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Weak interest rates forecast until 2003 Back  
James Jordan, Bank of America, foreign exchange sales and trading
ver the next 3-6 months expect short term interest rates to fall further. Minimum downside target is 3.40 however technically a drop down to 3.20/3.00 is possible before a base forms and a strong recovery gets underway. Once the higher low is formed expect a rally to begin which will take interest rates back up to the November 2000 high of 5.11, towards the end of 2002. The longer term picture however suggests that even further gains will be seen beyond 2002 with 5.70 targeted thereafter.

The longer term BUND contract is in a corrective phase. The pullback from 5.75 January high looks to have further to go. A break below 4.67 year low will open up a drop down to 4.55 over the next 3-6months. However a drop down to a deeper target of 4.18 is possible before the Bund finally bases and begins to rally again. There are a number of technical factors which support this view of an eventual base forming ahead of the major 3.80 low, primarily the break of trendline resistance at 4.46, which is drawn from 7.76, was a significant event which disrupted the long term downtrend. Ultimately therefore an eventual recovery off a higher low is favoured. This should see the yield on the Bund rise back to the 1999/2000 heights of 5.75 during 2003/2004 with potential in the long run for much higher rates thereafter.

The yield curve is expected to steepen further but will also move lower in general.

The entire yield curve is expected to drop lower as short and longer term interest rate fall into year end and potentially early next year. Short term rates will continue to outpace the long end but towards the middle of next year these short term rates are expected to form a base and a new uptrend unfold thereafter. Note that the down-phase is priced into the market, however the rally, when it comes, may be from a lower base than is currently foreseen.

Lower interest rates across the board therefore over the short to medium term before a new uptrend begins. Expect a window of opportunity to present itself to borrowers over the next 3-6 months, which will allow them avail of the easing bias which pervades the markets at present. From the beginning of next year therefore switching from variable to fixed should be considered as a prudent strategy going forward.

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