- The three dominating themes in financial markets currently are the flight to liquidity, deleveraging and the shift of attention of policymakers from inflation to growth. Even countries that are facing double-digit inflation numbers, such as the UAE and Saudi Arabia, are more concerned with tightening liquidity right now than inflation.
- These three themes will have implications on the currency markets. The shift of attention from inflation to growth implies that plans to change exchange rates in Gulf Cooperation Council (GCC) countries will be delayed, even if the need for more flexible exchange rates and monetary policy is as strong as ever. Deleveraging and the flight to liquidity should also imply that in the next few months the US dollar (USD) and the Japanese yen (JPY) should continue to outperform. Once liquidity conditions and sentiment normalize, however, we should expect to see markets focusing on fundamentals. At this point the market is more likely to enter a period of consolidation, where relative value should become the dominating theme. And once this happens there will be a differentiation between currencies, with current account surplus countries more likely to outperform and with the USD reversing some of its gains. Given the dynamic and decisive response by policymakers, expect to see this sometime into next year.
Liquidity, De-leveraging and Growth
November 5th, 2008 · No Comments
Tags: Forex Market
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