Bond Outlook July 13th

There have been two reversals of conventional wisdom over the last few days:

• That revaluation of the RMB is no longer a betting certainty, as China is slowing anyway
• That the ECB's cut in the refi rate may no longer be counted on, as a lower EUR and higher oil prices have brought back too great a risk of inflation.

The second of these opinion reversals may explain the modest recovery of the EUR against the USD. However, the higher yields in USD are supposed to give strength to the USD short term, even though the downward pressure of the "twin deficit" is expected to re-assert itself in months rather than years.

The uncertainty about exchange rates explains and reinforces our recommendation and the behaviour of many of our clients to diversify the currency of their bond holdings as much as possible. The commodity-currencies may have had their day for a while, and it is now the turn of peripheral European, Latin American and Asian currencies.