[B]Weekly Bank Research Center 11-05-07[/B]
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[B] Cyclical Dollar Weakness Still in 7th Inning [/B]
[/B] [/B] [/B]</p> [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
We like risky assets and believe that the dollar will remain on its back foot. This is a view we’ve held since the financial crisis of July/August. For the next three months or so, we share the market’s consensus opinion, which is also positive on risky assets and negative on the dollar. However, on a 6-12-month perspective, we believe that the preferred trades will evolve: while EM currencies may continue to perform well, we are less convinced that GBP/USD and EUR/USD can keep overshooting and stay above 2.10 and 1.50 or so. In this note, we present our assessment on some of the popular trades.
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[B] Global inflation - where does the buck stop? [/B]
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<em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
Oil prices are again setting new records and global in-flation is ticking up once more. Global food prices are on the rise this time too, and for good reason - global food stocks have been falling for quite some time and are now very low. Meanwhile, unemployment is at a 25-year low, and this may fuel wage growth. Central banks are facing an increasing dilemma, as inflation is still high and climbing, but growth is running out of steam. This combination means that the markets cannot be sure that central banks will support growth as much as they normally would. While this dilemma is not unusual at this juncture of the business cycle, where inflation is still being affected by the strong growth of recent years, the inflationary pres-sure from commodities is stronger than normal this time around. Central banks may take some comfort from the fact that core inflation (inflation excl. food and energy) is still low. Hence, many central banks can claim that core inflation in their own country is low - or, in other words, that domestically driven inflation is relatively subdued. Is it not enough for central banks to focus on inflation at home? Perhaps. But this leaves the problem that no central bank will address globally-driven inflation. Indeed, individual central banks do not have much incentive to tackle global inflation, as this would involve enormous costs in the form of very much lower growth. This means that global inflation may not receive enough in the way of attention or action, and perhaps this is what we are seeing at the moment.
<strong style=""> [B][B][B] [B] Positive US Economic Data Dumps Cold Water on Recession Fears [/B]
[/B] [/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
This week brought a boatload of positive economic news and threw a bucket of cold water on all those soothsayers calling for recession. Real GDP grew at a 3.9 percent annual rate during the third quarter and the fourth quarter got off to an exceptionally strong start, with nonfarm payrolls adding 166,000 net new jobs. Even the inflation data were milder than expected. To be certain, the problems in residential construction and structured finance have not gone away. New data on home prices show the ongoing correction in the housing market remains in full swing, particularly in overbuilt markets such as Florida, Arizona and California. Foreclosures also continue to increase and doubts remain as to whether or not some large lenders have sufficiently gotten ahead of the problem.
<strong style=""> [B][B][B] [B] Canadian Dollar Should Not Fly this High [/B]
[/B] [/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
Just as the FOMC decision had done two days prior, the market reaction to the employment report sent the loonie soaring. The Canadian dollar touched $US1.07 in morning trading. While domestic economic data has so far failed to provide any traction for the U.S. dollar, the Canada/U.S. near-term interest rate spread, along with surging oil prices have provided the Canadian currency with a fair bit of upward momentum, even more so than other ‘commodity currencies’ or the Euro – see exhibit 1. With all factors having converged to push the currency higher, we think the Canadian dollar could soften up in 2008. At a $US 100/bbl within sight, crude oil could surely push the loonie up to $US 1.10 in the near term, but not on a sustainable basis.
<strong style=""> [B][B][B] [B] Expect no Surprises from the Bank of England or European Central Bank this Week [/B]
[/B] [/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Recent events will keep attention focused on financial market developments in the US this week, with the potential for further sharp swings in equity prices and downward pressure on the dollar. Crude oil scaled a record $96 last week and could break $100 on ongoing supply fears and speculation. Interest rate decisions in the UK and euro zone on Thursday are the highlights of the economic calendar this week (rates expected to remain on hold at 5.75% and 4%, respectively), closely followed by Fed chairman Bernanke’s testimony on the US economic outlook to Senate later that day. The RBA could hike interest rates to 6.75% on Wednesday.
<strong style=""> [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
[/B] [/B] [/B] [I] J-Chart [/I]
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