The recent IMF annual meeting, held in Lima Peru this year, could have easily been described as unsettling by participants. Global growth forecasts have yet again been trimmed, no surprise there, but the news that private sector debt in emerging markets have been building up to $3 trillion is enough to get any sane person sweating. When you consider that the number one risk to global growth at this point, at least according to one of the members of the Bank of England’s MPC is a ‘disruptive slowdown in China’, you don’t need to be the most creative thinker to see what collateral damage is possible in the months and years ahead. Just think of Brazil where the likes of Eike Batista were betting huge on a never ending surge in demand for his commodity products; or consider the number of investment projects which have been shelved in the Shale gas industry in the United States; the oil sands industry in Canada; or perhaps the mining industry in Australia. You get the picture… there are many who would have lost huge amounts of money, and others who started projects that were dependent on those very same projects. All caught with their pants down. It can’t be pretty. The point I’m trying to make is that I can well imagine that down the line, maybe next year, or the year after we’ll hear horror stories about these failed investment plans, only time will tell if they will be enough to tip the world into its next economic crisis. When you consider all that, it is understandable that great caution is taken with regards to monetary policy and normalisation by the economies which lead the recovery… the United States and United Kingdom in particular. I could well understand if you take from this a certain loss of conviction in my bigger picture bullish dollar view…. Not a bit of it! What’s the alternative? Why should the dollar fall significantly from here? Any circumstance which causes the more suspicious regional economies and their currencies to strengthen will by its very nature give the Federal Reserve and the Bank of England the wiggle room to start their normalisation processes. Fundamentally the economies of Britain and the United States remain very solid, if not spectacular, but the risk of economic catastrophe elsewhere is what seems to be making policy normalisation less likely.
Yesterday saw more conflicting views from Federal Reserve policy officials, Williams was talking about a need to raise rates soon, on the other hand Dudley was saying that it’s too soon to hike. I could go on, but there is a clear split amongst the voting members. It seems entirely unrealistic to expect rate rises in 2015, and possibly even the first half of next year.
Later on this morning we get an update on the state of government finances in the UK, and a monetary report from Canada. Nothing particularly exciting. Looking at spot markets at the moment, I continue to expect a reversal of recent pound sterling strength versus the dollar. I also expect GBP to underperform versus the EUR. It’s been a tough time recently trying to pick market turns, but this still seems like the most likely path at present. As we head into the end of the year, we also continue to expect a continuation of the emerging market currency relief rallies.
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