Forex Investment and Currency Trading

Global

• The global economy is experiencing significant stress, but it also has important sources of resilience
• Major central banks should act to contain downside risks
• The U.S. dollar may experience another leg of down drift
• We are already entering a phase of global recession and all G3 economies are expected to experience negative growth in 2009
• Fed will probably cut the rate to 1% soon and ECB may lower the rate to 2%, while BoJ likely will keep the rates unchanged through 2009
• U.S. dollar may still have some potential to strengthen in the near term, although it should weaken in the medium to long run

Asia

• A U.S. recession will likely dominate the near-term outlook for Asian economies and markets
  Inflation is another key risk for the outlook, given high food and energy costs, abundant liquidity, and booming asset markets
• Capital flows will probably become more of a two-way street, adding pressure on currencies
• - Downside risk to US growth increased substantially, which already led to declines of Asian asset prices and slowdown of Asian growth
• + With slowing growth, tightening liquidity and falling commodity prices, inflation now takes second row seat
• - Asian currencies may continue to weaken in the near term, and those with greater external vulnerabilities may suffer even more

China

• The economy should grow below trend next year - Weaker global demand may hurt exports and domestic demand, making investment the key near-term stabilizer
• The government aims to protect growth, but more importantly, policy should focus on developing social safety nets and domestic demand
• China should become a major player in the global capital markets, but its own financial system and exchange rate policy remain challenges
• - Weaker global demand may hurt exports and domestic demand, making investment the key near-term stabilizer
• + Micro-adjustments have given way to broadly easing monetary policy and potentially aggressive fiscal expansion
• - Currency appreciation could stall while financial markets remain fragile, but should resume next year

Korea

• Two headwinds of the weakening global economy and the tightening of domestic credit would lead to sub-par growth into 2009
• Inflation should stay above BOK’s target range until the end of this year, due to a commodity price rally, weak won and rising inflation expectations
• Expect active expansionary policies from both monetary and fiscal authorities: BOK is likely to deploy an aggressive rate cut, and the government would increase spending in the 2009 budget
• + The global financial market turmoil and the domestic credit crunch have worsened, while data indicate that growth momentum had already slowed before the latest bout of the crisis
• + Headline CPI would gradually decline due to lower commodity prices and slower economic growth, but a weak KRW remains a key risk factor
• BOK cut policy rates in October, which seemed to mark the beginning of a new monetary easing cycle.

Singapore

• Further easing by the MAS via a downward re-centering of the policy band could take place even before the next scheduled policy meeting in April 2009
• Softening real income growth could curb domestic demand in tandem with falling external demand. Domestic funding conditions may be tightening, as suggested by a recent rise in interest rates
• The first response of monetary policy to the recession was a flattening of the slope of the policy band. Further easing by the MAS can not be ruled out
• Slowdown in hiring and potential retrenchments from the growth deceleration is expected to be moderate
• + The extent of the financial deterioration would unlikely be of the magnitude seen in New York and London. With Asia still seen as a growth region, job losses especially in the financial sector may be capped

Russia

• Growth should moderate towards end-2008 due to slow down in global demand and tightening of domestic credit conditions.
• Due to the sharp change in global conditions (deleveraging and unstable commodity prices) and higher Russia-specific risk, market forecast for Ruble is changed to neutral/devaluation.
• Domestic liquidity conditions will remain unstable.
• Domestic retail trade growth remains robust at over 14%, but there are signs of slowdown in manufacturing and construction.
• + The CBR is intervening at the upper range of the band (30.4 rubles against the basket of 55% USD and 45% EUR) using on average about US$2 billion daily.The CBR is expected to adjust the exchange rate or introduce capital controls.
• The authorities announced a broad range of measures, but they are yet to reach the market.

South Africa

• The economy should experience a cyclical slowdown in 2008-09 and fall below par, but the potential for a long-term moderate acceleration in trend growth remains intact, thanks to strong investment.
• Inflation is likely to decline from Q4 onwards and decline towards its 3%-6% target by late 2009, prompting cumulated rate cuts of 200bp in 2009
• Policies will remain prudent in the face of external shock, with no major easing of monetary or fiscal policy over the forecast horizon.
• Risks have increased that the SA economy may grow at a sub-par pace for longer than previously expected, amid a poorer global environment, a weaker rand and the recent decline in commodity prices.
• The slowdown in growth and decline in oil/food prices should largely offset the inflationary impacts of the weaker rand, unless it plunges further.
• Market expects neither aggressive near-term rate cuts nor major fiscal easing. But public spending plans may increase more significantly over the longer term.

Latin America Region

• Average regional growth to moderate, compared to 2007
• Weakening commodity prices and relatively strong domestic demand should shave the regional current account surplus
• Region to face a fairly quiet political calendar
• Activity data suggest a very slight regional slowdown could have started, with industrial production decelerating at a somewhat faster pace
• Domestic demand continues to support activity
• Municipal elections in Chile will likely develop in tranquility. Also in Venezuela, despite some noise, ahead of the November 23 local elections

Brazil

• Maintenance of current economic policy during the second presidential term: primary fiscal surplus, inflation targeting regime and floating exchange rate
• Mild advances on the reform agenda during Lula’s second mandate, amid extended negotiations in Congress
• The coalition built by the government in the Congress should be more stable than in the first Lula administration
• + Central bank is not likely to abandon the inflation-targeting regime even if they halt the tightening cycle. Primary surplus could be rasied in 2009
• + Fiscal reform could be approved in the Lower House by the end of 2008
• + Lula’s popularity reached record-high figures, reinforcing his political powers

Colombia

• Terms of trade and capital inflows will remain supportive of economic growth
• Fiscal policy continues to improve on the basis of cyclical factors and the government has no plans of further structural fiscal reforms
• Monetary policy remains above neutral with the central bank ready to tighten further if needed
  FDI inflows reached more than US$5.4 billion during the first half, but oil and coal prices have fallen significantly
• + Structural fiscal fragility remains as one of the main risks for economic performance in the next few years
• + Unlike the first half of the year, Banrep appears more focused on inflation, but it will probably shift to growth

Mexico

• Activity is bound to slow down due to worsening demand conditions in the US
• Financial conditions will remain relatively stable; once inflation risks recede, a stage of monetary easing will begin
• + Evidence on the impact of the US recession over Mexico is now widespread. The internal market does not have enough momentum to offset this effect
• − While macroeconomic conditions remain sound, a bout of FX volatility has to subside before monetary easing begins