Global Monetary Policy Is Decoupling; + Our Key FX Views On The Move

Global monetary policy dynamics are likely to be mixed over the coming year, with continued tightening in the US likely to keep some of the more vulnerable emerging markets on the defensive. Deflation remains a serious global risk.

We expect the European Central Bank to remain in easing mode for some time to come, with its options including additional interest rate cuts and other measures, so long as deflationary pressures remain. The US Federal Reserve is set to continue tapering in 2014 despite weather-related weakness in economic activity in December-January. Meanwhile, we expect the Bank of Japan to maintain its current policy for the remainder of the first half of 2014, but believe that once signs of economic weakness become clearer in the second half of the year, the BoJ will succumb to political pressure to further expand bond purchases.

Most central European central banks are likely to start hiking rates before the end of 2014. In Latin America, we expect tighter policy in Colombia, Mexico, and Brazil. Asian monetary policy will be mixed, with Chinese lending policy likely to be the dominant regional risk.

Subscribers can read more about our views on global monetary policy trends in Business Monitor Online.

Our Key FX Views On The Move

Meanwhile, our bullish asset class strategy view on sterling versus the Canadian dollar continues to play out, with GBP/CAD breaking through key resistance just above CAD1.8500/GBP and hitting a 5-year high of CAD1.8617/GBP in the process. We entered this view in September 2013 at CAD1.6490/GBP, and even now, after spot gains of 12.8%, we believe there is significant further long-term upside for sterling. Although GBP is getting expensive versus the US$, the sterling cross-rates still offer upside, in our view.

Elsewhere, the Chinese yuan has broken through long-term support, signalling potential for further weakness over the coming weeks and boding well for our bearish CNY asset class strategy view (played via the 12-month non-deliverable forward). Weak February purchasing managers' index figures suggest that the Chinese economy is slowing down considerably despite a ramp-up in lending, and the break lower in the currency offers a further warning sign.

Finally, the Indonesian rupiah has been flying in recent trading, with a break of technical resistance presaging further gains to IDR11,500/US$ over the coming weeks. A stronger rupiah also plays into our bullish asset class strategy view on Indonesian bonds, which is up by 3.6% and could offer double-digit returns in US dollar terms over the coming months.

This Week's Trivia Question

Last week's question was as follows: which North American actor recently stated in an interview that he had not watched any episodes of the long-running US TV drama series in which he plays the lead character? (Hint: the programme has become increasingly over the top, and the latest series is filmed in London.) The answer is Kiefer Sutherland in relation to '24'.

This week's question is as follows: Which central and eastern European autonomous region declared independence three weeks short of 75 years ago, but was immediately invaded by a neighbouring state and annexed the next day?

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