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Posts Tagged ‘The Great Stagflation’

By Paul Dobson
Jul 20, 2011 8:46 AM PT
Bloomberg

European leaders’ efforts to calm the region’s debt crisis will probably pave the way for a rally in higher-yielding currencies before a recession that’s worse than 2008 starts to bite, according to FX Concepts LLC.

Policy makers “are going to kick the can further down the road” at a summit aimed at ending the debt crisis tomorrow, chairman and founder John Taylor, whose firm manages $8 billion, said today in an interview in London. “It looks like we’re going to have a sort of risk rally,” which will lift commodity prices, supporting the Australian and Canadian dollars, he said. Gold may reach $1,900 an ounce by October, Taylor said.

Euro-area leaders are preparing for their second meeting in a month as they strive to resolve a crisis that pushed the 17- member currency to $1.3837 last week, the lowest level since March. Officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the crisis spreading, a person close to the talks said.

While FX Concepts is “back in” so-called carry trades, where higher-yielding assets are bought against lower-yielding currencies, the time frame for the trade is “pretty short” because of a looming recession, which will boost the dollar, Taylor said.

‘Deeper’ Recession

“We’re going into a recession, a really big one, bigger than 2008 — I’ll hang my hat on it,” he said. “It’s descending upon us already. Next year’s going to look worse.”

The recession will be deeper because there’s no other “gimmick” U.S. policy makers are able to use to stave off the slowdown, he said, referring to monetary and financial stimulus measures. Europe is likewise headed for a downturn, he said.

A worsening of Europe’s woes and a rebounding dollar will push down the euro as the recession takes hold, Taylor said, offering a “conservative” estimate for the European currency at $1.15 and the potential for it to trade at parity.

The euro rose 0.4 percent to $1.4208 as of 4:17 p.m. in London and was 0.1 percent weaker at 111.93 yen, while gold traded at $1,596 per ounce.