We remain comfortable with the view that EUR/USD will end the year significantly lower than it is now, though in the near term the dollar may not rally. We have centred our call on a bounce in the dollar against the EUR and the GBP
this year on the thesis that risk-aversion would spike so high as the US falls into a recession that fear-motivated bond flows would perversely support the dollar, just as they did in 2000-01. This thesis has partly worked so far this
year, as the sharp erosion in the USD’s yield premium should have been extremely damaging for the dollar but the dollar has not collapsed with the FFR. We still feel comfortable with the ‘Dollar Smile’ framework.
Written by Stephen Roach, Head Economist, Morgan Stanley
[B]Weekly Bank Research Center 02-04-08[/B]
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[B][B][B][B][B] A Hyper-Proactive Fed and the ‘Dollar Smile’ [/B][/B][/B][/B][/B]
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[I] Stephen Roach, Head Economist, Morgan Stanley [/I]
We remain comfortable with the view that EUR/USD will end the year significantly lower than it is now, though in the near term the dollar may not rally. We have centred our call on a bounce in the dollar against the EUR and the GBP this year on the thesis that risk-aversion would spike so high as the US falls into a recession that fear-motivated bond flows would perversely support the dollar, just as they did in 2000-01. This thesis has partly worked so far this year, as the sharp erosion in the USD’s yield premium should have been extremely damaging for the dollar but the dollar has not collapsed with the FFR. We still feel comfortable with the ‘Dollar Smile’ framework.
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[B] No Helping Hand for the Global Economy from OPEC [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
OPEC met in Vienna on 1 February. Despite calls from President Bush, among others, to increase oil production, the oil cartel elected to keep the production quota unchanged for its 10 members at 29,673 million barrels a day. Angola and Iraq have no quotas. The OPEC action once again underlines the gulf there is between OPEC on the one side and, for example, the oil consumers’ organisation, the International Energy Agency (IEA), on the other OPEC harbours - at least on the surface - a deep fear that the global economy is heading for a major slowdown, which is a view the IEA definitely does not share. The IEA continues to foresee strong demand for oil in 2008, primarily due to further Emerging Market demand.
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[B] Disappointing Employment Data Kicks Off the New Year [/B]
[/B] [/B] [/B] [I] E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
January’s employment data came in much weaker than expected with nonfarm payrolls declining by 17,000 jobs. The consensus estimate had been around 70,000, based on hiring surveys and weekly first-time unemployment claims. The smaller than expected outcome is at least partly the result of changes to the Bureau of Labor Statistics birth/death model. Regardless, the data add to concerns that the U.S. economy is edging even closer to recession. Some of the sting of this morning’s jobs reports was offset by a 0.1 percentage point drop in the unemployment rate to 4.9 percent. In addition, December’s meager initially reported job gain was revised much higher and now shows an increase of 82, 000 jobs.
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[B][B][B][B][B] Monetary/Fiscal Policy Levers Being Pulled to Limit Downside [/B][/B][/B][/B][/B]
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[I] Steve Chan, Economist, TD Bank Financial Group [/I]
So, the jury is still out on whether the U.S. will have tepid growth or a mild contraction, but U.S. policymakers are taking no chances. The Federal Reserve fulfilled financial market expectations by cutting rates by a further 50 basis points, lowering the fed funds rate to 3%. The Fed has cut by a cumulative 2.25 percentage points since last summer and monetary policy is now clearly pushing on the accelerator. The Fed noted that “downside risks to growth remain.” This is a less negative assessment than last time, but still hints that further easing is in the pipeline. Meanwhile, fiscal policy is swinging into action. The House of Representatives passed a US$146 billion economic stimulus package. The Senate still has to ratify, but it is only a matter of time before tax rebates and tax breaks are enacted. The details still need to be worked out, but based on the current proposals there could be a significant boost to economic growth in the second half of the year.
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Will US Monetary Policy Become Ineffective? [/B][/B][/B][/B][/B]
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[I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
The US Fed is cutting interest rates sharply, fearful of recession and the fallout from the credit market crisis. The US government has also enacted a fiscal stimulus package worth $150bn, or 1.1% of gdp, which will take the budget deficit to 2.4% of the economy in 2008. All of these measures have one thing in common; they are trying to stimulate demand in an economy that has been growing above its long run potential for almost the last decade, and with a much wider current account deficit in consequence. But will these policies prevent economic slowdown and solve the credit market problems, triggered by the bursting of the housing market bubble? The jury is out on this as far as we are concerned for a number of worrying reasons.
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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]
J-Chart is an innovative charting and bias-neutral market analysis tool. Based on its proprietary theoretical concept and display of market price action, J-Chart provides a much clearer and unique insight into the market than conventional charting methods. This innovative charting and market analysis tool is designed to visualize market price action that constructs unique price patterns called “Equilibriums”. Based on its “non-fixed time frame” concept and “Kinetic Equilibrium” application, J-Chart users are able to forecast markets’ future movements with high accuracy.