While the focus as usual tends to be on employment growth (which alone we question in the U.S. on a number of fronts, particularly in production and manufacturing) and increased spending/forecast GDP, a question lingering is the flat-as-a-pancake housing markets that get little mention, and repercussions in recovery of such through 2011, particularly in the United States. A temporary “bandage” is on but the wound is still wide open. Equity and housing markets have been at a complete imbalance through the course of this year, though other correlations, such as equity and FX, have been moving further apart as well. As a comparative measure to the EU, as the Euro has indeed been the source of weight for higher yielding currencies, it becomes a question of timing, and what major events will unfold and when.
Here is a general outline of some heavier points from the 53 page report (links/references below).
- Euro weakness seen to continue (they target 1.18 vs. USD), weighted down by slower recovery on Ireland, Portugal, Greece and Spain; continued trend in higher productivity and lower inflation in Germany vs. southern European countries
- Particularly bullish on US recovery vs. G4, citing job growth as the primary catalyst and target GDP close to 3%.
- The “Euro flu” expected to spread across the G10 basket, maintaining weight on higher yielding currencies, particularly noted through the beginning of the year.
- USD/JPY under continued pressure from low global rates, though as inflation increases and rates adjusted seek depreciation of JPY
- Believe the Fed will not continue QE program and that lows have been seen in US yields.
- Stating undervalue of the pound vs. peers and seeking a 0.77 trough in EUR/GBP “as some of the large depreciation following the onset of the financial crisis is unwound”
- CAD a “dark horse” for 2011, citing standby US growth/recovery as a means for growth
- A buried article in this heap starts on page 28 and discusses 2011 as a year of less correlation and volatility. As I was about to get into detail discussing the unraveling of FX/equity/bond correlations losing path throughout the course of 2010, there is a 2 page cover discussing the topic.
Click the image below to download the 53 page PDF or simply CLICK HERE (downloads straight from source page at http://ms.com/institutional/research/global_debates_playbook.html – other market outlook downloads available)
Source: Morgan Stanley
December 9, 2010
FX Pulse: 2011 Outlook