The economic data in recent weeks have been exceptionally bad, and almost no matter where one looks, the risk of recession appears to be rising - a few arbitrary examples include record low consumer and business confidence, falling housing market activity, weakening retail sales and production, and rising in-ventories. The slowdown is being led by the G3 (USA, Japan and Euroland), though countries such as the UK, Australia and New Zealand also look rather vulnerable. The driving forces of the slowdown should be pretty well known by now: tighter credit, rising energy and food prices, and shrinking wealth due to tumbling equity and house prices. Moreover, there is no reason to expect a turnaround anytime soon. Instead, one should anticipate a significant lowering of expectations for economic growth in the coming months. Emerg-ing Markets too appear to be hitting the brakes, with the noticeable exception of China. Overall, our theme of a global slowdown is still very much alive and kicking and, if anything, recession fears should increase going forward. This also means that markets will probably shift their focus from inflation back to growth.
July saw further significant underperformance by the finance sector, and the bank sector seems to throw up new problems almost daily. In a nutshell, the driving force here is a shift in the liquidity and housing mar-ket cycles that would appear set to continue for some time yet. Our theme concerning a financial crisis therefore looks likely to be relevant in H2 08 as well.
The weakest G10 currency in the past month has been NZD, which pretty much matches our forecasts. Last week, New Zealand cut its rates by 25bp to 8.0% - the first cut since 2003. The cut came a couple of months earlier than we had expected, but the direction was no surprise. The kiwi economy is slowing rap-idly, and a shift in monetary policy almost always spells trouble for an overvalued currency carrying a sig-nificant current account deficit. As NZD is being hit by both the above-mentioned themes, we expect to see further weakness in the coming months.
In our latest forecast update on 4 July (see FX Forecast Update: To catch a rising tide), we lifted our 3M forecast for EUR/USD to 1.60 (from 1.55) and 6M forecast to 1.55 (from 1.50). The 1.60 target was reached already on 15 July, but has since retreated to 1.56 at the time of writing. Three factors suggest the euro could have peaked for now. First, oil prices have fallen a good 15%. Second, the US has taken further steps to ease the problems plaguing the housing market. Third, economic data out of Euroland have been alarmingly weak. We have no doubt that the outlook for the US in the coming year is troubling - to put it dip-lomatically. However, relatively speaking, the downward movement in Europe is now clearly more pro-nounced and the downshift here has only just started. With inflation running at 4.1%, the scope for the ECB to turn soft on its inflation mandate is limited, though a more aggressive pricing of rate cuts in 2009 will probably coincide with a cyclical turning point for EUR/USD. Technically, the pair has been trading within a broad range between 1.53 and 1.60, which has held since March.
0 comments:
Post a Comment