Author Archives: Olivier Desbarres

History points to Asian FX rally fizzling out

Non-Japan Asian (NJA) currencies have appreciated versus the US dollar and currencies of their main trading partners in October. But the historical pattern of monthly appreciation/depreciation suggests that this Asian currency rally may start losing steam in coming weeks, with currencies eventually weakening modestly versus the US dollar.

This historical pattern is partly due to the seasonality of current account flows, the ebb and flows of capital attracted/repelled by valuations and central banks’ management of their currencies. I see few reasons why it will be materially different this time round.

Inflows into Asia are unlikely to accelerate given lingering foreign investors’ concerns about regional and global economic growth, the start of the US Fed hiking cycle and country-specific vulnerabilities including sensitivity to commodity prices and elevated foreign debt.

Furthermore, while Asian central banks may not purposefully weaken their currencies, they may have the room and incentive to lean against further appreciation: overall, Asia inflation is low and falling, exports are weak and FX reserves have fallen in the past six months.
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Global growth – Down but not out

While equity and commodity markets have recovered, it is an almost consensus view that already tepid global economic growth in H2 2015 likely weakened furthered in Q3 and shows few signs of recovering near-term,

Governments, lacking in both leadership and fiscal-reflation headroom, have passed the buck to central banks struggling to hit multiple growth, inflation and financial stability targets.

However, talk of global recession let alone economic collapse is somewhat overdone and I reiterate my long-held view that the global growth story is a cause for concern, not panic (17 December 2014).

Global GDP growth has been mediocre but pretty stable in the past three years at around 2.4 and 3.2%, according to respectively World Bank and IMF estimates, so perhaps it is the expectation of a return to pre-2008 growth rates which is unfounded.

International institutions have revised down their global GDP growth forecasts for 2015 but history suggests that the IMF’s 2015 forecast of 3.1% growth may prove a tad too pessimistic.

The focus on China’s ill-defined “hard-landing” and “true” growth rate has obscured the fact that growth in US, still the world’s largest economy, is back to its long-term average. 

Finally, while policy-makers are running out of tools to spur their economies, a number of emerging market central banks, including in China and India, still have room to cut policy rates further.

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More EM central banks to join rate-cutting party

The Reserve Bank of India (RBI) surprised the market with a larger-than-expected 50bp cut to its policy rate to 6.75% at its scheduled meeting on Monday. This should perhaps not have come as such a surprise given the collapse in WPI and CPI-inflation, resilient rupee nominal effective exchange rate and regional and global growth slowdown, not to mention the Fed’s recent decision to delay its hiking cycle once again. Read more

Deflation, what deflation?

Four themes have hogged the headlines this year – Greece, China, the Fed and linking these three topics…the risk of deflation and associated damage to the global economy.

At the risk of over-simplifying a complex picture, what is striking is that global headline and core inflation have actually been pretty well behaved (see Figure 1). Further analysis shows that headline and core inflation have evolved in reasonably narrow ranges since early 2013 in the world’s largest developed economies as well as China and Mexico. The fact these inflation data series are a little boring is in itself noteworthy given that central banks typically favour low and stable inflation. Read more

Should China consider renminbi revaluation?

The causes behind the current meltdown in global equities, commodity prices and EM currencies are complex, inter-connected and at times self-reinforcing. But at the heart of the problem lies the inability of policy-makers from Washington to Beijing to engineer a more robust path for economic growth in which the private sector can believe in. This problem, which is largely structural in my view, has been compounded by cyclical challenges including stretched positioning in riskier assets and historically weak equities in August, as well as country-specific concerns in Malaysia, Brazil and Russia to name but three. Read more

Euro weakness, uneven eurozone exports

The growth of eurozone exports in April-May was modest, rather than spectacular, and uneven across individual euro-member states. While a cheaper euro has likely helped boost peripheral eurozone economies’ exports and this may become more obvious in forthcoming data, other factors – including weak emerging market demand – are clearly also at play. Read more

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