Foreign Exchange Forecasts

I have been approached by traders, investors, fund managers and friends alike wanting to know my views (after all, I am still an active night trader, and my positions have been quite impressive over the last couple of years).

• US Dollar - NEUTRAL

It is benefiting from the funding crisis and the sudden deleveraging of European banks and this will persist for next couple of months. However, the recessionary conditions in the US, which will force the Fed to lower rates and stabilizing in the wholesale funding markets will stall the dollar’s trend.

• EURO – BEARISH

The rapid deterioration in Euro zone led markets to price risk of ECB easing, and the longer the ECB denying this, the Euro would have to take the depreciation heat longer. Expect it to hit 1.55 soon. Cross trade opportunity in Yen, AUD and Swiss.

• YEN – BULLISH

Trade on interest rates convergence and combined with higher volatility across markets, I think it will make it more difficult for Japan to recycle its current account surpluses. Watch for sell-down in commodity funds by Japanese household and the possible intervention of BoJ to keep Yen competitive from falling below 87.

• UK Sterling – Bearish

Rapid deterioration in UK data has reinforced my expectations that BoE will cut rate again, undermining the pound. The household’s debt position is much weaker than its peers and house price correction will continue for quite a while. May hit 1.856 next three months.

• AUD – Bullish

Strong case for AUD rebounds if signs are confirmed that Australia may escape recessionary threat in the next 6 months. RBA is reengineering its success seen in the 2001 and 1997/98 crisis. Sell down by Japanese investors is coming to the tail end.

• NZ Dollar – Bearish

Remain bearish (nothing personal) as market is pricing in a great deal of easing and carry trades having sold off aggressively. Tourist flows, new government, rate cuts and soft commodity exposures like diary products will keep one to be cautious on entering new long at current level.

• Renminbi – Bullish

Interest rate policy has turned dovish, and supported by traditional Keynesian stimulus, the currency will continue to appreciate, but it will be traded in a narrow range. Easing of oil prices will be another support for domestic demand-led growth.