Global economic conditions continued to deteriorate in February. Economic data were almost uniformly poor, the emerging markets showing clear signs of being more badly affected by the fall in global international trade than from any direct effects from the credit crisis.
Summary of main changes to exchange & interest rate forecasts
Global economic conditions continued to deteriorate in February. Economic data were almost uniformly poor, the emerging markets showing clear signs of being more badly affected by the fall in global international trade than from any direct effects from the credit crisis. However, the global financial markets crisis continues to worsen, with renewed efforts of further monetary easing via injecting money directly into the economy – quantitative easing – and further fiscal loosening being attempted, including in the UK and US. This is leading to the dollar becoming more sought after, even as the efforts to kick-start the US economy still show few signs of working. But the euro and the yen are under particular pressure as their exports collapse. Currency volatility is likely to remain a major theme of the coming months, as the worst of the economic and financial markets crisis is not yet behind us.
Emerging market currencies remained under selling pressure last month on signs that the global credit crisis was having a greater impact on global economic prospects than previously thought. We expect currencies to remain volatile, with a risk that some central banks may be willing to tolerate currency depreciation to maintain export competitiveness while domestic demand growth is weak. However, our latest forecasts indicate generalised – though not for all of them – appreciation in emerging market currencies over the coming 12-18 months, based on stronger global growth and rising commodity prices.
The yen has been hit by a fundamental change in investor sentiment since January and no longer seems capable of profiting from volatility in global financial markets. Weak Japanese Q4 gdp data has helped $/Y to strengthen more than 13% since January. The slump in overseas demand for Japanese exports and the fading of the yen’s carry trade status supports our case of a rise in $/Y above 100. Our objective is 102 by June and 105 during the second half of the year.