[Dan]

Global FX markets remain dominated by the “green shots” emerging in the world economy. There are increasing signs that global business and consumer confidence indicators are stabilising. As an example, the US ISM Manufacturing Index rebounded to 40.1 in April from 36.3 in March, the fourth straight month of improvement since it hit a multi-year low of 32.9 in December 2008. Granted, the index continues to signal negative US growth rates, but the US is not alone in this regard, as PMIs have also rebounded in the Eurozone, UK, Japan, and emerging Asia. The most impressive rebound has been seen in China’s PMI, which rebounded to an expansionary reading of 53.5 in April from a low of 38.8 in November 2008. As such, it appears that massive fiscal and monetary policy stimulus measures by major central banks and governments, as well as lower energy prices, are starting to feed through to the real economy. Hence, the pace of the decline in global economic activity appears to be stabilising.

From July 2008 to March 2009, the US dollar (USD) benefitted from global deleveraging, investor repatriation, and focus on bad news outside the US. Given the global recession and ongoing global deleveraging, there may be renewed rallies in the USD and the Japanese yen (JPY). However, as global economic expectations bottom out, FX markets should re-focus on poor US fundamentals which include poor growth prospects, zero interest rates, and a widening fiscal deficit. This will resemble the period from 2000-02, where the USD was strong during the recession in 2001 but started to fall when the global economy bottomed out at the end of 2001. The same scenario is unfolding now. A key difference this time is that fundamentals remain weak in several major markets such as the Eurozone, the UK, and Japan. As such, in contrast with the 2000-02 episode, it is natural that the USD has started to fall versus emerging-market (EM) currencies with strong long-term growth potential, such as the Indonesian rupiah (IDR), Korean won (KRW), Indian rupee (INR), and Brazilian real (BRL).

Going into H2, USD is expected to fall more broadly versus EM currencies. Among the major currencies, the outperformer should be the Australian dollar (AUD) given proactive fiscal and monetary policies from the Australian authorities. Moreover, efforts by China’s government to boost its economy should be positive for Australia, as it should provide a material boost to commodities demand. However, USD weakness should gradually also materialise versus other major currencies such as the New Zealand dollar (NZD), Canadian dollar (CAD), and British pound (GBP), where most of the negatives appear to already be in the price. Finally, pressure on the euro (EUR) should recede when the market gains more certainty about the direction of European Central Bank (ECB).