Currency themes
Theme #1. “Twist and Shout”. The Fed is expected to announce operation twist on Sept 21, likely followed before Thanksgiving by a loud “shout” (communicating their commitment to ultra-low rates beyond 2013). QE3 will be on the table if, as we expect, there is no inflection in the US data by Q1 of 2012. Such futile and reckless hyper-activity cannot augur positively for the USD.
Theme #2. The downside risks to the Euro are heavy. All eyes will remain focused on policy actions from Europe to address the sovereign debt crisis, with growing fears about the spillover to the European banking system and funding markets. A Greek debt restructuring is possible in H1 of next year, if not earlier, with its impact on financial channels capable of pushing a majority of Eurozone countries into recession. If the history of financial crises has taught us anything, it is that there is no such thing as an orderly restructuring.
Theme #3. Chinese growth decoupling, at least for now. Auspiciously, it is not all doom and gloom. Driven by a pickup in affordable housing starts, we expect Chinese growth to accelerate to 8.5% (saar) in Q4, providing an eminently welcome tailwind for Asian and commodity currencies.
JP Morgan FX forecasts against the USD
%, positive indicates that JPM expects the currency to appreciate vs. the USD by September-2012 (12m fwds)
Major forecast changes
This month we roll out our forecasts to Sept 2012. We are sticking with the view that the USD will end 2011 lower than where it began the year, and that the decline will persist into 2012. The pace should be slower (flat in Q4 2011, 3% trade-weighted decline to mid-2012) and volatility higher (12% – 15% on VXY Global) due to recession risks and the European debt crisis. The USD has little value absent a global recession or European credit event given its combination of record-low US rates, record-high government deficit and practically-nonexistent deficit reduction strategy
Key event risks
FOMC on Sept 21 and Nov 2; ECB on Oct 6 and Nov 3; Q3 GDP reports (US on Oct 27, Europe on Nov 15); parliamentary approval process for the EFSF; Nov 23 Congressional debt committee deadline; Italian and Spanish bond auctions; next troika review of Greece in early Dec; numerous ratings decisions.
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http://www.easyforexnews.net/wp-content/uploads/2011/09/JPM_Key-Currency-Views_2011-09-16_678435.pdf
J.P.Morgan
Global FX Strategy