The Japanese yen has lost a fair bit of ground in a relatively short period of time, so some retracement is bound to occur sooner or later. However, we look for the yen to weaken further on a trend basis in the quarters ahead. Japan will probably remain in a deep recession throughout most of the year, which will cause the economy to experience a mild case of deflation again (see bottom chart). Consequently, the Bank of Japan will keep rates as low as possible for as long as possible. Rock-bottom returns in Japan should contribute to further yen depreciation.
E. Silvia, Ph.D. Chief Economist, Wachovia
Weekly Bank Research Center 03-02-09
Deflation Still Unlikely, but Mind the Risks
Stephen Roach, Head Economist, Morgan Stanley
Judging by the rebound in inflation breakevens, deflation risks have subsided. Five- and ten-year breakeven inflation rates have bounced sharply, the former from negative into positive territory; they now stand at 60bp and 110bp, respectively. Small wonder, given aggressive easing of monetary policy, the recent bump in commodity prices, the run-up in gold quotes, January US inflation data, and the recent rise in longer-term consumer inflation expectations. Thanks to aggressive monetary easing and coming corporate actions to cut capacity, we don’t think that deflation is the most likely outcome. But investors should not entirely dismiss deflation risks, as tumbling operating rates are eroding pricing power. We think that uncertainty in the inflation outlook is now a key driver of those expectations and of breakevens. From a tactical perspective, therefore, our interest rate strategists, Jim Caron and George Goncalves, believe that inflation insurance in the form of breakevens should be sold for now.
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Central Banks Centre Stage
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
A number of central bank meetings and important releases of economic data make for a particularly eventful week ahead. The following looks at the possible FX implications of the week's interest rate decisions, starting with the Reserve Bank of Australia (RBA) in the early hours of Tuesday and the Bank of Canada (BoC) later the same day, and concluding with the Bank of England (BoE) and the European Central Bank (ECB) on Thursday. In Australia, recent data suggest that economic contraction may yet be avoided in Q4, although no significant positive growth can be expected. This means that the RBA's interest rate decision is associated with considerable uncertainty, with a risk of the leading rate being left unchanged at 3.25% (the consensus expectation is a 25bp cut, while the money market is pricing in a cut of 25-50bp). This in turn spells uncertainty about the AUD, and an unchanged interest rate would probably lead to a rise in the AUD/USD. Given the current environment of high risk aversion and low commodity prices, we are nevertheless reluctant to recommend long positions in the AUD/USD, although it might be worth considering going long on the AUD/NZD.
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Yen Will Probably Continue to Trend Lower
[/B] [/B] [/B] E. Silvia, Ph.D. Chief Economist, Wachovia
The Japanese yen has lost a fair bit of ground in a relatively short period of time, so some retracement is bound to occur sooner or later. However, we look for the yen to weaken further on a trend basis in the quarters ahead. Japan will probably remain in a deep recession throughout most of the year, which will cause the economy to experience a mild case of deflation again. Consequently, the Bank of Japan will keep rates as low as possible for as long as possible. Rock-bottom returns in Japan should contribute to further yen depreciation.
TD Economics Cuts Economic Growth Forecasts
Steve Chan, Economist, TD Bank Financial Group
Indeed, with credit market conditions in the U.S. failing to improve as much as hoped, and confidence yet to be restored, TD Economics will be downgrading economic growth forecasts for both 2009 and 2010. Our fully articulated forecast will not be available until mid-March, however the direction of the revisions is quite clear. In general, real GDP in 2009 will likely be revised down from an annual average of -1.6% to -2.9%, while the rebound in 2010 will be more subdued, with growth of only 1.4%, compared to our previous forecast of 3.2%.
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Compiled by: David Song, Currency Analyst and Geng Chen, Dailyfx.com