[LFX]

Buoyant activity data show the global economic recovery gaining traction in Q4-2009, intensifying the debate on when, and how quickly, monetary policy accommodation needs to be withdrawn. But the improvement in economic data has been choppy and central banks in Australia, the US, Indonesia, Philippines, the euro area, and UK have taken the opportunity this week to stress that an early (or in the case of Australia, aggressive) withdrawal of stimulus is unlikely.

The mood of caution which has enveloped the markets over the past couple of weeks lingering in the run-up to Thanksgiving. Investors are likely to book profits on risk assets as market nervousness over year-end liquidity and on the timing of central bank exit strategies continues to weigh, although overall funding conditions should be more resilient than in 2008. In addition, while low G7 yields, loose global monetary and fiscal policies, and large amounts of investor cash are likely to drive further USD weakness through year-end, some of the factors that have influenced USD depreciation in recent months are beginning to show signs of fatigue.

The boost to risk appetite – and the drag on the US dollar – from improving economic data may be beginning to lose steam as investors fret that economies will struggle as fiscal support fades in 2010. Meanwhile, recipients of yield-seeking portfolio flows have become more vocal in their concerns about currency appreciation.

The beneficiaries of greater investor caution continue to be gold, up at a new record on speculation of further central bank buying following India’s purchases from the IMF, and oil.

The upcoming G20 Finance Ministers’ Meeting (6-7 November) is likely to repeat the pledge to sustain stimulus until economic recovery is assured. But a scheduled discussion on asset bubbles is a reminder of the problems likely to be faced in coordinating exit strategies, as economies deal with varying paces of recovery.

Indeed, over the past week, central banks have signalled differing policy concerns for 2010: at the more hawkish end of the spectrum, the RBA continued to tighten; the ECB and BoJ remained on hold, but are limbering up to remove emergency liquidity measures; while the Fed remains open to further quantitative easing (QE) and the Bank of England extended its asset purchase programme.