Yen and dollar face a tough 2013

Updated 04 January 2013
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Yen and dollar face a tough 2013

LONDON: The yen and dollar face a tough 2013 as the Japanese and US central banks print money furiously to stimulate their economies, making the euro and sterling unlikely relative winners despite Europe’s gloomy prospects.
With a global economic recovery looking shaky, analysts say the major central banks will be happy to see their currencies weaken this year if it helps their exporters to become more internationally competitive.
This could trigger a round of competitive devaluations among the world’s most heavily-traded currencies, with Japan a likely winner in this race for weakness as its new government tries to end decades of regular recessions and deflation.
Currency forecasting is notoriously difficult and movements often seem at first to lack logic. For instance, the euro rose 1.8 percent against the dollar in 2012 despite the threat of a euro zone break-up, although the gains followed a European Central Bank promise to safeguard the currency union.
Undaunted, analysts expect the yen to be the worst performer, while the dollar may lag the euro and the pound even though the US is likely to outperform the euro zone and British economies in 2013.
This is because the US Federal Reserve plans to flood markets with a trillion dollars in stimulus this year by buying mortgage and government bonds, pushing down the value of the US currency.
Similarly, the Bank of Japan is preparing to pump trillions of yen into its stagnant economy.
Their actions should outstrip any similar move by the Bank of England, which has paused its printing presses, or the ECB. In the foreign exchange market, where a currency is always valued relative to another, a fall in the dollar or yen will push the euro and sterling higher.
“Major central banks printing more money and debasing the most liquid currencies is a major theme that will play out in the currency market this year,” said Tom Levinson, FX strategist at ING, referring to the Fed and BOJ.
Some investors will not necessarily trade one major currency for another and instead opt for the likes of the Australian dollar. “What this liquidity injection will spark is a push toward less liquid and more risky currencies,” Levinson added.
Flooding markets with dollars and yen will help to gloss over any weakness in the euro and the pound caused by the struggling economies of Europe.
“Central bank action, especially that of the Fed and the BOJ will help paint over cracks in the macroeconomic picture, both in the euro zone and UK,” said Jane Foley, senior currency strategist at Rabobank.
“Currencies will not move in a straight line. But we expect the euro to rise against the dollar to $ 1.35 in the medium term. The dollar will generally have a poor year, as will the yen.”
The euro is trading now around $ 1.3050, having gained rapidly after the ECB conditionally promised in the late summer to buy bonds of struggling euro zone countries, should their governments seek international aid.
Since then, no government has requested a bailout and Spain says it does not need help at the moment. However, should the ECB start buying bonds, its program would differ significantly from those of the Fed or BOJ. Its objective would be to help governments continue borrowing commercially at affordable interest rates, rather than stimulating the euro zone economy.
With Germany wary of anything that might be inflationary, ECB policymakers have promised not to crank up the euro printing presses. Any money spent on bonds would be “sterilized,” meaning the ECB would withdraw equivalent sums from the banking system.
Early signs of the trends forecast for this year are already apparent. The euro rose 15 percent against the yen in 2012, hitting a 1-1/2 year high this week.
The pound stands at multi-month highs against the dollar and yen, mainly because of the dollar and yen weakness and not because of a British economic turnaround, traders said.
The Fed has already made heavy asset purchases which have expanded its balance sheet. Some Fed policymakers have expressed concern about the long-term risks of this, even though they look set to continue the open-ended stimulus program for the moment.
John Normand, head of global FX strategy at JPMorgan, said the Fed and BOJ actions would boost the balance sheets of major central banks by about 10 percent this year, on a par with the pace seen in 2012 when both the yen and the dollar lagged the euro and sterling.
The large cash injections have prevented a sharp contraction in economic activity and restricted swings in foreign exchange markets, making it harder for investors to make money in the most traded currencies.
That has driven many to take bigger positions in the less liquid and riskier currencies and Normand said the flood of liquidity in 2013 will ensure investors keep using “carry trades” in the search for higher returns.
In carry trades, investors such as hedge funds borrow money in the more liquid and low interest-bearing dollar and yen to buy higher-yielding currencies like the Australian dollar .
Reflecting the expected slide in the yen, it will emerge as the favorite funding currency in 2013, analysts said.
“We would expect the yen’s use as a funding currency to broaden in the coming year,” Morgan Stanley said in a recent report, forecasting the dollar to rise to 90 yen in the coming months from around 88 yen yesterday.
While the yen and the dollar are likely to struggle, any glimmer of recovery in the euro zone and Britain — where investors have priced in expectations of a prolonged slowdown — could give both the euro and the British pound a fillip.
BNP Paribas strategists expect sterling to outperform the euro and the dollar. The bank expects the euro to drop to 80 pence in a few weeks, from around 81.20 now, and forecasts sterling at $ 1.68 in coming months, from $ 1.60, once global recovery gathers pace and UK exports pick up.
While the euro may lag the pound it could rise against the dollar, drawing support from the ECB’s promise to do whatever it takes to preserve the euro and the fact that the Fed will be pumping in more dollars.
“What looks absolutely assured is that in the first half of 2013, the Fed’s balance sheet will expand significantly more than the ECB assets,” said Alan Ruskin, macro strategist at Deutsche Bank, adding this was likely to lead to a lower dollar.
Ruskin expects the ECB’s balance sheet to shrink slightly by 100 billion euros until it starts any bond purchases.
“While uncertainties remain in the euro zone, as well as a weak growth outlook, we view the euro is likely to remain supported and reach $1.35 by end-Q1,” BNP Paribas said.


Wealthy Gulf individuals feel more confident about regional prospects

Updated 25 April 2018
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Wealthy Gulf individuals feel more confident about regional prospects

  • “Factors like the region’s stability, attractive investment opportunities and low-tax environment are seen as the main drivers behind the growing confidence in the region’s economy.”
  • Among the most optimistic were respondents in the UAE, with 57 percent of those surveyed saying they thought the overall outlook was improving.

DUBAI: Survey finds growing optimism on region’s economies, but Saudi investors remain wary.

Wealthy individuals in the Gulf are more optimistic over the future of the region and the global economy compared with last year, and are increasing likely to invest in their own countries and other emerging markets in Asia than in western economies. These are among the main findings of an annual survey by Dubai-based Emirates Investment Bank (EIB), released on Tuesday, of the sentiment among high net worth individuals (HNWIs) in the region. 

After two years of falling confidence, some 60 percent of regional HNWIs now believe things will improve or stay the same. Fewer are pessimistic about both regional and global economic prospects than last year, while nearly 80 percent of respondents said they would prefer to invest in Gulf assets, rather than looking abroad.

The recovering oil price was a big reason for the increasing feel-good factor in the Gulf, according to Khalid Sifri, EIB’s chief executive officer, who added: “Factors like the region’s stability, attractive investment opportunities and low-tax environment are seen as the main drivers behind the growing confidence in the region’s economy.”

After falling below $30 per barrel in early 2016, oil has subsequently recovered to a three-and-a-half-year high, breaching the $75 a barrel mark yesterday for the first time since November 2014.

However, the overall optimism of the survey masks some concerns among regional HNWIs; in Saudi Arabia, 48 percent of respondents said that they saw the regional economic situation improving or staying the same, against 52 percent who felt it was likely to worsen in 2018.The survey was conducted last November and December, when investor sentiment in the Kingdom was affected by the high-profile anti-corruption campaign undertaken against some prominent business people accused of financial wrong-doing. “It may have been affected by that. We shall see what the situation is at the end of this year,” Sifri said. 

Respondents from Kuwait were even more pessimistic. None of the respondents from the country felt that things were going to improve on the investment front this year, while 54 percent said they would worsen. Among the most optimistic were respondents in the UAE, with 57 percent of those surveyed saying they thought the overall outlook was improving. On the long-term global outlook, a total of 78 percent of those surveyed across the region were optimistic about prospects over the next five years, with most citing positive economic and political stability as the reason, along with a smaller number who said oil price stabilization would benefit the world economy. The oil price recovery was the biggest reason for regional optimism. 

The geopolitics of the region was claimed as a big factor in deciding investment decisions, but Saudis were less concerned than others. Only 29 percent in the Kingdom said they were influenced by geo-political events, compared with 83 percent in Qatar and 85 percent in the UAE. 

Oil prices, economic reforms and the introduction of VAT were also factors influencing investment, as was the election of Donald Trump as president of the USA. There has been a big shift in global investor orientation outside the GCC. Nearly half of regional wealthy investors (47 percent) are now looking to Asia, 38 percent to the wider Middle East and North Africa, some 34 percent to Europe and only 17 percent to North America. The survey was conducted among 100 HNWIs with $2 million or more in investable assets.