Weak USD Clearer in 2H09

I have been quite pessimistic on USD for a long while and have been consistently arguing the case of weaker USD, as signs of deflation ending are clearer in the last three months. The flight of quality is becoming a less than issue.

In this article, I argue that the weak USD trend will become more apparent in 2H09 onwards. For most part of 1H09, I am looking at scenario where most currencies to consolidate in broad range. There will be a clear struggle for those currencies that are impacted structurally by the global crisis, and those currencies that are struggling on cyclical recovery, predicated that the stock markets are not testing a new low.

Holding up the candle will be expectations for US President-elect Obama to deliver a large scale of economic stimulus by early February after his inauguration on January 20. Already, we are seeing signs of further easing in yields and narrowing of interest spreads.

Specific about Asian currencies, those with high exposure to external sector and the need to rebuild foreign reserves would see quite a limit to the currency’s appreciation. Chinese government has been actively supporting exports by raising export tax rebates to help its industries stay competitive will see continued appreciation of RMB over the medium term. A 5% nominal appreciation or possibly more cannot be ruled out as we move into 2H09. The worst of Korean won, which has been consolidating in a large 1200-1500 range appears to be over. Having said that, we should be more concerned with the appreciation of Japanese Yen, especially Japan’s export sector is in recession. The Bank of Japan has joined the Ministry of Finance in discouraging further Yen appreciation and this helped to push USD/Yen above 90 again.

The act of rebalancing is about the get real nasty for export-model and oil exporting countries.