While the gains in equity markets simmered down a bit this week, the uptrend that has been in place since mid-March remained intact. Among North American markets, the NASDAQ led the way, with a 2.7% rise during the week. Similarly, bond markets continued to reflect this renewed confidence in the U.S. economy, as evidenced by a further rise in yields. More specifically, yields on the U.S. 3-month and 2-year maturities rose by 0.15 and 0.28 percentage points respectively, and are up by more than 1 percentage point from the lows hit in March. Likewise, Canadian bond yields have risen from their troughs recorded in March. The improvement in financial markets has provided support to the U.S. dollar, and against a trade-weighted index of major currencies, it remained on somewhat firmer ground this week.
[I] Steve Chan, Economist, TD Bank Financial Group[/I]
[B]Weekly Bank Research Center 05-19-08[/B]
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[B][B][B][B][B] DEFCON-3 on Some Emerging Market Currencies [/B][/B][/B][/B][/B]
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[I] Stephen Roach, Head Economist, Morgan Stanley [/I]
There are reasons to be defensive on some emerging market (EM) currencies, even though most of them have performed very well against the dollar in recent years. Global growth is decelerating. While we favour loose economic coupling more than tight economic coupling, sentiment in many EM markets may be too high to accommodate this impending demand slowdown. Already, we have witnessed weakness in some of the AXJ currencies favoured by many investors. We fear that other EM currencies may also be vulnerable to some weakness vis-à-vis the US dollar. We stress that this is a tactical and cyclical call. From a structural perspective, we strongly believe that EM currencies should broadly outperform most G10 currencies. But we just think that a more than 5% depreciation in several EM currencies is a distinct risk in the coming weeks.
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[B] From Inflation to Currencies [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The top-three performing currencies in the past week have been HUF, BRL and CAD. Better-than-expected growth figures for Q1 were among the reasons for HUF firming more than 1% against EUR, while Brazil is benefiting from rising commodity prices and last week’s upgrade to ‘investment-grade’ by Standard & Poor’s. We have a positive/neutral view on BRL against EUR, but are more sceptical about the sustainability of HUF performance. Meanwhile, at the bottom of the league we have MYR, NZD and INR, which have fallen between 2.5% and 3% against EUR. The fact that a number of Asian currencies excluding JPY (AXJ) have performed poorly this year is essentially a reflection of the economies concerned being vulnerable to the recent surge in commodity and energy prices. AXJ fundamentals are generally good: the currencies are generally undervalued, the current accounts are in surplus, and government borrowing requirements are moderate. Furthermore, the currencies of the region could be expected to rise on the back of any pick-up in the dollar. That said, increasing commodity prices are pulling in the other direction, especially in the case of KRW and PHP. Korea is extremely dependent on energy-heavy imports, and the external deficit is climbing. Politics is casting a pall over the Philippine economy, with fiscal responsibility in hasty retreat and the government allowing a steep rise in public sector pay ahead of next year’s election. Among the Asian currencies, we expect that SGD, MYR, THB and TWD will be the winners. The fall in NZD that was discussed in last week’s Weekly Focus follows a further deterioration in the outlook for the New Zealand economy in the past week. We expect to see more Kiwi weakness going forward.
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[B] Wild Cards: Dollar and Treasury Finance [/B]
[/B] [/B] [/B] [I] E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
Two wild cards for the outlook are the dollar and the interplay between Treasury issuance and the willingness of foreign investors to buy U.S. treasury debt at current interest rates. Our view is that the dollar/euro rate improves modestly to the 1.45/1.50 range. This improvement will help reduce dollar risk and support foreign buying of U.S. financial instruments. This development is crucial given our expectation that federal budget deficits will run at $80B above last fiscal year and possibly as much as $200B over the prior year. Given the rapid weakening in the deficit outlook, the stability of the dollar is crucial to keeping the yield on the 10 year Note within the 3.7 to 4.0 percent range we now estimate for the rest of this year. Our concern is the risk that interest rates break on the upside of our range.
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[B][B][B][B][B] Optimism Builds in Financial Markets [/B][/B][/B][/B][/B]
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[I] Steve Chan, Economist, TD Bank Financial Group [/I]
While the gains in equity markets simmered down a bit this week, the uptrend that has been in place since mid-March remained intact. Among North American markets, the NASDAQ led the way, with a 2.7% rise during the week. Similarly, bond markets continued to reflect this renewed confidence in the U.S. economy, as evidenced by a further rise in yields. More specifically, yields on the U.S. 3-month and 2-year maturities rose by 0.15 and 0.28 percentage points respectively, and are up by more than 1 percentage point from the lows hit in March. Likewise, Canadian bond yields have risen from their troughs recorded in March. The improvement in financial markets has provided support to the U.S. dollar, and against a trade-weighted index of major currencies, it remained on somewhat firmer ground this week.
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[B][B][B][B][B] Is Inflation the Main Risk to UK Growth? [/B][/B][/B][/B][/B]
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[I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Sometimes it takes the central bank to speak in order to get people to take notice of events that others might also have spotted but the majority have missed. So it was with the latest Quarterly Inflation Report (QIR) from the Bank of England. A few observers had been warning that the main risk facing the economy was not the credit crunch, important though that is, but rising price inflation. This reasoning was based on a view that the credit crisis had mainly hit the developed markets and within them those with firms that had been most heavily involved in securitised products. But outside of these firms - the credit derivatives part of the financial markets and those closely related to it, including the housing market - other sectors were not doing too badly.
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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.