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Global Markets: Stepping Back From The Brink
Global Markets: Stepping Back From The Brink
Global Markets: Stepping Back From The Brink
May 8, 2009
Global Markets Currency and Fixed Income Research
HIGHLIGHTS
Stepping Back from the Brink
• There has been a somewhat more
positive (or at least less negative) Spring has brought with it not only the usual blossoms, but also slight signs
tone in the recent spate of eco- of revival in the global economy. In particular, the U.S. economy has shown some
nomic data, and there is further encouraging signs of stabilization which has underpinned a guardedly optimistic
evidence that the banking sector
view for the outlook. And as for the rest of the globe, other economies that just
is working through its troubles.
recently appeared on
• The recent decisions by a number the brink of disaster
of G20 central banks have fol- have also started INTERNATIONAL POLIcY INTEREST RATES
lowed the Fed’s lead as rates have
to show small im-
trended lower and in some cases %
provements in what 8
quantitative easing measures
have fallen into place. was previously a 7
plethora of abysmal 6
• But with so much stimulus in the data. Australia
U.S
5
global pipeline, the next hurdle is UK
to come up with a good exit strat- In addition to 4 Canada
Across the G7, official central bank rates have been slashed 50
to historical lows. The Federal Reserve led the way and the
45
fed funds rate has been at 0.00%-0.25% for five months Contraction
now. The recent rhetoric, however, acknowledges that the 40
Germany Australia
“economic outlook has improved modestly since the March 35 Eurozone US
meeting, partly reflecting some easing of financial market China
30
conditions.” But even so, the Fed conceded that “economic May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09
conditions are likely to warrant exceptionally low levels of
the federal funds rate for an extended period.” Source: Bloomberg
promising results. But one should not get too excited about still relatively remote, as the flu fears have recently been
these signs of life. The prevailing theme in the data is that relegated to the back burner.
it has become “less bad.” That is not the same as good. As With signs of improvement popping up, but still mea-
such, what has become obvious is that a bottoming process surable risks around those green shoots, the outlook for the
has been put in place. currency and bond markets has changed a bit. To the degree
That said, in the near term there are still a number of that some central banks, like the RBA and the RBNZ are
risk factors that suggest that the next few months contain still ostensibly cutting rates, while others like the Fed, BoE
more downside risk than upside risk. Included in that litany and perhaps the ECB are engaged in forms of credit and/or
of possible risks is another financial market “event” such quantitative easing, this still argues that bond yields could
as a struggling bank, which would certainly undo the gains have some further distance left to drop in the near term
seen thus far. before the much discussed green shoots take over.
Moreover, the deleveraging process is far from over and In the currency market, it seems that a gradual unwind
the negative feedback loop from the lack of access to credit in the risk aversion trade could continue. As the USD loses
to the real economy could still play a role. Recent survey its lustre as a safe haven and investors slowly embrace risk
data from senior loan officers suggests that there has been once again, there is scope for the Euro, Canadian dollar and
only a second derivate improvement in the extension of Australian dollar to benefit in the near term.
credit. Credit is still overall quite tight. All in all, there are pieces in place for a turnaround. It
Lastly, a resurgence of swine flu could easily test the is unlikely to be quick, but we hold to our view that by the
fortitude of the global economy. Economic conditions, second half of 2009, we still start to see these ‘green shoots’
while encouraging, are still sufficiently fragile enough that take root. Global output gaps, however, are unlikely to fully
a global flu pandemic could easily prompt a reversal in any close until much later in 2010 or early 2011. The lesson of
gains made recently. The likelihood of this, in our view, is this recession then, is that slow and steady wins the race.
10-yr-2-yr Govt. Spread (%) 2.20 1.83 1.35 1.86 1.45 1.86 1.90 1.85 1.80 1.75 1.65 1.65 1.65
f: Forecast by TD Bank Financial Group as at May 6 2009; All forecasts are for end of period. Source: Bloomberg, TDBFG
May 8, 2009
Global Markets Currency & Fixed Income Research
the next year, but it has also mused that any hypothetical 1 1
quantitative easing would occur at the short end of the term
0 0
bond market. Towards the longer end of the curve, there
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
is also some room for yields to decline in the near term, as
Actual data to: Q1 2009; Forecast by TD Economics as at May. 2009;
optimism about “green shoots” in the U.S. fades. Of course, Source: Bank of Canada/Haver Analytics
10-yr-2-yr Govt. Spread (%) 2.03 0.82 0.48 0.98 1.58 1.70 1.85 1.75 1.70 1.55 1.45 1.35 1.25
canada-U .S . Spreads
3-mth T-Bill Rate (%) 0.01 0.60 0.71 1.04 0.71 0.17 0.00 -0.10 0.00 0.00 0.20 0.20 0.15
2-yr Govt. Bond Yield (%) 0.09 1.04 0.63 0.82 0.34 0.28 0.00 -0.05 -0.05 -0.05 -0.05 -0.05 -0.05
5-yr Govt. Bond Yield (%) -0.01 0.47 0.13 0.18 0.14 0.09 -0.05 -0.10 -0.10 -0.15 -0.15 -0.20 -0.25
10-yr Govt. Bond Yield (%) -0.08 0.03 -0.24 -0.06 0.47 0.12 -0.05 -0.15 -0.15 -0.25 -0.25 -0.35 -0.45
30-yr Govt. Bond Yield (%) -0.22 -0.35 -0.44 -0.08 0.78 0.03 -0.15 -0.25 -0.30 -0.45 -0.45 -0.60 -0.70
f: Forecast by TD Bank Financial Group as at May 6 2009; All forecasts are for end of period. Source: Bloomberg, TDBFG
May 8, 2009
Global Markets Currency & Fixed Income Research
definitely stand firm on 3% cash rates, awaiting a Chinese 4 10-yr Gov't Bond Yield 4
recovery to “save” the Australian recession. Subsequently, 3 3
while we remain of the view that easing remains on the 2 2
cards, the timing has been delayed, reaching 2% in the 1 1
fourth quarter. 0 0
As we expect delayed RBA easing, we have also pushed 2001 2002 2003 2004 2005 2006 2007 2008 2009
out and trimmed the forecast 10yr bond rally, the curve re- Actual data to: Q1 2009;
mains steeper near-term for longer, and we have delayed the Source: Reserve Bank of Australia/Haver Analytics
10-yr-3-yr Govt. Spread (%) 0.86 -0.10 -0.26 0.30 0.78 1.24 1.20 1.35 1.35 1.40 1.25 1.20 1.25
Forecast by TD Bank Financial Group as at May 2009; All forecasts are for end of period. Source: Bloomberg, TDBFG
May 8, 2009
Global Markets Currency & Fixed Income Research
tion in the cash rate to 2% in June. Whether this reduction 9 3-mo . T-Bill yield 9
10-yr-3-yr Govt. Spread (%) 1.95 -0.32 0.35 0.31 0.40 1.35 1.55 1.65 1.45 1.35 1.25 1.20 1.40
Forecast by TD Bank Financial Group as at May 2009; All forecasts are for end of period. Source: Bloomberg, TDBFG
May 8, 2009
Global Markets Currency & Fixed Income Research
U.S. DOLLAR
The outlook for the USD remains broadly negative, in
U .S . DOLLAR
our opinion, and we retain a generally bearish (and weaker USD per EUR JPY per USD
than consensus) view of the prospects for the USD over the 1.24 132
course of the next 12 months or so. 1.28
1.32 124
The USD has derived some short term benefit from the
1.36
financial and economic turmoil as global investors have 1.40
116
sought the safety of deep and liquid US capital markets 1.44
108
during times of uncertainty. Reflecting this trend, the USD 1.48
retained a strong, negative correlation with equity markets 1.52
USD per EUR 100
1.56
through the early part of this year (weaker equities went JPY per USD
1.60 92
mostly hand in hand with a stronger USD). With equity 1.64
markets up strongly since early March, the USD has tended 1.68 84
to fall back, however. More broadly, we note that our own Jan-07 Aug-07 Mar-08 Oct-08 May-09
quantitative work suggests that while some economic fun- Source: Federal Reserve Bank of New York/Haver Analytics
damental inputs have moved in the USD’s favour recently,
the USD remains significantly (between 10-13% on a trade-
weighted basis) over-valued relative to our assessment of
TRADE-WEIGhTED U .S . DOLLAR
its fundamental fair value. The main drag on the USD’s
fundamental fair value is the significant deterioration in the 115
Index: 2000 = 100
US’ fiscal position over the past year. The level of net public 110
debt is rising strongly as the US administration utilizes fiscal 105
policy aggressively to offset the domestic slowdown and we
100
think this will ultimately weigh on the USD.
95
Global reserve managers are concerned about the im-
90
pact of US policies on US asset markets and the USD. The
85
People’s Bank of China – China’s central bank – noted that
the Fed’s announcement in March that it would buy Treasury 80
U .S . DOLLAR OUTLOOk
Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
Trade-wtd. USD 109.0 95.6 95.8 101.4 107.4 111.2 107.8 105.9 103.8 103.0 104.2 104.5 106.7
JPY per USD 99.0 104 106 106 91 99 96 95 92 90 95 96 100
USD per EUR 1.338 1.562 1.576 1.409 1.397 1.325 1.400 1.450 1.500 1.500 1.450 1.400 1.300
USD per GBP 1.501 1.987 1.993 1.781 1.463 1.432 1.538 1.611 1.667 1.685 1.648 1.609 1.494
f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
10
May 8, 2009
Global Markets Currency & Fixed Income Research
CANADIAN DOLLAR
While the Canadian dollar was one of the laggards lead-
cANADIAN DOLLAR
ing up to the last issue of Global Markets, this time the roles
USD per CAD CAD per USD
have been reversed and CAD has been the top performing 1.12 0.893
major currency over the last few weeks. Although the Bank 1.08 0.926
of Canada has effectively cut its policy rate to zero at only 1.04 0.962
0.25%, it expressed clear reluctance toward entering into 1.00 1.000
quantitative easing (QE), and set the bar very high for what 0.96 1.041
it would take to push the Bank into such aggressive action. 0.92 1.087
Ever since that announcement in April, USD/CAD has 0.88 1.136
moved in a nearly straight line lower, breaking below its 0.84 1.190
200-day MA for the first time in nearly a year, and setting 0.80 1.250
new lows for 2009. 0.76 1.316
We remain bullish on CAD in the medium term, and Jan-07 Aug-07 Mar-08 Oct-08 May-09
expect to see further strength through 2009. Currencies tend Source: Federal Reserve Bank of New York/Haver Analytics
deficit, we think that the USD should and will weaken over 90
lower in USD/CAD opens up the possibility of an eventual *Real broad effective exchange rate. Last plotted: April 2009
move down to 1.05-1.10. Source: Haver Analytics/JP Morgan
f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
11
May 8, 2009
Global Markets Currency & Fixed Income Research
JAPANESE YEN
We have been negative on the JPY in the past few
JAPANESE YEN
months, reflecting a concern that the global trade slowdown,
JPY per USD JPY per EUR
and the weakening in Japan’s trade position in particular, 84 110
trough may be just around the corner should be encouraging Source: Federal Reserve Bank of New York/Haver Analytics
f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
12
May 8, 2009
Global Markets Currency & Fixed Income Research
EURO
Some euro zone economic data are showing the same
EURO
“green shoots” that are observable in other parts of the global
USD per EUR JPY per EUR
economy. It remains too early to say for sure that growth has 1.62 170
troughed – and certainly, many risks remain – but prospects 1.58 165
160
do look a little better from the current vantage point. That 1.54
155
perhaps helps explain the European Central Bank’s (ECB) 1.50
150
decision to reduce interest rates modestly (25 basis points, 1.46 145
taking the benchmark interest rate to 1.00%) and refrain 1.42 140
135
from following the Bank of England, Swiss National bank 1.38
130
and the Federal Reserve down the quantitative easing road 1.34
USD per EUR 125
1.30
at the May policy meeting. JPY per EUR 120
1.26
ECB policy makers did announce a plan to buy covered 115
1.22 110
bonds (similar to asset backed securities) but details remain Jan-07 Aug-07 Mar-08 Oct-08 May-09
sketchy and it would seem that the total amount of assets Source: Federal Reserve Bank of New York/Haver Analytics
to be purchased (EUR60bn, the ECB suggested) is rela-
tively small (the euro zone covered bond market is around
EUR1.5tn and the total purchase equates to less than 1% of TRADE-WEIGhTED EURO
euro zone GDP). Undertaking policies which might stoke
Index: 2000 = 100
inflation or debase the EUR are clearly unpalatable for the 140
While we remain of the opinion that the euro zone may face
100
renewed internal pressures in the future, speculation of a
euro zone break up has – correctly – dropped off the radar
90
for now. We think the EUR stands to benefit in the medium 00 01 02 03 04 05 06 07 08 09
term from investor concerns about the over valued USD and *Real broad effective exchange rate. Last plotted: April 2009
we look for the EUR/USD exchange rate to continue grind- Source: Haver Analytics/JP Morgan
ing higher towards the 1.50 level by the turn of the year.
EURO fUNDAmENTALS
Shaun Osborne, Chief Currency Strategist
416-983-2629 Interest Rate Spreads + Business cycle –
Inflation Differential + fiscal Balances N
current Account + Politics N
Legend: - is negative, + is positive, N is neutral for currency
EURO OUTLOOk
Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
USD per EUR 1.338 1.562 1.576 1.409 1.397 1.325 1.400 1.450 1.500 1.500 1.450 1.400 1.300
JPY per EUR 132 162 167 150 127 131 134 138 138 135 138 134 130
GBP per EUR 0.891 0.786 0.791 0.791 0.955 0.926 0.910 0.900 0.900 0.890 0.880 0.870 0.870
CAD per EUR 1.569 1.575 1.609 1.500 1.703 1.670 1.637 1.682 1.724 1.724 1.648 1.591 1.461
f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
13
May 8, 2009
Global Markets Currency & Fixed Income Research
U.K. POUND
While we have expected GBP/USD to reflect generalized
BRITISh POUND
USD weakness in the next few quarters, the UK authori- GBP per EUR USD per GBP
0.65 2.20
ties may well be laying the groundwork for a broader (and
perhaps sharper) GBP rebound in the medium term, even 0.69 2.10
and government bonds in March as a first step in its QE pro- 0.89 GBP per EUR 1.60
cess, with the government sanctioning a further GBP75bn in 0.93 USD per GBP 1.50
asset purchases if needed. The decision to utilize GBP50bn 0.97 1.40
of that “option” at the May policy meeting was a surprise 1.01 1.30
for the markets but indicates a strong conviction among Jan-07 Aug-07 Mar-08 Oct-08 May-09
UK policy makers to go the “extra mile” to help revive Source: Federal Reserve Bank of New York/Haver Analytics
f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
14
May 8, 2009
Global Markets Currency & Fixed Income Research
AUSTRALIAN DOLLAR
It has been a one-way ride for the AUD since the last
Global Market, currently trading $US0.74-0.75. The main AUSTRALIAN DOLLAR
triggers for the AUD rebound were the RBA decision to USD per AUD JPY per AUD
1.06 120
take an optimistic stance on the Chinese economic recov-
ery, some slightly better-than-expected domestic and global 0.98 110
data; and a general feeling that the USD was overdue for 100
0.90
a correction.
90
The RBA’s pervasive optimism - in the accompanying 0.82
statement to pausing at a 3% cash rate - placed a significant 80
at face value, the AUD could spike in the next month or two 150
– in our minds a temporary blip to US$0.75. 140
130
Annette Beacher, Senior ����������
Strategist
120
+65 6500 8047
110
100
90
80
00 01 02 03 04 05 06 07 08 09
*Real broad effective exchange rate. Last plotted: April 2009
Source: Haver Analytics/JP Morgan
the NZD be trading above $US0.58, and we remain with USD per NZD
0.60 60
our three month target of $US0.55 with downside risks, and JPY per NZD
this call is based on general USD weakness. The NZD is 0.54 50
prone to a large fall on the crosses.
0.48 40
Unfortunately in the lead-up to the RBNZ decision, the Jan-07 Aug-07 Mar-08 Oct-08 May-09
market had completely lost interest in RBNZ easing, and our
Source: Federal Reserve Bank of New York/Haver Analytics
AUD/NZD stop of 1.25 was briefly triggered. We are still
a strong believer of the AUD/NZD trade, but the resistance
level of 1.29 appears very strong and there may be a better
level to get set. Upcoming data on house prices and retail TRADE-WEIGhTED NEW ZEALAND DOLLAR
sales will help form a view on the size of the next rate cut
Index: 2000 = 100
from the RNBZ, and hopefully again have a strong influ- 160
140
Annette Beacher, Senior ����������
Strategist
130
+65 6500 8047
120
110
100
90
00 01 02 03 04 05 06 07 08 09
*Real broad effective exchange rate. Last plotted: April 2009
Source: Haver Analytics/JP Morgan
SWISS FRANC
With EUR/CHF back down to the low-1.50s, markets are
SWISS fRANc
wondering whether the Swiss National Bank is a one-trick
CHF per EUR CHF per USD
pony, or if it’s going to intervene again to push EUR/CHF 1.42 0.97
higher. Over the last few weeks, while we’ve seen some 1.46
CHF per EUR 1.00
degree of “green shoots” in most of the global economy, CHF per USD 1.03
Switzerland has seen no such thing. Retail sales have tum- 1.50 1.06
bled, exports have continued to fall, and the KOF leading 1.54
1.09
f: Forecast by TD Bank Financial Group as at May 7, 2009; All forecasts are for end of period
Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
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