Joy Bolli: In laymen words, what is going on in the currency markets at the moment?
Giles Keating: On the one hand, the Federal Reserve in the US has signalled very clearly that it is moving toward quantitative easing, which means buying bonds to keep interest rates low and indirectly stimulate the stock market. That means a greater supply of dollars (is fed) into the system. That is tending to weaken the dollar. And the second thing is that a number of countries are trying resist the scale and the speed of that dollar weakening. We?re seeing some intervention and some taxes on capital inflows.
Officially the global recession is over and economies are starting to pick up again. Why would they aim at keeping their currencies weak at this point?
It is all a matter of the speed and scale of movement. Most countries don?t mind some appreciation, particularly emerging countries which are growing rapidly, They have a potential risk from inflation and want to become less reliant on exports. But as it gets too far too fast, they actually fear it could damage their export industries and become destabilizing. So, a modest move is consistent with an improving global economy. But too rapid a move cause problems.
Can you give us examples of which economies are profiting from this situation and which currencies are the most affected?
What we?ve seen over the last month is virtually all major currencies moving up against the dollar. We saw the euro and the Swiss franc in Europe. The yen is being strong. In the emerging markets, most of the major currencies including the Chinese renminbi, the Brazilian real and many others have moved up.�Although it?s been attractive for investors involved in those currencies, the pace has triggered some concern among policy makers in the affected countries. They feel that this very rapid move up could damage their economies. In just the last few days before this interview, we?ve seen the dollar regain a little bit of ground. That?s a relief to everybody. Even if the long-term trend in those currencies is upward, the move we?ve just seen was a bit too fast.
There are discussions about whether monetary unions could be a solution to the problem. But the euro and the dollar have both proven that even monetary unions face serious challenges. Would a monetary union ? let?s say in Asia ? make sense?
A literal monetary union is not on the cards. There are far too many political and economic barriers to that. But what might be possible ? and some world leaders are trying to look to this at the G-20 meeting that?s coming up in early November - is to look to some loose agreement, which would probably involve that the US would be doing a degree of monetary stimulus. They would do that in a measured way so it didn?t create too much short-term pressure.�Meanwhile, from the point of view of the emerging currencies, they would be looking to a gradual move up of not just months, but of a number of years. This makes sense from an economic development point of view. It fits with the idea of rebalancing to less reliance on exports and more reliance on domestic demand in the emerging markets. A kind of loose agreement of that type is possible, but it does require real coordination effort among the international community.
Where are the opportunities for investors in this environment and what must they bear in mind?
We feel that this is rather a positive environment for stock markets. The feeling here is that the effect of the quantitative easing in the US really is designed to push up stock markets and credit markets. That?s the way that process works: By making capital cheaper and by making financial assets less attractive to people, so they want to go out and spend.�Credit Suisse thinks investors should be riding that wave upward. And meanwhile there are potential opportunities in currencies. The dollar regaining a bit of ground could be an interesting entry opportunity into some currencies, where the longer-term trend, particularly in the emerging markets, is still upwards.
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