Currencies | Mar 16 2009
By Chris Shaw
Interest rates have been slashed around the world as policymakers do what they can to stimulate their respective economies but as this measure hasn’t proved to be enough, quantitative easing is the next approach being considered and/or adopted.
Danske Bank points out quantitative easing is, in its simplest form, where central banks try to inflate themselves out of an economic crisis by printing more money, which means they are pumping more liquidity into the system than is required to achieve their target level for interest rates.
To date the process is being undertaken by four central banks – the US Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank, while the Bank of Canada is seen as a likely candidate to follow suit.
Danske Bank notes the European Central Bank has to date at least resisted such a move and the Reserve Banks of Australia and New Zealand and the Norwegian Central Bank are less likely to introduce such a policy given they still have room to move with respect to interest rates. Also, in relative terms their economies remain in better shape than many global peers.
Moving to introduce a policy such as quantitative easing has implications for a currency as Danske Bank notes the yen, the British pound and the Swiss franc have all been sold off since the policy was introduced in each nation, while the US dollar has held overall but was initially sold down on the announcement of the policy in December of last year. In recent weeks the Canadian dollar has also weakened in expectation of quantitative easing being introduced.
With the global economic crisis turning increasingly to Europe over the past several weeks, Danske Bank has lowered its euro/US dollar forecast profile, reflecting the fact the greenback still enjoys reserve currency status and it is appears to be ahead of Europe in the economic cycle.
As well, the euro looks overvalued in Danske Bank’s view given the challenges the region faces, including the growing budget deficits being faced by an increasing number of member nations. This reflects weakness elsewhere as well, as Danske Bank points out those economies that previously purchased as much as 20% of the euro area’s exports are struggling and so buying less at present.
The bank’s new forecasts call for a euro/US dollar rate of 1.24 as at the end of June, 1.20 as at the end of September and 1.22 in a year from now.
Danske Bank has also lifted its near-term US dollar/yen expectations to factor in its view there will be further repatriations by Japanese investors leading into the end of the Japanese financial year this month and to account for increasing uncertainty in global markets.
On a medium-term timeframe though Danske Bank expects lower potential Japanese growth, trade flows and the outlook for a gradual improvement in financial market conditions to weigh on the yen and this bodes well for the US dollar against the Japanese currency.
Danske Bank’s new US dollar/yen forecasts are 98 as at the end of June, 100 as at the end of September and 105 this time next year.
