25 Nov 2014
Handover from liquidity to fundamentally driven markets will not be smooth - Rabobank
FXStreet (Barcelona) - Christian Lawrence of Rabobank, notes that the handover from liquidity to fundamentally driven markets has not been smooth nor is it close to completion.
Key Quotes
“Well as we have stressed, the handover from liquidity to fundamentally driven markets will not be smooth. The Fed has now concluded its QE programme but we remain of the view that rate hikes are some way off and we do not expect to see a hike before Q4 2015 – this is more dovish than analyst expectations, than Fed forecasts and more dovish than current market pricing. This in itself should mean that EM currencies are better supported in the first half of the year but become more vulnerably heading into year-end.”
“That said, we are of the view that the USD bull run will continue and this in itself will make it hard for EM currencies to outperform unless of course we see global liquidity drive volatility lower which would bode well for EM support on the back of carry trade demand.”
“Indeed, any periods of low volatility will bode well for high yielding currencies as market participants look to borrow cheaply and invest in higher yielding currencies to capture the interest differential.”
“It will not just be about the US however, with the Eurozone facing the threat of deflation we expect the ECB to announce its own QE programme in March of 2015 which will bode well for the global liquidity tide. This should be of particular benefit to CEE currencies.”
“Furthermore, we cannot forget about Asia. China recently cut its lending and deposit rates for the first time since 2012 and is allowing further CNY weakness and the BoJ recently expanded its QE programme and has also delayed its next sales tax hike for 18 months.”
“Analysis carried out by our Asian strategist, Mike Every, shows that Japanese QE has less of an impact internationally but we are of the view that even more QE could be forthcoming from Japan next year and this will go some way to keeping volatility compressed.”
Key Quotes
“Well as we have stressed, the handover from liquidity to fundamentally driven markets will not be smooth. The Fed has now concluded its QE programme but we remain of the view that rate hikes are some way off and we do not expect to see a hike before Q4 2015 – this is more dovish than analyst expectations, than Fed forecasts and more dovish than current market pricing. This in itself should mean that EM currencies are better supported in the first half of the year but become more vulnerably heading into year-end.”
“That said, we are of the view that the USD bull run will continue and this in itself will make it hard for EM currencies to outperform unless of course we see global liquidity drive volatility lower which would bode well for EM support on the back of carry trade demand.”
“Indeed, any periods of low volatility will bode well for high yielding currencies as market participants look to borrow cheaply and invest in higher yielding currencies to capture the interest differential.”
“It will not just be about the US however, with the Eurozone facing the threat of deflation we expect the ECB to announce its own QE programme in March of 2015 which will bode well for the global liquidity tide. This should be of particular benefit to CEE currencies.”
“Furthermore, we cannot forget about Asia. China recently cut its lending and deposit rates for the first time since 2012 and is allowing further CNY weakness and the BoJ recently expanded its QE programme and has also delayed its next sales tax hike for 18 months.”
“Analysis carried out by our Asian strategist, Mike Every, shows that Japanese QE has less of an impact internationally but we are of the view that even more QE could be forthcoming from Japan next year and this will go some way to keeping volatility compressed.”