- Global currency moves continued to be dominated by the swings in risk appetite, capital and trade flows, and gyrating terms of trade stemming from the worsening global recession. Policy responses — monetary easing, FX intervention, capital controls — have also added to FX volatility. In general, the US dollar is expected to outperform in this period of stress, with riskier currencies gaining ground later in 2009 when a bottom to global activity and a firming of risk appetite are nearer to hand.
- EUR is expected to weaken further, the outlook for euroarea growth currently endorsed both by the market and by the ECB is still not gloomy enough. Future negative surprises will likely force the ECB to cut rates more than it is currently expected by the market, helping to weaken the EUR.
- The pound will rise a little against the euro — or rather that the euro will fall faster than the pound against the USD after having weakened sharply in recent months in response to UK economic weakness and worries over the UK authorities’ commitment to economic stability. There is a risk of a genuine sterling crisis, in which a total loss of confidence in the UK economy and policy management send the pound lower and lifts inflation worries and gilt yields.
- The Swedish currency is expected to remain very weak in the first half of 2009 as the rapid deterioration in economic conditions points to a severe recession for Sweden in 2009. Developments in the stock market and risk appetite will likely continue to be dominant forces for the Swedish currency going forward. In the second half of 2009, as global risk appetite firms and the Swedish recession bottoms, the SEK is expected to strengthen.
- The Swiss franc is likely to weaken versus the euro, either in response to the deep Swiss recession and zero interest rates, or to reduced risk aversion and a reversal of the “flight to safety” trade, or, if necessary, because of SNB intervention to weaken the CHF. The SNB has made it very clear that it will intervene — if necessary in “unlimited” scale — to weaken the CHF if it does not fall of its own accord.
- The Japanese yen (JPY) is expected to remain generally strong against other currencies, as uncertainty surrounding the global economic outlook and volatile financial markets persist. However, the yen’s appreciation against the USD will probably be modest, given the sharp deterioration in the Japanese economy and some stabilization in the U.S. economy and financial markets for the second half of 2009. Meanwhile, the yen likely will appreciate against the Euro very sharply as the ECB is expected cuts policy rates in the face of a worse-than-expected economic outlook.
- Further weakening in the Canadian dollar (CAD) is expected in the near term on the back of faltering exports and terms of trade in the face of the weakening global economy. Over 12 months, the bottoming of the US economy and reestablishment of risk appetite should allow for some modest appreciation of CAD/USD.
- The near-term outlook for the AUD and NZD remains down, although the AUD is expected to outperform the NZD. Although it is clear that the monetary policy and fiscal stimulus being applied to the Australia and New Zealand’s economies are helping, the economic outlook for both countries continues to deteriorate and further policy stimulus, both monetary and fiscal, is expected. Over the medium-term, any improvement in risk appetite and/or signs of stabilization in the local and global economy should help both the AUD and NZD regain lost ground against the USD.
- Many emerging Asian currencies improved mildly during the first three weeks of January. But renewed risks of global financial crisis and collapsing Asian exports imply that currency weaknesses may continue during the remainder of the first quarter. A rapidly cooling Chinese economy, with GDP growth falling from 9% in the third quarter or 2008 to 6.8% in the fourth quarter of 2008, could add further concerns about Asian economic outlook. Assuming economic activities stabilizing in both the U.S. and Asia and financial risks receding from the second half of the year, emerging Asian currencies as a group could resume the trend of modest appreciation against the U.S. dollar. In particular, Chinese yuan, Korean won, Malaysian ringgit, Indian rupee and Indonesian rupiah could outperform market expectations over a six- to 12-month time horizon.
- Currencies in CEEMEA have been under intense pressure in the past few weeks and the risks towards greater depreciation against the USD and EUR.
Global Currency Strategy
January 29th, 2009 · No Comments
Tags: Forex Market
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