Tuesday August 28, 2007 - 11:40:17 GMT
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GVI Weekly Month Ahead Forex OutlookAugust 28, 2007
Forex Forecast of Major Currency Pairs
At some point, the reaction of financial markets to new sub-prime revelations will start to diminish. Clearly, while all the news is not out yet, the price reaction of the markets to the latest stories in the press has started to dampen. Forex markets are not at the point yet where the traditional drivers of forex trade can come back to the fore. Note that a risk premium persists in the short-term euro-libor rates for the major currencies. It is notable that policy decisions by most key central banks have been put on hold while the financial markets work their way through the current credit crisis. That suggests at some point when conditions start to normalize again that some catch up policy decisions will have to be taken. The jury is still out on the ECB policy decision next week and on the Fed in early September. Both banks are keeping all their options open. This current period of market uncertainty has tended to favor the USD. Presumably, when markets start to normalize again, the USD should fall.
Major Currency Pairs - Currency Forecasts- Monthly Perspective
The European economy, led by Germany, is still in a solid expansionary phase. Concern is that the economy may be slowing seem not to be shared by the ECB, who on August 2 signaled a September interest rate hike. Since then, ECB President Trichet has indicated that the central bank will make its next decision at the upcoming policy meeting on September 8. The EUR stands to benefit from a return to normalcy in the financial markets.
The Bank of Japan would love to have a normalization of interest rates and a normalization of monetary policy. Nevertheless, the economy simply has not cooperated. The low level of inflation remains a concern. Odds now favor a 4Q07 rate hike of +25bps. A return to JPY carry trades would be an indicator that financial markets have resumed business as usual. When the BOJ does hike by +25bp, the low level of Japanese interest rates afterwards should not be a major deterrent to the carry trade.
The U.K. economy is seeing some price pressures. The Bank of England raised its repo target by +25bps to 5.75% on July 5. Another rate hike is possible later in the year.
The Swiss National Bank has been unhappy with the relative weakness of the CHF against the EUR. Additional quarterly hikes are in the pipeline with the next possible +25bp tightening set for September 13.
The Australian economy has been improving. A key focus for the RBA remains inflation, employment and commodity demand. Latest (2Q07) inflation data suggest that a future rate hike is possible, depending on the state of the financial markets.
The CAD is underpinned by M&A flows, a steady economy and commodity prices. The Bank of Canada hiked rates at its July 10 policy meeting. Another hike of +25bps is seen possible late in the year.
John M. Bland is a co-founder and partner of Global-View.com. Prior to Global-View.com, he was a Vice-President and senior dealer in a forex inter-bank and futures trading arm of a subsidiary (ContiCurrency) of the Continental Grain Company in NYC. Previous to that, he was one of the early members of the Chemical Bank corporate advisory service in NYC, and also worked in international liability management for that bank. John holds an MBA from the Hass School at the University of California at Berkeley and a bachelor?s degree in International Economics from Berkeley.
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