The USD has pushed beyond the highs reached in late 2008. In general the macroeconomic and financial landscape continues to evolve in a USD positive manner. Growth expectations are weakening while policy responses are falling short of what is required to stabilize markets.
In the US, government capital injections for financial firms have created nationalization fears that have progressively undermined financials to a degree that has negatively affected overall index performance. In Europe, an insistence that budget discipline be maintained and a general aversion to cross-border bailouts is arguably contributing to instability in both banking sectors and the EMU bond market.
USD supply into the FX market is being curbed by sharply increased home bias among US investors and a shrinking US C/A deficit. USD supply into funding markets is being curbed by home bias among US investors.
The FX pressures caused by the USD shortage in global banking tend to intensify amid the risk aversion created by asset market price declines. At present, markets appear to be at least in part responding to the deterioration in leading indicators, with key barometers such as purchasing manager surveys suggesting that the rate of contraction is increasing, not decreasing. Outside of the US and Japan, the conventional monetary policy response to this is not quite complete, with the BoE and ECB expected to reduce short-rates this week by around 50bps. It seems unlikely that such moves will be sufficient to boost confidence and, as such, their main contribution will probably be to sustain the current USD supportive trends in interest rate differentials.
0 responses so far ↓
There are no comments yet...Kick things off by filling out the form below.
You must log in to post a comment.