Sunday, March 28, 2010

Global Portfolio Manager's Spotlight US dollar forecasts, renminbi adjustment [UBS Research] $CNY $UUP

Revised US dollar forecasts

  • Not pretty The dollar, euro and the yen are fundamentally challenged currencies. The dollar suffers from large structural budget and current account deficits. The euro remains moderately over-valued and represents an incomplete monetary union confronted by sovereign risk. The yen is the currency of an economy characterized by anaemic growth potential and deflation, confronted over the medium term by troubling trends in public sector in debtedness and demographics.
  • The dollar—for now Fortunately, exchange rates are about relative value. And, for now, the dollar has the upper hand. Stronger growth this year in the US (3.0%) versus the Eurozone (1.5%) or Japan (2.0%), together with recurring sovereign risk jitters in Europe, point to further dollar appreciation in 2010. We revise our year-end 2010 forecasts to EUR/USD 1.30 and leave our USD/JPY forecast at 95.0. Many of these same factors—especially growth differentials and the diminished status of the euro owing to sovereign uncertainty—are likely to remain intact into 2011. Accordingly, we forecast EUR/USD at 1.25 by the end of 2011. We retain the view that the yen will remain more stable, with a year-end 2011 forecast of USD/JPY 90.0.
  • The risks to the view are considerable. A sharp yen sell-off remains a possibility, particularly if sovereign risk premiums rise owing to Japan's significant fiscal and demographic challenges. In the US, the twin fiscal and current account deficits remain on unsustainable trajectories. Dollar appreciation against the 'majors' without either an offsetting depreciation against emerging currencies or a marked pick up in foreign demand for US exports, will ultimately widen the US current account deficit and thereby place the dollar at even greater risk over the medium term.
  • Renminbi adjustment overdue The Chinese renminbi is unlikely to appreciate significantly this year or next. We foresee the resumption of gradual renminbi appreciation in Q2 2010, with the USD/RMB exchange rate moving to 6.40 at the end of 2010 and 6.00 by end 2011. That is problematic, as much for political reasons as economic ones. Global economic and trade tensions are likely to remain elevated around the contentious issues of China's exchange rate and trade surpluses. also

    Source UBS Research content, UBS commentary as at 25 March 2010

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