FYI | Aug 29 2008
By Chris Shaw
CIBC World Markets had been factoring in falls in the euro, pound sterling and Australian dollar against the US dollar, but not until 2009. However, the early moves from global markets to price in rate cuts from their own central banks saw the greenback come back well ahead of schedule.
Allowing that they have been a little off in timing terms, CIBC currency experts now anticipate the US dollar will hold onto most of the gains it has enjoyed, with further advances seen as less likely. The analysts reason the American economy remains dependent on exports, and at present, this will prevent any further significant appreciation in the US currency.
With respect to the Canadian dollar the group suggests the weakness has been something akin to throwing the baby out with the bathwater, as the currency suffered largely because other currencies were also falling against the greenback. Further falls should not be expected, say the analysts, as the market is pricing in Canadian interest rate cuts that are unlikely given monetary policy there is already more stimulative than in other economies. Add in an expected broad rebound in commodity prices in coming months, and in CIBC’s view, the Canadian dollar will again move through parity against the greenback sometime in 2009.
In contrast, the euro is at a level that shows the market is pricing in a recession, which means most of the bad news is already in the currency, particularly as the European Central Bank is unlikely to lower rates quickly given the inflation issues in the region.
While CIBC suggests the euro may in fact be over-valued against the US dollar in the short-term, further falls are likely to be modest at best. The argument for rate cuts is better in the UK and CIBC expects the Bank of England will be able to cut rates by as much as 0.75% over the next few quarters. This would result in the pound underperforming the euro if such a scenario were to eventuate, the analysts reason.
In contrast, the Bank of Japan can be expected to stay put on rates in coming periods, as an easing wouldn’t make much difference given rates are already so low. While the Japanese economy is potentially heading for a recession, the country’s large current account surplus should be enough to push the yen higher against the US dollar in the group’s view, particularly if other Asian currencies also continue to strengthen.
The fall in the Australian dollar was the result of the Reserve Bank suggesting there was evidence the economy was slowing down, comments that caused the hot money to quickly move elsewhere. But the group takes the view the market has now largely priced in around 1.0% in rate cuts going forward and with less chance of further cuts in the medium-term and expectations of stronger commodity prices in coming months, the most likely scenario is some form of bounce.
