Magazine article Global Finance

Familiar Forces May Impact Funding Currencies

Magazine article Global Finance

Familiar Forces May Impact Funding Currencies

Article excerpt

FX Update

In the second half of 2007, easy US monetary policy underpinned a sharp rally in commodity prices, kept equity markets well supported and precipitated a marked decline in long term bond yields. Similar patterns have emerged since late July of this year. Not only had gold gained 7.5% against the USD by early September, but a wide range of other commodity markets had also continued to trend sharply higher. Meanwhile, most major equity markets saw some (circuitous) recovery while the yield on many benchmark bonds had posted only modest rebounds from historic lows.

It seems the focus of the markets may be starting to move away from trying to decide which of the major nations has the worst structural problems, to instead trying to work out which central banks look (relatively) the most hawkish. With Jean-Claude Trichet noting in early September that "risks to the outlook for price developments are slightly tilted to the upside," it could be argued the ECB's position stands in slight contrast to the clearly dovish stance of the BOJ and the apparendy split view of the FOMC at the August 10th meeting over the need for additional stimulus.

If this wearily familiar picture is an accurate one, then it does indicate several simple outcomes for the currency markets. Over and above a possible rise in the EUR, it suggests continued demand for a range of commodity as well as emerging-market currencies. It also suggests weakness in currencies that could be used as funding vehicles. …

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