Global softness combines with the sharp adjustments in commodity and equity security markets, decisive government intervention and the continued monetary stimulus in developed economies are key factor influencing the flows in foreign exchange markets.
The USD is consolidating and it is in the recovery mode. The fragile European fundamental couple with the intervention of Japan and Switzerland along with the FED asset reallocation and equity market sell-off all pointing a positive move in the USD in the upcoming months.
Please see the appendix for the global forecast of the upcoming period up to Q1 2013.
CURRENCY OUTLOOK
USD/JPY
The USD/JPY will remained extremely stable due to the recent financial turmoil, the low yield spreads and continued risk aversion make it range bound within the region of 76 to 78. However, position in USDJ/JPY is bullish as financial market volatility will falls and market participant will be more focus towards fundamentals. The year-end USD/JPY target is of 80.
USD/CAD
The Canadian dollar is trending lower on the back of rising global risk aversion driven by uncertainty in Europe, The rapid shift is seen by in the market participants in portfolio holdings to highly liquid US assets and away from risk assets like CAD. The weakness will continue until there is stability in Europe. Accordingly, though the current outlook looks fairly bleak for CAD, we would expect a general retracement of some of the recent losses as we approach year-end. The uncertainty and vulnerability of US economy, with the growth estimates on the lower side is in turn pulling the Canadian outlook down. We anticipate further near-term CAD weakness before markets stabilize and the CAD will lose the year near to parity with the USD.
JAPAN CURRENCY FUNDAMENTALS
The safe heaven waves will continue to support the Japanese yen (JPY) while the country’s manufacturers envisage an improvement in economic conditions. The disaster earth–quake economic impact on Japan growth will be small as compare to the recovery which will be seen in the year 2012 due to the post construction after earthquake and economic recovery activities. Japan massive rebuilding effort and the rebound in auto & electronic manufacturing will lift the economy through remainder of the year and most of 2012.
The country’s manufacturer shows an improvement which is evidenced by the recent Tankan survey. The Japan industrial output has risen for the fifth consecutive month. The Industrial production in August is increased to 0.8% and show an increase of 0.6% from the previous year. The third quarter activity is 6% more from the first quarter readings.
The previous monthly report Bank of Japan (BOJ) states that the Japan economy is improving slowly but surely. Production and export are consistently increasing approving pre-quake levels. Investment and consumptions are also on the right track. The values of japan export are back to the pre earth-quake levels.
The latest retail sales reading are lower but the car sales are still showing the buoyed patterns and the gains are in momentum. The reconstruction effort is likely to gather momentum during the complementary part of 2011 and through 2012. GDP will expand by a meagre 0.3% this year, with a 3.2% rebound anticipated for 2012.
The rising yen is not favourable for the Japanese government and we have seen several interventions in the past from the BOJ to stabilise the currency situation and huge buying interest is seen from the Japanese government. The region of 75 is another potential area where more BOJ intervention is expected if the level of 75.95 is breached.
The BOJ is committed to continue the virtually zero interest rate policy until it judges the rice stability in order for japan economy to avoid the risk of deflation.
UNITED STATES OF AMERICA CURRENCY FUNDAMENTALS
The steady recovery of USD is shaping. Although the employment rate is high and housing market is a moving at a very slow pace couple with the slow recovery of the consumers spending. The USD benefit from strong fiscal and monetary stimulus. The liquidity support from the FED asset purchase program remains intact despite unattractive US treasury yields (10-year bonds valued at 1.74%). In addition, the acute sell-off in emerging markets also injected an element of support to the USD. The consensus forecast of GDP growth remain unchanged for the year 2011 i.e. 1.7% q/q annualized. Recent indicators confirm that a gradual recovery is under its way.
The quality of the US corporate balance sheets and capital investments are improved. The improvement in the quality of asset should help to ride out this slow economic activity period allowing business to take advantage of future opportunities such as additional expansions to emerging markets which is supported by the weaker dollar.
CANADA CURRENCY FUNDAMENTALS
The Canadian economy has shown a solid recovery in the first quarter of 2011 but the second quarter shows a contraction. The factors which rallied the growth during spring gradually disappear. Most notably, motor vehicle & parts assemblies that had been sharply curtailed by global supply disruptions are essentially back on track. The GDP show a good position in the month of July suggesting that a third quarter has a better start but there are other factors which hinder the growth.
The weaker growth of US and intensifying sovereign debt concerns in Europe are unnerving the financial markets. The latest data suggest that the economy continue to remain modest. The labour market is showing the sign of slowing and the consumer confidence is steady in the month of September. The retailers reported stable sales. The auto sales are down but remain in line with the average of the past decade.
The housing markets are cooling off with potential buyers is taking advantage of historically lower interest rates. As long as the debt crisis of Europe continued and with the heightened degree of economic uncertainty and financial market volatility, we expect consumers and businesses to remain cautious spenders for the time being. Meanwhile exports are restrained by slow global demand, particularly from the United States, which accounts roughly 75% of Canadian international shipments.
CANADA AND UNITED STATES Adrienne Warren +1 416 866-4315
Fundamental
INTEREST OUTLOOK
Please find below the interest outlook for Japan, United States and Canada
| UNITED STATES | CANADA | JAPAN |
| The Federal Reserve will keep its fed funds target rate on hold until Q3 2013, in line with the Fed’s loose commitment made in August. Indeed, should further monetary easing be deemed essential, unconventional policies will likely be engaged once again. However, the options are now more limited after the Fed engaged in “Operation Twist” last month, shifting US$400 billion worth of Treasury securities with maturities of 3 years and under into Treasury securities with maturities of 6 out to 30 years by the end of June 2012. While the Fed has acknowledged that the impact of the operation has been, and will continue to be, modest, it is the Fed’s view that lower borrowing costs will provide further support for the US economy, especially when fiscal policy is at a standstill. | The Bank of Canada (BOC) to remain on the side-lines until the end of Q3 2012, with the risk of an even longer holding period pending developments in Europe’s debt situation, US politics, and Canadian domestic growth. Indeed, continued financial market turmoil and a sharp reduction in both business and consumer confidence have put downward pressure on global economic activity, raising the risk of weaker growth prospects for Canada. Real GDP has already come in weaker than expected in Q2 with a mild contraction while the risks of another weak print in Q3 have increased. Inflation, on the other hand, has come in slightly higher than originally expected. | The Bank of Japan (BOJ) has a low interest rate policy for more than two decades as being export base country. The same interest will continue in the upcoming periods. The (BOJ) decided to extend the deadline for new applications for loans under the "Funds-Supplying Operation to Support Financial Institutions in Disaster Areas" by six months, up to April 30, 2012. It also decided to extend the effective period of the "Relaxation of the Collateral Eligibility Standards for Debt of Companies in Disaster Areas" by six months, up to April 30, 2013. |
APPENDIX
| Currency | Currency Pair | Actual 16-10-2011 | Q2 - 2011 | Q3 - 2011 | Q4 – 2011 | Q1- 2012 | Q2-2012 | Q3-2012 | Q4-2012 | Q1-2013 |
| YEN | USD/JPY | 77.24 | 81 | 77 | 78 | 79 | 80 | 81 | 82 | 83 |
| Canadian Dollar | USDCAD | 1.01 | 0.96 | 1.05 | 0.99 | 0.98 | 0.98 | 0.98 | 0.98 | 1 |
Source: Consensus Economics Inc. September 2011
