With the recent sell-off in bonds, markets have moved to price in a first hike in the fed funds rate as early as December. In the meantime, long-term interest rates have continued their upward climb, with the 10-year US Treasury yield now at 3.9%.
Stephen Roach, Head Economist, Morgan Stanley
Weekly Bank Research Center 06-15-09
Coming to Terms with the Term Premium
Stephen Roach, Head Economist, Morgan Stanley
With the recent sell-off in bonds, markets have moved to price in a first hike in the fed funds rate as early as December. In the meantime, long-term interest rates have continued their upward climb, with the 10-year US Treasury yield now at 3.9%. While central banks will certainly start to normalise policy rates once the recovery is entrenched, a beginning of rate hikes any time this year seems premature, in our view. For longer maturities, by contrast, we continue to believe that the medium-term outlook is for higher yields, for two reasons. First, with a large chunk of QE programmes yet to come, excess liquidity looks set to continue its rapid growth, supporting risky assets and the real economy, but raising inflation risks further down the road. Second, macroeconomic uncertainty is back with a bang, bringing with it rising term premiums.
A Look At Our Global Scenarios From an FX Perspective
Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The main scenario calls for a sustained and stronger than expected global recovery, putting an end to the global recession in Q3 09. On the FX market, this is likely to lend support to currencies with strong commodity exposure and better-than-G10-average domestic fundamentals (AUD, CAD, and NOK), and facilitate a correction in those currencies that were sold off to become fundamentally undervalued as risk appetite abated (GBP and SEK). By contrast, currencies that benefited from the global financial deleveraging, and which remain potential funding currencies, (CHF, JPY, and USD) are likely to be under pressure.
Canada – Reality Check for Pending Recovery
Steve Chan, Economist, TD Bank Financial Group
While markets are anticipating a recovery, indicators of global demand remain weak and we maintain the view that the worldwide rebound will be sluggish. Those global imbalances between developed world spending and emerging market lending remain yet to be unwound. Bank of Canada Governor Carney conveyed a similar view in a sobering speech Thursday. Carney noted the downdraft to global investment demand and consequent diminished potential growth in developed economies. However, he also noted new opportunities as emerging markets shift towards greater consumption.
Pound Rallies on Signs of UK Recovery
Trevor Williams, Chief Economist at Lloyds TSB Financial Markets
The pound was buoyed by data this week suggesting the UK could emerge from recession as early as the current quarter. This saw £/$ briefly rally though 1.66, before ending the week 3% higher at 1.6492. The pound also rose to a six-month high against the euro, £/€ gaining 2.8% to 1.1769 at the close of the week. The US$ had another volatile week, but the dollar index rallied on Friday to close above 80. It still ended the week modestly weaker against the euro and yen, at 1.4014 and 98.30 respectively. Further broad gains for commodity prices and equities this week, with crude oil breaking though $72, saw most commodity-linked currencies extend recent gains. The Australian and New Zealand dollars were also boosted by positive economic data, leading them to rise through 0.82 and 0.64 respectively against the US$.
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Compiled by David Song, Currency Analyst
