Summary: EM currencies – waving goodbye to
Uncle Sam? (pg 3)
We include a summary of last month’s analysis of the growing importance of EM countries on growth
and commodity prices, and how this will push them to loosen their close links to the dollar. This month,
we develop this theme by analysing the forces that lead to changes in reserve currency status
Is the dollar damaged goods? (pg 4)
The USD became the world’s reserve currency over a period of time but part of its ascendancy was also a
natural function of GBP’s demise. It is important to know the factors that helped lead to GBP losing its
key reserve status, as a guide to what seems to be happening to the USD. It would seem that the USD is
damaged goods, and 2010 will feel like a moment when this process is accelerated as EM countries
ponder their monetary policy options.
GBP – The Old Lady doth protest too much (pg 9)
BoE Governor King wanted a greater extension to the QE programme in August and although he did not
get his way, GBP weakened. Furthermore, he has been at pains to talk about a reduction in the deposit
rate. On both these issues he may have not got what he wanted but indirectly he has made a difference via
GBP. We maintain that only once the QE process ends and the economy shows true signs of life will GBP
be able to strengthen on a sustained basis. Rather than a plain V-shaped bounce back, GBP will look more
like a W-shaped currency.
Yen strength unlikely to last (pg 13)
The most important reason for believing that yen strength will not last concerns Japan’s deflation threat.
Given the unprecedented size of the output gap, Japan faces arguably an even bigger deflationary threat
now than it did in 2001/2002. Additional yen strength would only add to this threat and risk an
unbearable burden on public sector debt. The new government may soon start to voice more clearly the
view that a stronger yen would not be in Japan’s interest, and we may then see it unwind some or all of its
recent strength.
Swiss enter into full-blown intervention (pg 19)
We feel that we should see very little movement in EUR-CHF at least for the next three months - trading
much like the Danish krone. In our view, if 1.50 is broken, EURCHF will gap a lot lower but this would
be an uncharacteristic change in policy. Importantly, despite holding the line, the Swiss authorities have
been unable to change the overall trend of CHF strength.