International | Oct 05 2006
By Chris Shaw
The last few months have offered investors a wild ride in both equity and commodity markets but the excitement has not been matched in currency markets, where the dominant feature has been the lack of a dominant theme.
As DBS notes this moved the focus onto yield carry strategies, possibly helping explain why the Japanese yen for one was so weak during the quarter. Fortunately for currency traders DBS is expecting this quarter will produce some more interest, as it expects events to unfold that generate some changes in valuations among the major currencies.
It points to history as a guide for the US dollar by noting it has a track record of depreciating leading into the US mid-term Congressional elections, which come up before the end of the year. On average the currency depreciates by around 3% under such conditions, though the bank notes until it becomes more clear what the future direction in interest rates is in the US (and the market is now betting it is down) the currency is likely to remain in its consolidation range of 125-129 against the euro. DBS is forecasting 128 by year end and 130 by June next year.
While seeing upside for the euro against the greenback the bank has the opposite view for the currency against the yen, suggesting any move above 150 is a good selling point. It points out the euro has moved higher recently on an expanding interest rate differential, but with the Japanese looking set to officially announce the end of deflation it sets the scene for future rate hikes, meaning the yen should strengthen.
It also sees the yen moving higher against the US dollar, as in its view the Japanese economy is stronger than it appears and three successive months of increases in core consumer prices is also supportive for further rate hikes. DBS is forecasting a yen rate against the US dollar of 114 by year end and 112 by the middle of next year.
In terms of the Chinese currency the bank suspects there may have been a deal done between the Chinese and the Americans where in return for America dropping a bill proposing import tariffs there will be a move to widen the daily trading band for the yuan. This in turn is likely to precede further appreciation of the currency, the bank forecasting a full year gain of 3%, which implies a rate at the end of the year of 7.83 against the US dollar. Further strengthening can also be expected next year, as DBS expects a June 2007 rate of 7.72 yuan to the dollar.
