2009 FX Outlook - A Year Of Alternative Policies

Special Reports | Written by ActionForex.com | Dec 29 08 10:38 GMT |


The dollar's rally in the second half of 2008 was driven by deleveraging and worse-than-expected economic conditions in the Eurozone. Looking to 2009, although the dollar may remain strong in the first quarter, fade out of deleveraging demand and Fed's quantitative easing process will make USD's outlook bearish.

There are several main themes for currency trading in 2009:

1. Zero interest rate policy - As global economy has deteriorated much faster than expected, central banks all over the world are busy cutting policy rates so as to stimulate economic activities. Most of the G10 have aggressively lowered rates which are expected to converge to zero. This theme benefit Japanese yen, Swiss franc and USD as their interest rates are closest to 0%.
2. Quantitative easing - Cutting interest rates to zero means the central bank has one less policy tool and the government will have to turn to quantitative easing. As the US is in deficit, the government will have to increase money supply or bear more debts to finance the purchase of assets. This will cause the dollar to weaken in later 2009.
3. Fiscal policy -The US is expected to adopt more fiscal stimuli than the Eurozone and it will be positive for US' economy and the dollar in early-09.

EURUSD: Although the Euro is anticipated to weaken further, it should be bottomed out in 2Q09. Although slashed policy rate by 150 bps in December, ECB's attitude seemed to be more conservative than other and it's possible for the bank to continue falling behind the curve. Credit Suisse remains bearish for the Euro in near term as it doubts about the EBC's 'ability to manage an appropriate fiscal policy response and banking sector rescue effort'. However, in long term, 'political will exists to manage these stresses and that Europe's relatively high overall level of savings will allow monetary union tail risks to abate'.

USDJPY: Japanese yen should remain strong and USDJPY is expected trade below 100 in 2009.The Bank of Japan slashed overnight lending rate to 0.1% in December, making it's the policy rate among the lowest in G7. As other countries' lending rates converging with Japan's, it's hard to the yen to weaken. Moreover, according to Morgan Stanley, Japanese yen should strength 'as the rapidly deteriorating Japanese economy will encourage local investors to retrench further and continue to repatriate capital. JPY should advance as deleveraging enters its next phase'.

GBPUSD: The pound should remain under pressure as yields are falling and the economic condition in the UK makes it tough for the government to finance the banking sector and boost sentiment. In late 2009, there's possibility for the pound to recover as the currency has been sold off quite severely. Goldman Sachs believes 'the pound could remain under some pressure in the short term but it now looks as if a lot of bad news is fully factored in, financial conditions have eased enormously and speculative positioning remains very short the pound. All combined, these factors suggest sterling will recover back towards fair value'.

USDCHF: Analysts are neutral on the outlook of Swiss Franc. While CHF should be supported after SNB had already cut interest rates to very low level, it may underperform USD as well as JPY. Credit Suisse said 'banking sector worries and aggressive monetary policy easing have limited the CHF's safe-haven appeal in Q4. However, Switzerland's large current-account surplus and positive net investment income balance should ultimately provide support in a G10 low yield environment fall and prevent significant further weakening'.

AUDUSD: Although RBA's intervention supported Aussie in the near-term, poor economic outlook and the likelihood for further rate cut point to bearishness in the Australian dollar. Credit Suisse believes 'the AUD is likely to continue to struggle to attract financing in the new year as local yields continue to move lower and commodity prices stay heavy'. Goldman Sachs expects 'An environment of continued deleveraging, heightened risk aversion, downward revisions to global growth outcomes and intensifying downside risks to commodity prices leaves the Australian Dollar vulnerable to further weakness in the near term'.

NZDUSD: Inline with the outlook of its counterpart, Kiwi should remain under pressure due to decline in commodity prices as well as the relatively high-yield of the currency. Deutsche Bank views any rebound in Aussie and Kiwi as opportunities to sell these currencies.

USDCAD: Going into 2009, recession in the US is expected to see significant negative impact in Canada. Further rate cut and economic stimuli will lead to budgetary deficit which in turns put Canadian dollar under pressure. Morgan Stanley expects 'CAD to underperform as deteriorating external demand on the back of the US-led global slowdown and sharp commodity price declines present a meaningful challenge for Canada... inclined to look for opportunities to play CAD from the short side in this environment'.

Source : Actionforex.com