Paradigm shifts - dollar downgraded (pg 3)
In November 2007 we turned USD positive. Financial decoupling never looked plausible and FX market
valuations became overstretched. For instance we argued that when EUR-USD reached 1.60, it was due
for a swift correction lower. Directionally we have hit the mark but we were too early. Also at the time
GBP-USD hit 2.11, there were a number of forecasts saying 2.50 was possible. Recently, when GBPUSD
was in the low 1.40’s talk of parity was rife. Now however, we suddenly find ourselves on the other
side. Is it because we are born contrarians? The answer is a resounding no. We believe the USD rally is in
the process of burning itself out and the weakness in the USD will fall primarily on the EUR’s shoulders.
Quantitative easing and the dollar (pg 11)
With the Fed almost completely out of room to cut interest rates further, and the economic environment
still looking very grim, focus is turning to the likelihood that the Fed will pursue a ‘quantitative
easing’(QE) policy to try to support the economy. In fact, with the Fed’s announcement that it plans to
buy GSE debt and mortgage-backed securities, this policy has arguably already started. It could, however,
be taken further with a large outright purchase of treasuries or even corporate bonds by the Fed. We ask
what impact would QE have on the dollar?
Long term forecasts (pg 17)
Given the problems of forecasting out even one year, many are understandably reluctant to venture a view
for further out. However, we are aware that a number of our customers have a need for some indication of
the likely FX market direction over a longer term horizon for planning purposes. So again, with some
trepidation, we publish these longer term forecasts.
Carried Out (pg 20)
The major FX impact of the crisis only really started to be felt from July of this year. Since July the total
return on the G10 carry trade has been about -20%, with the week commencing 20th October alone seeing
an unprecedented -11% move. Do carry trades have any future? Implied FX volatility is still at
exceptionally high levels and the money markets, though easing, are still under some strain. For carry
trades to be successful, volatility will need to decline and stabilise, and money markets will need to
resume normal functioning. These conditions seem unlikely to be in place for some time.
Lost…and not yet found (pg 25)
With interest rates heading towards zero and printing presses being warmed up, the task is to bring to an
end the worst economic crisis since the 1930s. But debts are excessive and global contagion rife,
suggesting unconventional policies will struggle to make an impression

Dollar Bloc (pg 27)
Canada – Tarred by energy
After several attempts at breaking above the 1.3000 threshold in the October-December period, USDCAD
has stabilized in recent weeks and even pushed back below 1.2000 in early January. By some
measures, the CAD’s recovery is relatively impressive. However, we expect that lower official and
market interest rates will contribute to re-newed weakening in the CAD over time.
Australia – Battered but not out
Australia has so far managed to maintain positive growth and the financial system has so far come
through the global crisis in relatively good shape. The central bank has responded to the domestic
slowdown and the gloomy global outlook by rapid cuts in the cash rate. With few further cuts expected
due to the interest rate premium the RBA must keep, the AUD is unlikely to fall further.
New Zealand – Recession: Persistent but shallow
The New Zealand economy entered a recession earlier than most with the shallow but protracted
slowdown was engendered by high interest rates designed to counter rising inflation. After seeing a fiveyear
low in November the NZD has now subsequently recovered slightly.