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• Stay strategic in FX rather than trying to chase the stock market

• Global economic expectations are putting in a multi-month bottom

• When that is confirmed in H2, the USD will come under sustained pressure

• EM currencies will lead the rally on better medium-term growth prospects

In an environment of persistently high levels of market “noise.” , traders have two choices: 1/ chasing risk appetite – and thus by implication the US stock market or 2/ deciding on a strategic course of investment and waiting for good levels. We prefer the latter course of action. Granted, there remain many potential event risks, which may yet derail or delay the base case. These include swine flu and the US bank stress tests. Global financial system losses from the credit crisis continue to mount and further capital injections may yet be needed. However, we are firmly of the view that the global economy is facing a Great Recession not a Great Depression. In this context, we think that the economic data will start to turn positive as we enter 2010. It will not feel like a recovery. However, after so many months and quarters of economic contraction, just the fact of positive numbers should give global asset markets a sustained lift. This is what markets are already anticipating. It is likely to be a bumpy ride, but global economic expectations are putting in a multi-month bottom. If we are right, then the days of US dollar (USD) strength are numbered.

USD thrives on misery and retreats in the face of optimism. This was exactly the pattern we saw in 2001-2002. To be sure, that crisis was much smaller in economic scope than the present one. However, the “governing dynamics” were the same. In contrast to the emerging market (EM) crises of the 1990s, it was a US crisis that spread around the world. While the Federal Reserve was cutting interest rates in 2001-2002, the USD held up relatively well. It was only when the Fed stopped cutting and global economic expectations bottomed that the USD started to come under sustained pressure. Thereafter, it fell for three straight years until it was given a temporary reprieve by the US Homeland Investment Act. Base case is premised on the belief that investors will once again use the USD as the world’s funding currency. From 2002-2005, broad-based USD weakness was a necessary part of the global monetary easing that supported the recovery. If that was true then, then it is doubly so now given the size and extent of the crisis. Multi-lateral organisations and national governments are well aware that the USD should and will fall. The only question is the speed with which it declines. Market looks for a USD devaluation, but not a USD crisis, anticipating that the retreat in the value of the greenback will be relatively gradual. In that environment, EM markets and currencies should prosper.