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FX Crossroads

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Financial crisis − three scenarios for global markets

Wed, Oct 1 2008, 13:25 GMT
by Danske Research Team

Danske Bank A/S

Summary and conclusions

• • On Monday we outlined possible implications of the Troubled Asset Relief Programme (TARP) in the US (What does TARP mean for FX?). We did not stop to consider the impact of a rejection in the US House of Representatives, which in hindsight was a glaring oversight. Judging from the market reaction, we were not alone in this mistake. It is very hard to predict what happens next. But in our first article we present three scenarios as a way of creating a framework for thinking about the next phase in what has become a once in a lifetime financial crisis. 

• • As a means of assessing the potential effect on the G10 currencies, of the three scenarios, we employ a partial analysis based on our short term financial model (STFM). The STMF is introduced in our second article, where we discuss what information can be extracted from the model, as well as evaluate current spot misalignments. 

• • Finally, we consider the likely implication for Sterling of our revised Bank of England forecast - we now expect a first cut already in November. Other things being equal, the FX implication will probably be upward pressure on EUR/GBP in the short term followed by downward pressure in the longer term, due to the ECB also cutting rates. Accordingly, we still see room for EUR/GBP up to 0.82 in the short term, before returning to around 0.78 or lower in the longer term. A further strengthening of USD in the near term will, however, drag down on EUR/GBP. 

• • FX Crossroads is published every second Wednesday. Next publication date is 15 October.

• Download full FX Crossroads with charts

Published on  Wed, Oct 1 2008, 13:29 GMT




Archive

• It is all about risk
  Published On Wed, Nov 26 2008, 16:33 GMT
• Monetary policy and the link to FX: DKK and GBP
  Published On Wed, Nov 12 2008, 15:16 GMT
• The great carry bubble
  Published On Mon, Nov 10 2008, 10:20 GMT
• New FX forecasts - USD set to strengthen further
  Published On Wed, Oct 15 2008, 15:10 GMT
• Financial crisis - three scenarios for global markets
  Published On Wed, Oct 1 2008, 13:25 GMT

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