negusneg
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negusneg 10/11/07
Stephen Jen si sbilancia sul $. Secondo l'economista di Morgan Stanley il $ è sottovalutato, ma alla luce del previsto rallentamento dell'economia Usa dovrebbe raggiungere un minimo di 1,51 in questo trimestre.
Essendo corto di $ (non ne ho in portafoglio) dal 2002, mi sto chiedendo da tempo quale potrebbe essere un livello interessante per iniziare ad accumulare. Data la forza del trend attuale, però, fino ad ora sono rimasto alla finestra.
Non vedo quali potrebbero essere nell'immediato le notizie capaci di invertire la tendenza, anche se sicuramente la tendenza alla riduzione del deficit di parte corrente potrebbe in futuro fare da catalizzatore.
The Undervalued Dollar to Keep Weakening
November 09, 2007
By Stephen Jen | London
Summary and conclusions
The dollar is cheap, but is likely to undershoot further, particularly in light of the recent downward revisions by our US economists on the growth outlook of the US economy. Euroland, Japan and the UK will also likely slow in the coming two quarters. But the broad theme of economic de-coupling is likely to be preserved, with much of the rest of the world (RoW) weathering the prospective US slowdown better than in the past, making it difficult for an already significantly undervalued dollar to gain much traction in the coming two quarters.
We are now looking for the dollar to bottom against the EUR and GBP in 4Q, at 1.51 and 2.13, respectively. Also, with the dollar and the world’s risky assets under such intense pressure, the JPY is poised to participate, in earnest, in this dollar downtrend. We are looking for USD/JPY to trade down to 106 by 1Q08, before recovering to 114 by end-2008.
Our thoughts
We presented our last set of forecasts on September 13, 2007 (The US Dollar Is the Sub-prime Currency, for Now). In that note, we argued that the dollar would remain on its back foot for two quarters, until the US housing market bottoms in 1Q08, and that the dollar should rebound with the economy. In the coming months, a mid-cycle slowdown in the US, coupled with relative resilience in the RoW and powered in part by a robust Chinese economy, means that the dollar will remain weak for the next two quarters. However, valuation is increasingly in favour of the dollar, and the US ‘twin deficits’ will continue to plunge rapidly to help support the dollar .
Since then, the dollar has weakened by more than we had expected. From a spot rate of 1.39, EUR/USD has overshot our forecast peak of 1.43 and traded above 1.47 earlier this week. It is clear that we had underestimated the intensity of the pressures impinging on the USD and the relative impotence of valuation supporting the dollar.
We make the following points:
Point 1. The US economic outlook has worsened somewhat. To reflect the powerful contraction in the US housing market and the credit crunch that will restrain housing demand, consumption and capital expenditures, our US economists recently revised down their growth forecasts. 2008 growth is now expected to be 1.8%, from 2.1%. The weakness will mainly be concentrated in early 2008 (0.5% in 4Q and 0.7% in 1Q). Consumption growth is expected to slow from above 3% in the first three quarters of 2007 to 1.3% in the coming three quarters. The angst regarding the US sub-prime market will add to fears about USD assets. However, as long as China’s economy and asset prices hold up (i.e., a modest slowdown, nothing sharp), perceived economic de-coupling will continue to lead to downward pressures on the dollar, we believe.
Point 2. The dollar is in trouble. Market psychology regarding the dollar is deteriorating. While we still have a structurally constructive opinion on the dollar and the US economy, we think that, if the situation is mismanaged by the US and European authorities, what has so far been an orderly descent in the dollar could easily degenerate into a more violent event. In contrast to end-2004, when the USD also experienced a sharp correction, only to rally in the new year, the main players pushing the dollar this time around are not hedge funds or real money accounts. Instead, central banks and SWFs from the Middle East and Asia may have been more active than they were back in 2004. The risk here is that, if the ECB and the US Treasury don’t escalate their rhetoric, the market might interpret this as ‘benign neglect’ and could, in response, start to participate in this dollar sell-off. The cyclical reasons for the dollar’s descent are obvious, but there are some structural justifications that investors who are watching the dollar’s decline could easily find convincing.
We will not repeat these structural factors (detailed in our previous note), but still look for the US and Euroland to gradually move into a situation whereby preconditions for coordinated interventions will gradually be met. Since we don’t expect these preconditions to be met soon, the dollar will likely keep falling until the Euroland and UK economies are affected and the G7 are provoked into taking action (see Waiting for Coordinated Intervention? November 1, 2007).
Point 3. The G7’s stance on exchange rates makes little sense now. The G7’s focus on China’s currency policy is misplaced. There is still the outdated notion that, without the ‘sticky’ USD/CNY and USD/Asia in general, EUR/USD would not rise so sharply. This might have been true of the undercurrents in currency markets in recent years, but we believe that it is no longer a good description of the current situation. Exchange rates are no longer driven by trade or concerns about trade imbalances. We don’t remember the last time someone told us that they were selling the USD because of its C/A deficit. Rather, more than ever, exchange rates are driven by cross-border flows, e.g., diversification flows by central banks in Asia and the Middle East, and structural portfolio adjustments in the private sector, as ‘home bias’ declines worldwide. These flows are very powerful, and have little to do with where USD/CNY is. In other words, we don’t find the G7’s notion on currencies compelling. If Mr Trichet repeats the G7’s mantra, we believe that it would have a negligible effect on EUR/USD. As the USD falls in coming weeks, the G7 will likely be pushed into re-thinking their strategy in anchoring expectations about the dollar.
Point 4. What is happening in the world is very healthy. We have previously argued that the low and declining US household savings rate could be explained by three variables – housing wealth, the long bond yield, and equity wealth, with housing wealth being, statistically, the most important determinant of this important variable, which underpins the US external imbalance (see US Savings Rate, the Housing Market, and the USD, September 22, 2005). If we simulate the expected decline in US housing wealth, and changes in the long bond yield and equity wealth consistent with our latest US economic forecasts, the US household savings rate should start to recover by the end of this year.
Another way of thinking about global rebalancing is that the ‘20%-balancing-down, 80%-balancing-up’ scenario we have had should help the world rebalance, with the US slowing, while the RoW catches up. This is precisely what we are witnessing, and policy makers and investors should not be puzzled or alarmed by this development.
Point 5. The JPY may finally participate in this USD sell-off. So far, the JPY has failed to participate in the general USD sell-off. We have long been reluctant to consider downside risks to USD/JPY, because of the extraordinarily high ‘home bias’ in Japan. But with the recent sell-off in the dollar, and the lack of any push-back by the G7 officials, we now believe that the risk to USD/JPY is biased to the downside, as the developed world will likely slow in coming quarters and risky assets come under some downward pressure. However, beyond this period, we are still expecting USD/JPY to drift back up, due to capital outflows.
Commodity and EM currency forecasts
As the developed world (US, Euroland and Japan) slows in the coming two quarters, there will be a bit of a wobble in the commodity currencies and the EM currencies. Our forecasts for the AXJ currencies remain unchanged, as they had already incorporated such a scenario.
Bottom line
Despite believing that the USD is grossly undervalued against the EUR and GBP, and may not be far from the ultimate trough against these currencies, we believe that the market will likely push the USD lower, until the G7 are provoked into threatening or conducting interventions. As the G7 are not yet in a position to intervene, the USD will likely keep weakening, even against the JPY.
Stephen Jen si sbilancia sul $. Secondo l'economista di Morgan Stanley il $ è sottovalutato, ma alla luce del previsto rallentamento dell'economia Usa dovrebbe raggiungere un minimo di 1,51 in questo trimestre.
Essendo corto di $ (non ne ho in portafoglio) dal 2002, mi sto chiedendo da tempo quale potrebbe essere un livello interessante per iniziare ad accumulare. Data la forza del trend attuale, però, fino ad ora sono rimasto alla finestra.
Non vedo quali potrebbero essere nell'immediato le notizie capaci di invertire la tendenza, anche se sicuramente la tendenza alla riduzione del deficit di parte corrente potrebbe in futuro fare da catalizzatore.
The Undervalued Dollar to Keep Weakening
November 09, 2007
By Stephen Jen | London
Summary and conclusions
The dollar is cheap, but is likely to undershoot further, particularly in light of the recent downward revisions by our US economists on the growth outlook of the US economy. Euroland, Japan and the UK will also likely slow in the coming two quarters. But the broad theme of economic de-coupling is likely to be preserved, with much of the rest of the world (RoW) weathering the prospective US slowdown better than in the past, making it difficult for an already significantly undervalued dollar to gain much traction in the coming two quarters.
We are now looking for the dollar to bottom against the EUR and GBP in 4Q, at 1.51 and 2.13, respectively. Also, with the dollar and the world’s risky assets under such intense pressure, the JPY is poised to participate, in earnest, in this dollar downtrend. We are looking for USD/JPY to trade down to 106 by 1Q08, before recovering to 114 by end-2008.
Our thoughts
We presented our last set of forecasts on September 13, 2007 (The US Dollar Is the Sub-prime Currency, for Now). In that note, we argued that the dollar would remain on its back foot for two quarters, until the US housing market bottoms in 1Q08, and that the dollar should rebound with the economy. In the coming months, a mid-cycle slowdown in the US, coupled with relative resilience in the RoW and powered in part by a robust Chinese economy, means that the dollar will remain weak for the next two quarters. However, valuation is increasingly in favour of the dollar, and the US ‘twin deficits’ will continue to plunge rapidly to help support the dollar .
Since then, the dollar has weakened by more than we had expected. From a spot rate of 1.39, EUR/USD has overshot our forecast peak of 1.43 and traded above 1.47 earlier this week. It is clear that we had underestimated the intensity of the pressures impinging on the USD and the relative impotence of valuation supporting the dollar.
We make the following points:
Point 1. The US economic outlook has worsened somewhat. To reflect the powerful contraction in the US housing market and the credit crunch that will restrain housing demand, consumption and capital expenditures, our US economists recently revised down their growth forecasts. 2008 growth is now expected to be 1.8%, from 2.1%. The weakness will mainly be concentrated in early 2008 (0.5% in 4Q and 0.7% in 1Q). Consumption growth is expected to slow from above 3% in the first three quarters of 2007 to 1.3% in the coming three quarters. The angst regarding the US sub-prime market will add to fears about USD assets. However, as long as China’s economy and asset prices hold up (i.e., a modest slowdown, nothing sharp), perceived economic de-coupling will continue to lead to downward pressures on the dollar, we believe.
Point 2. The dollar is in trouble. Market psychology regarding the dollar is deteriorating. While we still have a structurally constructive opinion on the dollar and the US economy, we think that, if the situation is mismanaged by the US and European authorities, what has so far been an orderly descent in the dollar could easily degenerate into a more violent event. In contrast to end-2004, when the USD also experienced a sharp correction, only to rally in the new year, the main players pushing the dollar this time around are not hedge funds or real money accounts. Instead, central banks and SWFs from the Middle East and Asia may have been more active than they were back in 2004. The risk here is that, if the ECB and the US Treasury don’t escalate their rhetoric, the market might interpret this as ‘benign neglect’ and could, in response, start to participate in this dollar sell-off. The cyclical reasons for the dollar’s descent are obvious, but there are some structural justifications that investors who are watching the dollar’s decline could easily find convincing.
We will not repeat these structural factors (detailed in our previous note), but still look for the US and Euroland to gradually move into a situation whereby preconditions for coordinated interventions will gradually be met. Since we don’t expect these preconditions to be met soon, the dollar will likely keep falling until the Euroland and UK economies are affected and the G7 are provoked into taking action (see Waiting for Coordinated Intervention? November 1, 2007).
Point 3. The G7’s stance on exchange rates makes little sense now. The G7’s focus on China’s currency policy is misplaced. There is still the outdated notion that, without the ‘sticky’ USD/CNY and USD/Asia in general, EUR/USD would not rise so sharply. This might have been true of the undercurrents in currency markets in recent years, but we believe that it is no longer a good description of the current situation. Exchange rates are no longer driven by trade or concerns about trade imbalances. We don’t remember the last time someone told us that they were selling the USD because of its C/A deficit. Rather, more than ever, exchange rates are driven by cross-border flows, e.g., diversification flows by central banks in Asia and the Middle East, and structural portfolio adjustments in the private sector, as ‘home bias’ declines worldwide. These flows are very powerful, and have little to do with where USD/CNY is. In other words, we don’t find the G7’s notion on currencies compelling. If Mr Trichet repeats the G7’s mantra, we believe that it would have a negligible effect on EUR/USD. As the USD falls in coming weeks, the G7 will likely be pushed into re-thinking their strategy in anchoring expectations about the dollar.
Point 4. What is happening in the world is very healthy. We have previously argued that the low and declining US household savings rate could be explained by three variables – housing wealth, the long bond yield, and equity wealth, with housing wealth being, statistically, the most important determinant of this important variable, which underpins the US external imbalance (see US Savings Rate, the Housing Market, and the USD, September 22, 2005). If we simulate the expected decline in US housing wealth, and changes in the long bond yield and equity wealth consistent with our latest US economic forecasts, the US household savings rate should start to recover by the end of this year.
Another way of thinking about global rebalancing is that the ‘20%-balancing-down, 80%-balancing-up’ scenario we have had should help the world rebalance, with the US slowing, while the RoW catches up. This is precisely what we are witnessing, and policy makers and investors should not be puzzled or alarmed by this development.
Point 5. The JPY may finally participate in this USD sell-off. So far, the JPY has failed to participate in the general USD sell-off. We have long been reluctant to consider downside risks to USD/JPY, because of the extraordinarily high ‘home bias’ in Japan. But with the recent sell-off in the dollar, and the lack of any push-back by the G7 officials, we now believe that the risk to USD/JPY is biased to the downside, as the developed world will likely slow in coming quarters and risky assets come under some downward pressure. However, beyond this period, we are still expecting USD/JPY to drift back up, due to capital outflows.
Commodity and EM currency forecasts
As the developed world (US, Euroland and Japan) slows in the coming two quarters, there will be a bit of a wobble in the commodity currencies and the EM currencies. Our forecasts for the AXJ currencies remain unchanged, as they had already incorporated such a scenario.
Bottom line
Despite believing that the USD is grossly undervalued against the EUR and GBP, and may not be far from the ultimate trough against these currencies, we believe that the market will likely push the USD lower, until the G7 are provoked into threatening or conducting interventions. As the G7 are not yet in a position to intervene, the USD will likely keep weakening, even against the JPY.
