We have argued that differentiation in the pace
of recoveries and the speed of monetary policy
exit is likely to be a key trading theme in 2010.
Within that, the underperformance of the G3
relative to much of the rest of the world is a
central part of our forecasts. As part of that
view, we have emphasised the large differences
in financial conditions across countries since
the crisis began to unfold, and the sharp
currency shifts that helped to drive them.
Although we have seen substantial reversion
towards pre-crisis levels in many assets, on
average ‘peripheral’ Europe and Asia have
sustained big depreciations versus their
respective ‘major’ currencies: the EUR and
JPY. But, unlike those earlier crises, the
economic differences between core and
periphery are much harder to see. Put simply,
it is hard to argue that the Euro-zone is in
substantially better shape than its periphery—
and even harder to argue that Japan is in a
position of strength relative to non-Japan Asia.
So these depreciations look less like a cushion
against disproportionate economic pressure
and more like a genuine misalignment.