Assuming that the US economy follows a U-shaped trajectory in 2008 (a mild and shallow recession in 1H, followed by a recovery in 2H), USD/JPY has a good chance of selling off in 1H, but rising in 2H. A year of two tales for the US economy should have important cyclical implications for USD/JPY. In addition to the external shocks arising from the US business cycle, the JPY will also be perturbed by four policy-induced growth shocks made in Japan, which should enhance the U-shaped trajectory we see for the JPY crosses this year. We reiterate our call for USD/JPY to trade down to 103 by June, then back up to 110 by year-end. An economic slowdown in the US and Japan and a general risk-averse financial environment should be positive for the JPY in 1H, while the opposite should be negative for the JPY, as Japanese investors resume pushing down their ‘home bias’ in 2H.
[I]Written by Stephen Roach, Head Economist, Morgan Stanley[/I]
[B]Weekly Bank Research Center 01-14-08[/B]
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[B][B][B][B][B] Japanese Yen Will Rally before Falling in 2008 on US Recession [/B][/B][/B][/B][/B]
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[I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
Assuming that the US economy follows a U-shaped trajectory in 2008 (a mild and shallow recession in 1H, followed by a recovery in 2H), USD/JPY has a good chance of selling off in 1H, but rising in 2H. A year of two tales for the US economy should have important cyclical implications for USD/JPY. In addition to the external shocks arising from the US business cycle, the JPY will also be perturbed by four policy-induced growth shocks made in Japan, which should enhance the U-shaped trajectory we see for the JPY crosses this year. We reiterate our call for USD/JPY to trade down to 103 by June, then back up to 110 by year-end. An economic slowdown in the US and Japan and a general risk-averse financial environment should be positive for the JPY in 1H, while the opposite should be negative for the JPY, as Japanese investors resume pushing down their ‘home bias’ in 2H.
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[B] Can the ECB Cut Rates with Inflation So High? [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
We changed our forecast for the ECB last Friday, calling for the central bank to ease monetary policy by 50bp in H2 08. This was due to a combination of the credit crisis looking set to continue, an earlier-than-expected slowdown in US manufacturing, Euroland private consumption appearing to soften, Euroland’s exports no longer receiving so much support from eastern Europe and, finally, credit terms having presumably been tightened more in Euroland over the past year than in other regions, such as the US and Japan.
<strong style=""> [B][B][B] [B] US Recession Fear Grips Markets, Fed Stands Ready to Ease as Required [/B]
[/B] [/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
Financial market chatter about the possibility of a U.S. recession became almost deafening this week. This is not surprising, given that some very high profile forecasters started off the New Year with predictions of back-to-back quarterly contractions in U.S. GDP in 2008. Market jitters were also fuelled by increased concerns about financial losses on credit default swaps. To make matters worse, the North American economic data have almost uniformly painted a picture of slowing economic growth. All of this has not been lost on policy makers, leading to dovish comments from Federal Reserve and Bank of Canada officials that point to further rate cuts and talk of fiscal stimulus measures in both countries.
<strong style=""> [B][B][B] [B] US Recession or Continued Resiliency? [/B]
[/B] [/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
The R word made more headlines this week, as yet even more firms called for the U.S. economy to fall into recession this year. A few even believe we are already in recession. Our own proprietary recession warning model shows a slightly better than 50 percent chance of recession in the next six months. Even with this dire warning, we continue to believe the economy will escape an actual downturn. Worries about recession mostly emanate from last week’s weaker economic news, particularly the ISM manufacturing report and the 0.3 percentage point rise in the unemployment rate. We too have become more pessimistic about the outlook but believe growth will bounce back a bit in January and expect the Federal Reserve to cut interest rates further. An economic stimulus package is another possibility, although it would likely occur too late to impact the economy this year.
<strong style=""> [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
[/B] [/B] [/B] [I] J-Chart [/I]
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