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Bond Outlook November 29th

The cracks in currency parities are starting to show, and it looks like they will widen further. Bernanke’s speech is not quite in line with market perceptions about interest rates.

Bond Outlook [by bridport & cie, November 29th 2006]

When, last week, we wrote of the cracks in the structure of currency exchange rates, we scarcely thought that the cracks would start creaking the very next day. The Chinese are letting the RMB appreciate, making all sorts of comments about the USD being overvalued. Apart from a few complaints from French politicians, there is no clamour in Europe about the EUR being too strong. All indications are that the USA will keep interest rates steady and could reduce them, while almost everywhere else rising rates are on the cards. The decline of the USD against all other major currencies therefore looks set to continue, even if in fits and starts.

 

This week’s speech by Fed Chairman Bernanke seemed somewhat at odds with the financial markets’ near-consensus expectation that interest rates, in a sort of “rescue operation”, will be reduced quite sharply in early 2007. This market expectation is the underlying cause of the low yields at the long end of the USD curve and a major contributor to USD weakness.

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