Yen Will Probably Continue to Trend Lower

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.                                                                                               

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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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