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					16 July 09




                                                                            cu=C=fkqbobpq=o^qb=jlkqeiv
We continue to expect a                           ‘The good news is that the forces pulling the economy down are decreasing in intensity,’
weak recovery – a view with                       commented the IMF’s chief economist in the latest revision to its World Economic Outlook.
which the IMF concurs.                            ‘The bad news is that the forces pulling the economy up are still weak. The balance is slowly
                                                  shifting, and this leads us to predict that, while the world economy is still in recession, the
                                                  recovery is coming. But it is likely to be a weak recovery.’ That is pretty much in line with
                                                  our own macro-economic forecast. The IMF expects world output to grow by 2.5% in 2010,
                                                  led by emerging economies, while developed economies grow by only 0.6%.
A fall-off in risk appetite has                   The recent correction of commodity prices and move away from riskier assets was reflected
benefited defensive                               in currency markets. The winners were defensive currencies, such as the Swiss franc, the US
currencies.                                       dollar and, for this cycle, the yen, against which the Australian dollar gave back 7% in a single
                                                  week.

Quantitative easing (QE)                          By suppressing nominal and real, long-term and short-term interest rates, countries that are
remains a major factor.                           using QE are also depressing their currencies. A weaker currency is, of course, also
                                                  supportive of the economy, so authorities are unlikely to take measures to support the
                                                  currency until QE has stopped. The most overt version is the policy direct intervention to
                                                  sell down the franc by the Swiss National Bank, but the European Central Bank's expansion
                                                  of its balance sheet through a huge increase in its lending against securities to banks is also a
                                                  form of QE. By contrast, the US and the UK have recently signalled that they will move away
                                                  from QE, amid rising expectations for growth and inflation.

Headwinds will persist for                        Financing problems are also likely to weigh on countries seeking to attract foreign investors
developed Western                                 to fund record government debt issuance. We would highlight the UK, where government
economies...                                      debt is forecast to rise from 43% of GDP in 2007 to 90% by 2014. This increasingly
                                                  contrasts with the position of Asian and emerging economies whose currencies are
                                                  supported by trade surpluses and lower levels of government debt.

...so central banks should be                     While economic recovery is now ongoing, our caution over the headwinds to growth means
in no rush to raise rates.                        that we do not forecast any interest rate increases for the leading developed economies
                                                  until 2010 - and not until the year after for Japan and the eurozone.
Currencies                          Spot                 RBS Forecast (as of 10 July)                                                   Past Performance (in %)
                                 15/07/2009           Sep-09 Dec-09 Mar-10 Jun-10                                    -1W         -1M         -3M     -6M       -12M              YTD
Euro vs Dollar                       1.41                  1.35      1.30            1.31         1.32                1.3         1.8         6.9       7.8       -11.8            1.3
Yen vs Dollar                         94                    95        91              89           90                 0.3         4.2         5.6      -4.6        10.1           -3.6
Sterling vs Dollar                   1.64                  1.59      1.50            1.50         1.52                2.0         0.5         9.6      12.7       -18.1           14.2
Swiss Franc vs Dollar                1.08                  1.13      1.16            1.15         1.15                1.2         1.3         6.1       4.3        -7.2           -1.2
Swiss Franc vs Euro                  1.52                  1.53      1.51            1.51         1.52               -0.1        -0.5        -0.4      -3.1         5.5           -2.5
Australian Dollar vs Dollar          0.80                  0.76      0.73            0.72         0.72                2.1         0.8        11.2      22.1       -18.4           15.0
Euro vs Sterling                     0.86                  0.85      0.87            0.88         0.87               -0.7         1.3        -2.5      -4.5         7.1          -12.7
Renminbi vs Dollar                   6.83                  6.70      6.60            6.50         6.40                0.0         0.1         0.0       0.1        -0.1           -0.1

                     Growth (GDP)                       Inflation (CPI)                                       Interest Rates                                           Decision
                 2008 2009(C) 2010(C)               2008 2009(C) 2010(C) Current                         Sep'09 (F) Dec'09 (F)            Mar'10 (F)   Jun'10 (F)     Next Date
US                1.1         -2.8          1.9      3.8          -0.6           1.7         0 - 0.25     0 - 0.25          0 - 0.25         0.25          1.00        11-Aug-09
UK                0.7         -3.7          0.7      3.6           1.7           1.8           0.50         0.50              0.50           0.50          0.50        06-Aug-09
Eurozone          0.6         -4.2          0.3      3.3           0.4           1.2           1.00         1.00              1.00           1.00          1.00        06-Aug-09
Japan            -0.7         -6.6          1.3      1.4          -1.2          -0.6           0.10         0.10              0.10           0.10          0.10        11-Aug-09
                                                                    (C) Consensus Forecast                                                                                (F) RBS Forecast




                                                                                                              Source: All data from Datastream, except where stated otherwise
STERLING vs DOLLAR
                                                                                                     STERLING / DOLLAR SPOT RATE
Recommendation                  Time Horizon:              3 Months
     New                       Previous                   Conviction                     2.00
    Negative                   Negative                   Increasing

                                                                                         1.80
Performance (as of 15/07)           -1M     -3M      -6M -12M YTD
Sterling vs Dollar (Reuters)         0.5     9.6     12.7 -18.1 14.2
                                                                                         1.60
Recommendation: Sterling has rallied from its lows
as investors have taken a more positive view on the                                      1.40
outlook for the global economy. We believe that this
leaves sterling extended against the US dollar as the                                    1.20
process of recovery is likely to prove bumpy. In the
longer term, the two currencies share the issues of                                      1.00
quantitative easing, huge government deficits and                                           Jul 07              Jan 08                 Jul 08              Jan 09                 Jul 09

weakened financial systems, which suggests that                                           MAV:            30d         200d      RSI:             14d         50%         30% & 70%
volatility is likely to persist.
   Valuation: Sterling, at around $1.60, is under its long-term average (20-year average around $1.65).
   Activity: While the US economy is still in recession, the UK economy is set to fare worse in 2009, with a consensus
expectation of -3.7%, versus 'only' -2.8% for the US economy in the current year.
   Liquidity: There is only a very small net short speculative trade position in sterling. Both currencies effectively have a
zero yield, so there is little to chose on this basis. Even in terms of quantitative easing, which acts to weaken the currency,
both countries' central banks have been active in boosting the money supply, but now both are looking to reduce the
emphasis and plan the withdrawal of this support as the domestic economy recovers.
   Risk: The bias of risk has shifted decisively against the UK, with the government and its budget appearing unsustainable and
unconvincing to financial markets.
   Momentum: The recent rally has moved above the negative trendline against the US dollar. However, we would expect a
period of consolidation, and the 200-day moving average continues to fall.




 %                          GDP (YoY GROWTH)                                                                                 BUSINESS SENTIMENT
 6                                                                                              65

                                                                                                60
 4
                                                                                                55
 2
                                                                                                50
 0
                                                                                                45
-2
                                                                                                40

-4                                                                                              35

-6                                                                                              30
     89   91    9      95      97    99         01    0        05        07                          89   91     93      95      97         99        01    03      05       07        09
               UK                          US                       Source: Datastream                          UK                               US                       Source: Datastream


%                            3-MONTH YIELDS                                                     %                            10-YEAR BOND YIELDS
18
16                                                                                              12
14
                                                                                                10
12
10                                                                                               8
 8
 6                                                                                               6
 4
                                                                                                 4
 2
 0                                                                                               2
     89   91    93     95      97    99         01   03       05       07        09                  89   91     9       95      97         99     01       0       05      07         09
               UK                          US                       Source: Datastream                          UK                               US                      Source: Datastream
EURO vs DOLLAR
                                                                                                        EURO / DOLLAR SPOT RATE
Recommendation                 Time Horizon:                  3 Months                     1.70
     New                      Previous                       Conviction
    Negative                  Negative                       Increasing                    1.60

Performance (as of 15/07)           -1M    -3M       -6M -12M YTD                          1.50
Euro vs Dollar (Reuters)             1.8    6.9       7.8 -11.8 1.3
                                                                                           1.40
Recommendation: We forecast that the US economy
                                                                                           1.30
will emerge from recession in the latter part of the year,
ahead of the eurozone economy. While the US dollar                                         1.20
has been hampered by concerns over quantitative easing
                                                                                           1.10
and funding ballooning budget deficits, we expect that
confirmation of a US recovery will put the spotlight back                                  1.00
on the euro, most of whose member states face                                                 Jul 07                Jan 08                 Jul 08           Jan 09                Jul 09
variations of the same fiscal and monetary challenges.                                      MAV:            30d           200d      RSI:             14d      50%         30% & 70%


    Valuation: The euro appears expensive against its average value since its creation in 1999, though the range over the nearly
ten years of its existence has been huge, from $0.82 to $1.58.
    Activity: While the US is set to emerge from recession in the latter part of the year, consensus expectations for the
eurozone continue to be downgraded. With consensus growth forecasts at -4.2% for the eurozone, compared with 'only' -2.8%
for the US in 2009, we forecast further action, including quantitative easing, by the European Central Bank (ECB).
    Liquidity: There is a net long speculative position in the futures market which would be negative for the euro if it was
unwound. In the meantime, the euro retains a yield advantage. The US has made much more use of quantitative easing to boost
the money supply, which has weakened the dollar, but the Federal Reserve is now talking of moving away from further measures.
By constrast, the ECB has boosted the amount of liquidity that it is supplying to the financial system.
    Risk: We see considerable additional, extraordinary risks to both the dollar and the eurozone. On the US side, we would
cite the huge size of the budget deficit and the unprecedented quantitative easing. With the eurozone, it is uncertain how the
ECB and the single currency will function as pressures build up on individual member states.
    Momentum: The current euro rally has broken through the technical downtrend. While we would forecast a period of
consolidation in the short term, the trend is now positive.

%                            GPD (YoY Growth)                                                                                    BUSINESS SENTIMENT
6                                                                                                 65

 4                                                                                                60

                                                                                                  55
 2
                                                                                                  50
 0
                                                                                                  45
-2
                                                                                                  40
-4                                                                                                35

-6                                                                                                30
     89   91     9      95     97    99         01       0       05       07        09                 89   91       93      95      97         99    01    03       05      07        09
               Europe                      US                         Source: Datastream                           Europe                            US                   Source: Datastream


%                            3-MONTH YIELDS                                                       %                              10-YEAR BOND YIELDS
9                                                                                                 10
8                                                                                                  9
7
                                                                                                   8
6
                                                                                                   7
5
                                                                                                   6
4
                                                                                                   5
3
2                                                                                                  4

1                                                                                                  3
0                                                                                                  2
    89    91     9      95     97   99      01       0          05       07        09                  89   91        9      95      97         99     01    0       05      07        09
               Europe                      US                         Source: Datastream                         Europe (Germany)                      US                 Source: Datastream
SWISS FRANC vs DOLLAR
                                                                                                     SWISS FRANC / DOLLAR SPOT RATE
Recommendation                     Time Horizon:            3 Months                     1.30
     New                          Previous                 Conviction
                                                                                         1.25
    Negative                      Negative                 Increasing
                                                                                         1.20
Performance (as of 15/07)               -1M    -3M    -6M -12M YTD                       1.15
Swiss Franc vs Dollar (Reuters)          1.3    6.1    4.3 -7.2 -1.2                     1.10
                                                                                         1.05
Recommendation: While we see the global economy
                                                                                         1.00
improving, we expect the US to lead the way. The Swiss
                                                                                         0.95
economy is set to lag, given the eurozone's influence. As
concerns over the Swiss banking system have                                              0.90

undermined its status as a safe haven, we no longer think                                0.85

the Swiss franc will rally significantly against the dollar in                           0.80
times of crisis. After the Swiss National Bank's direct                                     Jul 07              Jan 08                 Jul 08           Jan 09                Jul 09

intervention in FX markets to weaken the Swiss franc,                                     MAV:            30d          200d      RSI:            14d      50%         30% & 70%
we expect it to give up its recent gains against the dollar.

    Valuation: The Swiss franc still stands towards the top end of its historical range versus the dollar.
    Activity: Swiss growth expectations have deteriorated against a broad trend of slowing global growth, especially as the
European region moves into recession. US and Swiss interest rates have converged at close to zero.
   Liquidity: Investor positions in the futures market are currently long the Swiss franc, which would be a potential negative
when it unwinds. The interest rate differential has effectively disappeared. The US has made much more use of quantitative
easing to boost the money supply, which has acted to weaken the dollar, but the Fed is now talking of moving away from
further measures. By constrast, the Swiss National Bank has continued to use or threaten direct selling of francs to hold down
the exchange rate.
    Risk: The Swiss franc is a traditional safe haven for investors at a time of market or economic uncertainty. However, this
position has been undermined by the losses of the Swiss financial industry, which have required government bail-outs.
    Momentum: The recent rally has broken the downtrend against the US dollar. The technical position is therefore
positive, though moves have been capped by SNB intervention in the market.



 %                              GDP (YoY GROWTH)                                                                              BUSINESS SENTIMENT
 6                                                                                              70
 5                                                                                              65
 4                                                                                              60
 3
                                                                                                55
 2
                                                                                                50
 1
                                                                                                45
 0
-1                                                                                              40

-2                                                                                              35
-3                                                                                              30
     89   91       9       95      97    99     01     0       05       07        09                 89   91       93       95    97        99     01    03      05      07        09
               Switzerland                     US                   Source: Datastream                          Switzerland                       US                  Source: Datastream


%                                3-MONTH YIELDS                                                 %                             10-YEAR BOND YIELDS
10                                                                                              10
 9                                                                                               9
 8                                                                                               8
 7
                                                                                                 7
 6
                                                                                                 6
 5
                                                                                                 5
 4
 3                                                                                               4
 2                                                                                               3
 1                                                                                               2
 0                                                                                               1
     89   91       9       95      97    99     01    0       05       07        09                  89   91       9        95    97        99    01     0       05      07        09
               Switzerland                     US                   Source: Datastream                          Switzerland                       US                  Source: Datastream
YEN vs DOLLAR
                                                                                                             DOLLAR / YEN SPOT RATE
Recommendation                       Time Horizon:              3 Months                      130
     New                            Previous                   Conviction
    Neutral                         Neutral                    Unchanged                      120

Performance (as of 15/07)                 -1M     -3M      -6M -12M YTD                       110
Yen vs Dollar (Reuters)                    4.2     5.6     -4.6 10.1 -3.6
                                                                                              100
Recommendation: We are neutral on the outlook                                                  90
for the yen against the US dollar. While the US
economy is set to recover, quantitative easing and the                                         80
government's huge funding requirement remain a                                                 70
burden. Japan is set to stay in recession for a while
longer, but it receives support from its huge stock of                                         60
savings, which tend to flow back in times of crisis,                                            Jul'07                   Jan'08                   Jul'08                    Jan'09                     Jul'09

supporting the yen. We therefore expect the exchange                                           MAV:               30d             200d      RSI:                  14d            50%         30% & 70%
rate to trade in a range of Y90-100 against the dollar.
    Valuation: The last time the yen was below 100 to the US dollar was in 1995. Then, it was overvalued; now, adjusted for
relative inflation, it still appears undervalued.
    Activity: The Japanese economy's reliance on exports means that it is now facing a much sharper decline in activity than
the US. Consensus expectations are for a 6.6% decline, compared with a fall of 'only' 2.9% for the US economy in 2009. We
forecast that the recovery in Japan will, in the absence of positive domestic drivers, lag that of the US. While the collapse of
global trade has swept away the current-account surplus, Japan has a huge stock of savings, and the yen has been supported by
repatriating investment flows during the liquidity crisis.
   Liquidity: There is no significant net position in the yen futures market at present, as the large short position has been
unwound. Given low US interest rates, the yen's traditional yield discount is no longer a material influence. In addition to zero
interest rates, both Japan and the US have used quantitative easing, which has acted to weaken their currencies.
    Risk: The performance of the yen during the recent market turmoil clearly identifies it as a beneficiary of increased risk-
aversion and de-leveraging. While the pace of economic decline has moderated, the recovery looks set to be a fragile and
bumpy process.
    Momentum: The recent appreciation of the yen confirms that it remains in a positive technical trend, having consistently

%                                 GDP (YoY GROWTH)                                                                                       BUSINESS SENTIMENT
 6                                                                                                    60                                                                                                        65
    4                                                                                                 40                                                                                                        60
    2
                                                                                                      20                                                                                                        55
    0
                                                                                                         0                                                                                                      50
    -2
                                                                                                    -20                                                                                                         45
    -4
                                                                                                    -40                                                                                                         40
    -6
    -8                                                                                              -60                                                                                                         35

-10                                                                                                 -80                                                                                                         30
         89    91       9    95      97    99         01       0    05       07        09                    89   91         93      95      97        99           01      03         05    07          09
                    Japan                        US                      Source: Datastream                            Japan (LHS)                              US (RHS)                     Source: Datastream


%                                  3-MONTH YIELDS                                                   %                                    10-YEAR BOND YIELDS
9                                                                                                   10
8                                                                                                     9
7                                                                                                     8
6                                                                                                     7
                                                                                                      6
5
                                                                                                      5
4
                                                                                                      4
3
                                                                                                      3
2                                                                                                     2
1                                                                                                     1
0                                                                                                     0
    89        91      9     95      97    99       01      0       05       07        09                  89      91         9       95      97            99          01        0      05        07          09
                    Japan                        US                      Source: Datastream                               Japan                                   US                         Source: Datastream
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WC2R 0QS.

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as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from
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The analysis contained in this document has been procured, and may have been acted upon, by Coutts & Co and connected companies for their own purposes, and the results are being
made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Coutts & Co nor any connected
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