The month of August is typically characterised by thin markets, rising volatility and quite sharp FX movements. Commercial clients are traditionally conspicuous by their absence at the beginning of the month and speculative clients have free hands. This August has been no exception and has in fact been packed with rather large moves in major currencies: the USD has gained 5.4% against the EUR, JPY has advanced 4.6%, GBP has lost 2.2% and the AUD has dropped 2.8%. The appreciation of the USD against the EUR has - with good reason - received most attention over the month. In the first half of the month, EUR/USD ended the uptrend that started some six years ago. And it was indeed a sharp reversal. Some forecasters warned investors “not to stand in the greenback’s” way, but the dollar rush abated in the second half of the month with EUR/USD trading around 1.47, albeit surrounded by noticeable fluctuations.
[I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank[/I]
[B]Weekly Bank Research Center 09-01-08[/B]
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[B] Moving Up the Left Side of the Dollar Smile[/B][B][B][B][B][B] [/B][/B][/B][/B][/B]
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[I] Stephen Roach, Head Economist, Morgan Stanley [/I]
We are updating our currency forecasts (the last round of forecast revisions was published on July 3, 2008 in Dollar Smiling Against EM, Still Frowning Against EUR). We continue to look for a tentative and asynchronous dollar recovery. As the global economy downshifts in earnest, the world will be pushed further up on the left side of the ‘Dollar Smile’, i.e., the sharper the global slowdown, the more the dollar should be supported. We convey this notion in our new forecasts, as we have done in the previous forecasts, while marking to market the sharper-than-expected move in the dollar in the past month. As Asia slows, the AXJ currencies should continue to depreciate against the dollar. If the global slowdown is severe enough, commodity prices should also come under downward pressure, however temporary, with logical implications for commodity currencies. We are revising down our forecasts for EUR/USD to 1.40 and 1.32 by end-2008 and end-2009, and our new year-end targets are now 107 and 112 for USD/JPY. We are looking for weaker GBP, AUD, NZD and CAD.
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[B] Dollar Rise - Too Fast, Too Furious? [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The month of August is typically characterised by thin markets, rising volatility and quite sharp FX movements. Commercial clients are traditionally conspicuous by their absence at the beginning of the month and speculative clients have free hands. This August has been no exception and has in fact been packed with rather large moves in major currencies: the USD has gained 5.4% against the EUR, JPY has advanced 4.6%, GBP has lost 2.2% and the AUD has dropped 2.8%. The appreciation of the USD against the EUR has - with good reason - received most attention over the month. In the first half of the month, EUR/USD ended the uptrend that started some six years ago. And it was indeed a sharp reversal. Some forecasters warned investors "not to stand in the greenback's" way, but the dollar rush abated in the second half of the month with EUR/USD trading around 1.47, albeit surrounded by noticeable fluctuations.
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[B] Real GDP-Inflation Data Keeps Fed on Hold [/B]
[/B] [/B] [/B] [I] E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
This week’s release of second quarter GDP revealed strong exports but a weak domestic economy. Consumer spending was boosted by the rebates but the outlook remains uncertain. As a result, the downside risks to the economy remain in place. Our outlook remains for below par growth in the second half of the year. Meanwhile, core inflation remains just above the Fed’s perceived target ceiling. Therefore, short-term rates are likely to remain steady as the Federal Reserve faces the dual imbalance of below-trend economic growth and above-target inflation. For the long end of the Treasury curve, we expect inflation stability will keep the ten-year rate in a tight 3.8 – 4.0 percent range. We remain cautious on the recent dollar improvement and we are concerned that the federal deficit outlook has deteriorated faster than expected. The U.S. reliance on capital inflows in a weak economy/higher inflation period is a perilous balance.
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[B][B][B][B][B] Canada’s Real GDP Standing Still [/B][/B][/B][/B][/B]
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[I] Steve Chan, Economist, TD Bank Financial Group [/I]
Admittedly, the Canadian economy is hurting. Economic growth (real GDP) did not surprise in Q2 and came in just slightly positive at 0.3%. Furthermore, Q1 growth was revised down to -0.8% (from -0.3%). When stripping out inflation and looking solely at volumes, overall economic activity in Canada has been stuck in a rut since late last year, and we do not expect it to rebound before late next year. After see-sawing since last fall, the level of monthly real GDP by industry hasn’t grown in almost nine months. Average annual real GDP growth for this year is likely to come in below even our cautious forecast of 1.0%. Although we won’t have the two largest provinces’ Q2 estimates for another while, Ontario and Québec real GDP likely contracted for a second consecutive quarter, mostly a reflection of declining exports to the U.S. Hence, by itself, the real GDP data suggests that Canada just barely avoided the technical definition of a recession, while the U.S. economy is humming along just fine. Too narrow a focus on real GDP, along with a rearview mirror look, could lead to that erroneous conclusion. Other important indicators of economic health, such as employment, wage & income growth, corporate earnings, housing markets, financial market and credit conditions, as well as consumer balance sheets all point to Canada scoring higher than the U.S., both in recent quarters and, most importantly, in the quarters ahead.
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[B][B][B][B][B] Global ‘Real’ Interest Rates Are Too Low [/B][/B][/B][/B][/B]
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[I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
The global economy is slowing down. And some countries could have a recession – or two consecutive quarters of negative growth - including the UK. After world growth of 5% on average in the last four years, the fastest sustained period since the early 1970s, the rate of expansion is set to ease to 4% this year and to 3.5% in 2009. This growth slowdown would imply a need to lower nominal interest rates but action like that by the monetary authorities would be wrong, and perhaps be a huge policy mistake. The reason is that real interest rates - nominal interest rates deflated by price inflation - are too low at a global level. What do we mean by this? When real interest rates are below real long run average growth, the monetary policy stance can be said to be expansionary, and contractionary when above real growth. Following on from that, low real interest rates therefore generate upward pressure on inflation, as growth is pushed above its long run average, while high real rates create downward pressure on inflation, as growth is pushed lower. Real interest rates are a good guide therefore to whether monetary policy interest rates are too loose or too tight. We have calculated real interest rates for the global economy, and this shows that they are presently too loose, in fact negative, encouraging upward pressure on price inflation. This needs to be tackled. The question is how?
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[B][B][B][B][B] Other Pre-screened Independent Contributors[/B][/B][/B][/B][/B]
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[I] J-Chart [/I]
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[B]Complied by David Song, Currency Analyst[/B]