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.
Source: Morgan Stanley
December 9, 2010
FX Pulse: 2011 Outlook
