Global forex market analysis, strategy and currency forecasts

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May 24th 2013

Over the past 24 hours there has been a slight shift in expectations surrounding Federal Reserve policy. There has been a slight easing of speculation that the Fed will make an early move towards slowing the rate of bond purchases as part of the third round of quantitative easing.

If there is reduced expectations of easing, there will also tend to be a decline in near-term dollar support, especially as the US currency had attracted strong speculative inflows. There is an important risk that this will provide only temporary relief given underlying trends.

There will still be concerns surrounding the global growth outlook and there will be a particular focus on emerging markets. There will be increased concerns surrounding the Chinese outlook with further evidence that the economy will deteriorate under the weight of bad-performing loans and a collapse in shadow banking following a prolonged period of over-investment. There are also likely to be important concerns surrounding the other BRIC countries of Brazil, India and South Africa.

There will be the threat of capital outflows from emerging markets with important distortions caused by global quantitative easing policies. There will be some degree of temporary relief if there are reduced expectations of an early end to the Fed’s quantitative easing programme, but this could prove to be only temporary relief given the medium-term outlook.

There will also be concerns surrounding de-leveraging within the global banking sector which will have an important impact in undermining the growth potential. Overall, the longer-term flows and stresses still suggest that there will be medium-term dollar gains and a sustained increase in market volatility.

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