own macro-economic forecast. The IMF expects world output to grow by 2.5% in 2010, led by emerging economies, while developed economies grow by only 0.6%
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‘The good news is that the forces pulling the economy down are decreasing in intensity,’ commented the IMF’s chief economist in the latest revision to its World Economic Outlook. ‘The bad news is that the forces pulling the economy up are still weak. The balance is slowly shifting, and this leads us to predict that, while the world economy is still in recession, the recovery is coming. But it is likely to be a weak recovery.’ That is pretty much in line with our own macro-economic forecast. The IMF expects world output to grow by 2.5% in 2010, led by emerging economies, while developed economies grow by only 0.6%
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Recovery is effectively under way, but we expect volatility to return as growth turns out to be a bumpy process.
If, as we forecast, the economic upturn starts in the second half of the year, the recovery is effectively under way. However, our caution over the strength of that recovery, the risks from the still-fragile financial system and the problems of unwinding emergency policy measures means that we would be reluctant to chase recovery and risk themes in FX markets. We would expect volatility to return to currency markets when it becomes apparent that the economic recovery will be a bumpy process.
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If, as we forecast, the economic upturn starts in the second half of the year, the recovery is effectively under way. However, our caution over the strength of that recovery, the risks from the still-fragile financial system and the problems of unwinding emergency policy measures means that we would be reluctant to chase recovery and risk themes in FX markets. We would expect volatility to return to currency markets when it becomes apparent that the economic recovery will be a bumpy process.
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Investor sentiment about the economic outlook is improving...
Investor sentiment has picked up significantly since the March lows for capital markets. With increasing signs that the first quarter of the year is likely to have been the worst part of the current global recession, investors have switched from fearing a downward spiral to anticipating an economic recovery.
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Investor sentiment has picked up significantly since the March lows for capital markets. With increasing signs that the first quarter of the year is likely to have been the worst part of the current global recession, investors have switched from fearing a downward spiral to anticipating an economic recovery.
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While interest rates converge, we expect that volatility will stay high...
The implication of convergence on zero interest rates and quantitative easing targeting bond yields is a reduction in volatility for yield differentials. However, we expect that macroeconomic uncertainty will continue to drive high levels of volatility in FX markets. This is likely to dissuade yield-hungry investors from backing higher-yielding currencies for the time being.
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The implication of convergence on zero interest rates and quantitative easing targeting bond yields is a reduction in volatility for yield differentials. However, we expect that macroeconomic uncertainty will continue to drive high levels of volatility in FX markets. This is likely to dissuade yield-hungry investors from backing higher-yielding currencies for the time being.
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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.
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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.
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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.
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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.
Find out more...
The euro is set to decline against the dollar...
Euro weakness is 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.
Find out more...
Euro weakness is 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.
Find out more...
While capital markets fell in unison, FX highlighted relative risks...
In global capital markets dominated by de-leveraging, correlations tend towards unity as investors seek cash by liquidating their assets. However, FX markets are driven by where that money goes next. Are the sellers overseas investors withdrawing their cash or domestic owners paying down foreign currency borrowings? The FX markets have consistently been the first to reveal the fault lines of globalisation as the US sub-prime collapse has reached out to pull the global economy into recession.
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In global capital markets dominated by de-leveraging, correlations tend towards unity as investors seek cash by liquidating their assets. However, FX markets are driven by where that money goes next. Are the sellers overseas investors withdrawing their cash or domestic owners paying down foreign currency borrowings? The FX markets have consistently been the first to reveal the fault lines of globalisation as the US sub-prime collapse has reached out to pull the global economy into recession.
Find out more...
A rally in equity markets would prompt a correction for recent gainers...
Any rally in global asset markets is likely to be associated with a sell-off in the US dollar and the Japanese yen, both of which have benefited from the waves of de-leveraging that have swept global markets. Hence, our short-term forecast is for dollar and yen weakness.
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Any rally in global asset markets is likely to be associated with a sell-off in the US dollar and the Japanese yen, both of which have benefited from the waves of de-leveraging that have swept global markets. Hence, our short-term forecast is for dollar and yen weakness.
Find out more...
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