Will the Dollar Get a Boost After QE Ends?
2011-05-09
Many analysts agree that the US dollar could gain significant momentum once the Federal Reserve’s Treasury purchase program ends in June. However, economists say it’s harder to predict how long the dollar will be able to benefit from this support.
Westpac has long held short dollar positions against riskier currencies, locking in some profits on the dollar index last week. Bank analysts note that yields on US Treasury bonds remain extremely low, which continues to weigh on the dollar.
Experts believe market anxiety over the end of QE2 will be strong. In their view, this event will help the dollar only if it coincides with the release of strong US economic data.
Mark Faber, publisher of the Gloom, Boom & Doom Report, is convinced that US monetary authorities will launch a third round of quantitative easing. According to the economist’s forecast, over the next 10 years, the United States will face trillion-dollar budget deficits. Such deficits cannot be financed solely by bond issuance, so the Fed will need to at least partially monetize government debt through quantitative easing to keep interest rates low.
UBS, RBC: China Posts Strong Trade Surplus
2011-05-10
According to recently released data, China’s trade surplus rose from $139 million in March to $11.4 billion in April, far exceeding economists’ expectations of $1.0 billion. UBS Securities economists expect China’s export surplus over imports to reach $140–150 billion in 2011. UBS forecasts that China will post a monthly trade surplus for the remainder of the year.
Analysts at Royal Bank of Canada believe that after this data release, pressure from the United States on China to strengthen the yuan’s exchange rate will intensify. At the same time, the growing trade surplus may convince Chinese authorities that the economy can afford a larger increase in the national currency’s value to help curb inflationary pressure. Experts expect the yuan to rise to 6.40 per dollar by mid-year and to 6.20 by the end of 2011.
Barclays Capital: Greece’s Future Looks Uncertain
2011-05-10
Barclays Capital analysts note that the euro is under pressure due to uncertainty about how European authorities will help Greece resolve its debt problems. Despite weekend discussions among EU leaders, no official public statements have been made on the matter.
Standard & Poor’s downgraded the country’s credit rating from BB- to B on Monday, May 9. This is the fourth time since April 2010 that the agency has lowered Greece’s rating. Credit default swaps on Greek debt surged to a record high of 1,369 on Monday, indicating a 69% probability of default within the next five years.
Markets are now discussing the likelihood of Greek debt restructuring. Such an outcome is now considered quite possible. ECB Governing Council member Ewald Nowotny stated that while it was previously expected Greece would be able to finance itself independently next year, there are now signs this may not happen.
JPMorgan: Yen to Gradually Strengthen Against Dollar
2011-05-11
JPMorgan analysts believe the Japanese yen could rise again to its yearly high against the US dollar, as Japanese investors are reluctant to invest in foreign assets, seeking to reduce risk after the country’s largest earthquake on March 11.
Experts estimate that Japanese investors and companies are repatriating about 10 trillion yen ($123.5 billion) in overseas assets. This situation contrasts with other countries, where demand for high-yield assets is rising.
Additionally, Japan’s large current account surplus is creating upward pressure on the yen. Bank strategists do not expect the country’s current account to fall into deficit, even though the disaster will likely reduce Japan’s trade surplus.
Another factor supporting the yen is the weakness of the US dollar. JPMorgan analysts believe that for the USD/JPY pair to stabilize, US interest rates would need to be much higher than Japan’s, but both countries are currently maintaining extremely low rates. Analysts expect the Fed to raise rates no earlier than late 2012.
JPMorgan forecasts that by the end of next March, the US dollar will fall to 78 yen. The bank believes Japanese monetary authorities will no longer conduct currency interventions, as the market has become much less volatile. Experts expect any Japanese intervention will be based on volatility, not a specific exchange rate level, so authorities will not prevent the gradual strengthening of the national currency.
Daiwa: China’s Economy Not Overheated Yet
2011-05-11
Daiwa Capital Markets analysts believe that despite high inflation in China, the country’s economy is not yet overheated. In their view, there is no need for aggressive tightening of monetary policy.
According to recently released data, China’s consumer price index rose 5.3% in April, down from 5.4% in March.
Nevertheless, strategists note that since inflation remains high, a relaxation of China’s monetary policy in the second or third quarter is unlikely.
Daiwa warns that if the Chinese authorities do not ease their approach in the third quarter, the likelihood of a slowdown in China’s economic growth in the last quarter of 2011 will increase significantly.
HSBC: Yuan to Become Reserve Currency in 5–7 Years
2011-05-12
HSBC analysts believe that in 5–7 years, the Chinese yuan will become a global reserve currency. In their view, this development will be driven more by growing demand for China’s currency than by government actions, and the yuan will achieve near-full convertibility.
Experts expect the yuan’s exchange rate to strengthen more slowly in the coming years than it has recently. The focus should now shift from the pace of yuan appreciation to its internationalization.
HSBC expects rapid Chinese economic growth to make the yuan one of the three most used currencies in international trade within the next 3–5 years. Strategists recommend that central banks diversify their currency reserves, reducing their share of US dollars and increasing the share of other currencies, including the yuan.
John Taylor: High-Yield Assets Near Peak
2011-05-13
John Taylor, head of the world’s largest currency hedge fund FX Concepts LLC, notes that the rally in high-yield assets, which began in the first half of 2009, is coming to an end, and attention will soon shift back to eurozone debt problems.
According to a Bloomberg survey, investor sentiment toward US and global economic prospects is becoming less optimistic, and demand for commodities is likely to decline over the next six months.
Taylor believes that stock markets, the euro, and emerging market currencies have either already reached their peaks or will do so by the end of July.
The S&P 500 index, which more than doubled from March 2009, lost 1.1% since May 2 under the influence of signs of slowing US economic growth.
The EUR/USD pair hit a six-week low yesterday at $1.4123, losing 4% since May 4, when it reached $1.4940.
Taylor is now betting on a decline in the euro. In his view, the euro will eventually fall to parity with the US dollar.
FX Concepts analysts are pessimistic about Greece’s future and advise investors to prepare for a potential country default. Yesterday, yields on two-year Greek bonds jumped to 26.77%. As the yield spread between Greek and German bonds rapidly widens, a crisis could erupt very soon, strategists say.
BNY Mellon: EU Authorities Must Act
2011-05-13
BNY Mellon currency strategists believe that the situation in Greece and the eurozone cannot remain in such a state of high uncertainty.
Despite last Friday’s EU meeting to discuss the country’s problems, no statements were made about the region’s leadership plans. While French Finance Minister Christine Lagarde supports providing Greece with financial assistance, Finnish opposition is against any rescue programs for debtor countries. BNY Mellon analysts emphasize that it will be extremely difficult to find a solution that satisfies all parties.
Although the simplest solution appears to be providing Greece with funds, it is unlikely that northern eurozone countries will agree. Moreover, this would not solve the region’s fundamental problems. Another option—debt restructuring with extended payment terms—would not help Greece much, leaving it in a very poor state. Also, if Greece’s lending terms are eased, other indebted countries—Portugal and Ireland—may also request concessions.
Despite all difficulties, European authorities must present a plan for their next steps as soon as possible, as uncertainty continues to drive up Greece’s financing costs.
BNY Mellon is betting on a decline in the euro, which, in the bank’s view, is overvalued. Economists believe the EUR/USD pair could return to levels around $1.30, where it traded at the beginning of 2011.
