International Financial Outlook June, 2009
Summary of main changes to exchange & interest rate forecasts
The financial markets have latched on to some positive signs for economic recovery in recent weeks after an unrelenting series of negative news in previous months. This has led in our view to an overly optimistic outlook, reflected in some exchange rate and interest rate trends. We look for some of this to unwind in the months ahead.
The recent weakness of the US$ may prove only a temporary phenomenon, if early signs of stabilisation continue to strengthen in the months ahead, indicating a swifter return to economic growth in the US than other leading economies. The US economy could emerge from recession as soon as the third quarter of 2009. This would clearly raise speculation of higher US interest rates, albeit from current record low levels. While we currently forecast that the Fed funds rate will be raised within 12 months, well ahead of the ECB refi rate or UK Bank rate, it may be sooner. But quantitative easing is likely to be withdrawn before rates are raised.
Reflecting the recent weakness of the US$, we have accordingly raised out short-term targets for €/$ to 1.30 and £/$ to 1.46 at end 2009. Although momentum appears against the greenback at this time, suggesting the risk of further short-term depreciation, the risk of a stronger rebound should also not be discounted, particularly while generalised financial market uncertainty and volatility remain so high. The appreciation of the UK pound has been checked recently by heightened political uncertainty, which represents a significant near-term risk to our latest forecasts.
Government bond yields have risen aggressively in recent weeks, reflecting a variety of factors including rising inflation expectations and sharply higher projected issuance. The test now for central banks is to show how committed they are to quantitative easing, particularly in the US and UK. We believe major global central banks will be required to do more quantitative easing than originally anticipated.
Emerging market currencies have continued to outperform their developed country trading counterparts, buoyed by stronger growth prospects, rising commodity prices and surging equities. While we remain confident about the medium-term prospects of most emerging market currencies, the strength of recent gains has raised speculation of central bank intervention to protect export competitiveness.
Full Report in PDF
Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com
Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.
|
