Expect great currency swings in months ahead....
We are headed to an interesting time in the FX market. With G8/G20 countries taking divergent paths, I suspect the FX markets are about to hit a period of high volatility in the coming months.
First off, we have a situation where our world leaders this weekend at the G20 summit in Toronto basically agreed to "not to agree" on how to tackle the world economic woes. On one side, you have countries like Britain, Germany, France and Spain who are looking to reign in stimulus spending to bring down deficits, and the US that continues to hold the mantra that increased spending will stabilize our economy. China, on the other hand, is attempting to cool of its hot economy and fight inflation by allowing the Yuan to slightly fluctuate, and using up a lot of its accumulated commodities stockpiles to allocate to continue slower growth. Which in turn, could slow down global consumption of commodities and base materials. As a result, it seems that we may be heading into a period of slower global economic growth and perhaps a double dip recession.
I would expect a period of risk aversion in the markets in the near term because of the combination of slower growth, threat of double dip recession (whether that comes to fruition is to be seen) and debt crisis that undoubtedly will make its way from Europe, to Japan and quite possible the US. And because of this, we may see a near term upswing in the US Dollar on risk aversion fears, then the US Dollar could come under threat on debt concerns and AAA rating risks.
What does it mean for you as an FX trader? I still maintain my longer term view of a move to 91.00 on the USD index by the end of the year, then the USD may turn as the increased stimulus spending finally catches up with the US Dollar and push the currency lower as threat of the US AAA ratings come under scrutiny. In short, expect some major FX moves as we head into H2 2010 and Q1 2011.
Blake Morrow
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