Foreign Exchange Markets 2010 Shaw Capital Management

Foreign Exchange Markets 2010: Shaw Capital Management Korea: This is
clearly leading to a withdrawal of international funds from the
European capital markets, and is dramatically illustrated in the
widening of yield spreads in the bond markets of member countries. There
is still a general assumption that the stronger members will provide
support for the weaker members if this proves to be necessary to prevent
a default on sovereign debts.


But the uncertainties
have been increased by conflicting statements from the European Central
Bank and some politicians about the willingness to undertake such
operations, and so investors and speculators have taken evasive action,
and the euro has fallen by around 10% from its peak in early-December.


This
fall has provided support for the other major world currencies,
including the dollar; but the background situations in Japan, and in the
UK, also provide reasons for concern, and so the currency markets
remain in a very uncertain state.


Foreign Exchange
Markets 2010: Shaw Capital Management - It is likely that the
uncertainty will continue. The US economy is clearly recovering from
recession; economic conditions in Japan are very weak, and Japan appears
to face the possibility of a credit downgrade if it does
not take steps to reduce its massive fiscal deficit; and there have
already been warnings from Standard and Poor’s that the UK also faces
the possibility of a credit downgrade if there are no convincing
measures to reduce its huge fiscal deficit after the forthcoming general
election. Prospects are therefore very difficult to assess; but our
tentative conclusion is that the dollar will continue to “improve”,
helped to a considerable extent by weaknesses elsewhere; and that this
will allow market pressures to gradually subside as the global economic
recovery continues through the year.


But the possibility of a major currency crisis cannot be ignored, especially if the debt problems in Greece and other periphery countries threaten to lead to
the break-up of the single currency system in Europe. It is fortunate
therefore that the available evidence on the performance of the US
economy is more encouraging. Non-farm payrolls fell again in December by
85,000, but are expected to have increased in January; retail sales
held up well in the pre-Christmas period; manufacturing output is
improving, according to the latest report from the Institute of Supply
Management; and even the housing market appears to be recovering.


This
general situation is reflected in the first preliminary estimate from
the Commerce Department of growth at a seasonally adjusted annualised
rate of 5.7% in the final quarter of last year, a higher figure than the
market had been expecting. Most economists therefore appear to be
forecasting overall growth this year in the 2.5% to 3% range, after the
estimated fall of 2.4% last year.


Foreign Exchange
Markets 2010: Shaw Capital Management - The Fed is clearly in no hurry
to tighten its present monetary stance. The statement after the latest
meeting of its Open Market Committee was more upbeat about the prospects
for the economy; but shortterm interest rates were left
unchanged and close to zero, and there was a clear indication that they
would remain at very low levels “for an extended period”.