Currency
22 September 2011
Currency Outlook USA
Considerable uncertainty
about US dollar rate
In recent weeks the euro area debt crisis has boosted USD against EUR and
DKK. Coupled with the response by the central banks in USA and the euro
area, the future developments in the debt crisis will have a decisive impact
on the dollar rate in the months ahead. In principle we forecast that the dollar rate will remain relatively stable, albeit uncertainty is unusually high.
Strong forces pull the dollar
rate in opposite directions
At present strong forces pull the dollar rate in opposite directions. On the one
hand the euro area crisis worsens the overall financial turmoil, and the likelihood
of a rate cut by the European Central Bank boosts USD against EUR and DKK.
On the other hand weak growth prospects in USA and an extremely relaxed
monetary policy by the Federal Reserve System (Fed) pull in the direction of a
weaker dollar rate. To this must be added that USA’s debt problems are also serious involving large twin deficits.
The euro area debt crisis in
particular may have a
substantial impact on the
dollar rate
What will carry the most weight relative to the dollar rate in the coming months is
highly uncertain. We anticipate that the weaknesses of the American and European economies will largely cancel each other out and that the dollar rate will remain relatively stable. However the euro area debt crisis in particular has the potential to significantly impact the dollar. If a strong and credible political response
as to how to solve the debt crisis is produced, USD may weaken substantially
against EUR and DKK. If in contrast the debt crisis escalates further, USD will
appreciate sharply.
Prospects of weak economic
growth and perhaps recession
The debt problems in Europe and USA have created serious concern among
consumers and businesses alike. Therefore we expect that private consumption
and investments will show weak developments in 2H and as a result the US
economy risk sinking into recession again. In 2012 we expect stabilisation but not
a strong recovery.
New bond purchases by the
Fed are likely
Due to the weak growth outlook the Fed hold out prospects of a fed funds rate
close to 0 until the summer of 2013. At the FOMC meeting on 21 September the
Fed decided to launch ”Operation Twist” involving the sale of short and purchase
of long bonds worth more than USD 400bn. In contrast the Fed refrained from introducing a new round of quantitative easing measures involving the purchase of
bonds with new money, known as QE3. We project that the Fed will go all the
way later in the year and implement QE3. Seen in isolation this may weaken USD,
but other factors – in particular the euro area debt crisis – may be of greater importance.
2010
GDP
Inflation1
3.0%
1.0%
Sydbank
1.0%
1.5%
2011f
Consensus
1.6%
1.6%
Sydbank
1.0%
1.5%
2012f
Consensus
2.1%
1.9%
Recent
1.0% (Q2) 2
2.0% (Aug)
1 Core CPI, ie consumer prices excl energy and food
2
QoQ – annualised
Time horizon
Spot
3-m
6-m
12-m
Prepared by:
Jacob Graven
+45 74 37 44 51
sydbank.dk
Economics Research
Currency outlook
USD/DKK
Forward rate
Interest rate outlook
(key rate)
Market
outlook
553.7 (522.9)
551-573 (532)
551-573 (532)
573-596 (552)
553.5
553.0
552.1
0-0.25% (0-0.25%)
0-0.25% (0-0.25%)
0-0.25% (0-0.25%)
0-0.25% (0-0.25%)
0-0.25%
0-0.25%
0-0.25%
Figures in parenthesis represent the estimates of the most recent edition of Currency Outlook.
USD/DKK
In recent weeks the euro area debt
crisis has boosted USD against
EUR and DKK. We anticipate that
the weaknesses of the US and
European economies will largely
cancel each other out relative to
the exchange rate in the coming
months. However uncertainty is
exceptionally high.
580
580
570
570
560
560
550
550
540
540
530
530
520
520
510
510
500
S
O
N
D
J
F
M
A
M
J
J
A
S
500
Source: Thoms on Reuters Datas tream
Sovereign debt and debt ceiling,
USDtn
Following a dramatic political fight
the politically imposed US debt
ceiling was lifted at the beginning
of August. As a result USA avoided
technical bankruptcy. However the
deficit reduction agreement is so
thin and the political resolve so
weak that the credit rating agency,
S&P, downgraded USA
shortly after.
MNS.
MNS.
15
15
14
14
13
13
12
12
11
11
10
10
Debt ceiling
9
Sovereign debt
9
8
8
7
7
6
6
5
5
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Thoms on Reuters Datas tream
GDP growth (QoQ, annualised)
and industrial confidence index
Economic growth was disappointingly weak in 1H. Over the summer
consumers and businesses were
concerned about the debt
problems in USA and Europe. As a
result there is an imminent risk
of USA slipping into
another recession.
65
8
Industrial confidence (right-hand)
6
4
60
GDP growth
55
2
50
0
-2
45
-4
40
-6
35
-8
-10
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
30
Source: Thoms on Reuters Datas tream
Inflation, %, YoY
Inflation increased in 1H mainly as
a consequence of rising commodities prices. This will probably
change in the coming months
when falling commodities prices
and weak economic growth will put
a downward pressure on inflation.
6
6
5
5
De facto
4
4
3
3
2
2
1
1
Excl energy and food
0
0
-1
-1
-2
-2
-3
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-3
Source: Thoms on Reuters Datas tream
This investment research is aimed at clients of Sydbank and may not be published or further distributed
without the express consent of the Bank. The analysis has been prepared on the basis of information from
sources which Sydbank finds reliable. Sydbank assumes no liability for defects, including any source errors,
misprints or errors of calculation, or for any subsequent changes in assumption.
The recommendation in the analysis reflects the general opinion of the Bank and can not alone form the basis of investment decisions. The recommendations can be used in connection with advisory services in
Sydbank where also the individual circumstances of the client must be included. Sydbank accepts no responsibility for losses which may have any direct or indirect connection with transactions made solely on the
basis of recommendations in the analysis.
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