Bank Research Consensus Weekly 01.23.12
G3 Central Banks: Constitutional Questions
Spyros Andreopoulos & Sung Woen Kang, Morgan Stanley
Debt, deficits and deleveraging imply a new, post-Great Moderation economic landscape. In this changed landscape, at least some societies' preferences are likely to shift - probably towards higher inflation, as: (i) with anaemic growth, the willingness to sacrifice some of it in favour of lower inflation will be diminished, especially when (ii) inflation would help at least a little to erode private and public debt. In democracies, policy institutions and their actions tend to - and indeed should - follow societal preferences. Central banks may prove no exception. Despite formal independence, monetary authorities do not operate in a vacuum. Rather, an important question for investors is how robust central banks' institutional insulation will prove to be. These are not least constitutional questions - i.e., they go back to central banks' constitutions, or statutes. Here, we examine the constitutions of the three major DM central banks along four crucial dimensions: mandate; target; prohibition of direct monetary financing of the sovereign; and how the central bank constitution can be changed.
FX: Dollar Bull or Bear?
Kasper Kirkegaard, Senior Analyst, Danske Bank
In an environment of low global growth, US outperformance and concerns about Europe’s ability to fund itself the dollar should of course appreciate! Or should it?The dollar certainly started 2012 on a strong footing, but while analysts are forecasting a flat dollar this year and investors are looking for significant dollar gains (as reflected in near record long dollar positions) we expect the dollar to be near a peak for now. A dollar uptrend is simply not compatible with improved risk sentiment, easy US monetary policy and a sizable US current account deficit in our view – at least as long as the world economy stays clear of a recession.
LIBOR Recedes, but Crisis Unsolved
John E. Silvia, Chief Economist, Wells Fargo
Short-term borrowing rates have moved down in recent weeks, reflecting easing concerns about the ongoing European debt crisis. The three-month LIBOR rate, which is the rate at which banks in London lend to each other, has fallen by a little more than two bps since the start of the year. While this is only a small move, it is still important, considering that LIBOR rates had been steadily rising since the summer.
United States – The Recovery Is Homeward Bound
Alistair Bentley, Economist,TD Bank Financial Group
In their 2009 bestseller This Time is Different, Carmen Reinhart and Kenneth Rogoff present what has become the most widely accepted diagnosis of the economy’s current malaise. After exploring years of economic history, the authors find that recessions caused by financial imbalances and debt accumulation are followed by disappointingly slow recoveries. Given this, it is hardly surprising that the U.S. economy has struggled so much over the past three years.
Compiled by David Song, Currency Analyst
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