Currency Views: March 2010 - OCBC Wealth Management

European debt woes may help boost greenback in the short term

26 February 2010

There is now a tussle taking place between risk appetite and risk aversion, with the U.S. dollar favoured when risk aversion sets in. For example, concerns that China will tighten monetary policy weighed on global equity and commodity markets recently, which helped the U.S. dollar to rebound. Going forward however, if risk appetite returns due to the improving economic and earnings figures, the greenback could face renewed pressures. We continue to hold the view that the greenback is likely to remain weak in the first half of this year as there are no signs that the Fed will raise rates anytime soon.

Euro

Credit issues in Greece and Spain have weighed on the Euro, especially after the ECB said that the European Union will not step in to rescue Greece which saw its sovereign credit downgraded by all the major credit rating agencies recently. For now, we expect the Euro to lag the Australian and New Zealand currencies, and even the Pound, given credit concerns in the Euro-zone region.

British Pound

The BOE has kept its benchmark rate unchanged at 0.5 per cent, and also voted to continue with its programme of asset purchases totalling 200 billion Pounds financed by the issuance of central bank reserves. The central bank's Monetary Policy Committee currently expects the programme to take another two months to complete as economic data on the U.K. continues to be soft.

Merger & Acquisition activity inspired buying of the Pound in the middle of January, as seen in the takeover of Cadbury by Kraft. Inflationary pressures should also continue to prove supportive of the currency, especially if it stays above the BOE's 2 per cent threshold. The Pound looks set to remain fairly well supported versus the Euro and Greenback.

Australian dollar

The yield differential continues to favour the higher yielding commodity currencies. Furthermore, the superior growth in emerging markets like China and India is helping to propel the commodity currencies higher, or at least providing them with support.

In addition, better employment and economic data out of Australia, which has led to expectations that the RBA will raise rates in February, will also provide the Aussie currency with support.

New Zealand dollar

Continued rate hike speculation and greater risk appetite have been the main drivers of the New Zealand dollar's strength. The Kiwi has been helped by expectations that the RBNZ will raise its benchmark interest rate earlier-than-expected, although such expectations could be misplaced, given that economic data out of New Zealand still looks weak.

Nevertheless, we still like the Kiwi dollar as it will benefit from the positive medium-term prospects for commodity prices. However, investors who are buying the currency on the basis of higher interest rate yields, may be disappointed in the short term as the RBNZ looks unlikely to move on interest rates at least in the first half of this year.

Japanese Yen

The Japanese currency continues to trade within a range as a slew of economic measures aimed at ending deflation and spurring growth and inflation has not borne fruit.

Going forward, how the Yen trades vis-a-vis the U.S. dollar depends on traders' perception about whether the Fed or BOJ will hike rates first. Given the perception that the U.S. appears to be recovering at a faster pace than Japan's economy, the U.S. dollar looks likely to head higher against the Yen.

Performance of Currencies

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