Forex Investment and Currency Trading

New issuance in corporate credit markets remains weak, even after improvement in money markets.

• Credit standards within the banking system are still tightening, as highlighted by the recent loan officers survey by the Fed and the ECB.
• The risk-taking capacity within banks and the investor community has been reduced and is likely to be further reduced in coming months.
• We have been in a multi-year process where leverage has been built. This process is now reversing, and it is likely to have some inertia, especially now that it has an additional catalyst from pronounced economic weakness.
• While things might have improved somewhat relative to the fully frozen credit markets of two weeks ago, it has likely not improved sufficiently for the deleveraging process to stop.
• On this basis, one would expect further Dollar gains into year-end, as the deleveraging process continues to dominate. EUR/$ is expected to gravitate towards 1.20 on a 3-month horizon. Looking into next year, one has hopes that government intervention, both in terms of financial sector backstops and more traditional demand boosting policies, will gradually bring back credit markets, which should see the deleveraging process slow and more normal macro links return. In that scenario, we would expect the Dollar to give back some of its outsized recent gains, and return to a level that is slightly weak to long-term fair value.
• With regard to the Yen, deleveraging works in a Yen supportive direction, given the Yen’s role as a global funding currency, and given Japan’s large holdings of assets abroad, many in unhedged form. Therefore analysts expect USD/JPY to trade to 90 on a 3-month horizon on the back of repatriation flows and as long-term carry-driven structures are unwound further.