Mitul Kotecha, Head of Global Foreign Exchange Strategy, said, “G3 recovery will gather pace over 2011 but will still fall far behind Asia. G3 growth will be led by the US, boosted by accommodative monetary policy and fiscal support. Eurozone fiscal austerity will weigh on recovery there whilst in Japan the pace of growth will moderate compared to 2010.  We look for 3.0%, 1.5% and 1.3% GDPGross Domestic Product (GDP) is defined as the total market value of all final goods and services produced within the country in a given period of time (usually a calendar year). GDP is one of the key measures of national income and output for a given country's economy. growth, respectively in 2011. G3 economies will undergo the slow and gradual recovery associated with emergence from financial crisis. On the interest rate front, the Fed will remain committed to its USD 600 billion asset purchase program and we only expect policy normalisation to begin in late Q3 2012, with the Fed Funds rate forecast at 1% by end 2012.  In Japan the BoJ will also maintain loose policy settings given persistent deflation, via its asset purchase program. The ECB appears to be the most likely to move away from its accommodative policy settings and could resume its exit strategy from April 2011, hiking the refi rate in Q1 2012. Key themes that will continue to have a strong influence on currencies over 2011 are Fed QE and Eurozone peripheral debt problems. Yield will regain some hold over currencies which will help the USD as US bond yields push higher. We expect the USD to strengthen during 2011 especially against the EUR and JPY. Our end year forecasts for EUR/USD and USD/JPY are 1.25 and 94, respectively.”

Dariusz Kowalczyk, Senior Economist and Strategist for Asia ex-Japan, said, “Asian outperformance versus G3 is likely to continue in 2011, with GDP growth easing only slightly, to about 8% from an estimated 9% in 2010. Expansion will be driven by domestic demand in the region’s biggest economies, as private consumption should be strong in China and India on the back of years of double-digit growth in wages. A favourable growth outlook will sustain attractiveness of emerging Asia for direct and portfolio investors. In view of escalating inflationary pressures and rising asset prices, we also expect more monetary tightening. This will help most Asian currencies to appreciate versus the USD. We favour the KRW, the PHP and the CNY, with the latter likely to gain more rapidly as policy makers shift focus from growth to inflation.”

Frances Cheung, Senior Strategist for Asia ex-Japan, said, “Concern about local currency strength in the region is giving way to worries over consumer price inflation and the build-up of asset price bubbles. It has been our view that keeping rates low can only be a short-term solution to fight against capital inflows, as a low interest rate environment will add to asset price inflation expectations and attract yet more inflows. Looking into this year, we expect more monetary tightening across Asian economies. We see Asian rates rising in general, especially when we also expect USD rates to go up. Asian rate curves are likely to bear-steepen in early 2011 in anticipation of more rate hikes, while liquidity flowing into the region helps curb the increases in short-end rates in response to policy rate hikes. As the hiking cycle proceeds, the impact of previous tightening will start to kick in, managing longer-term inflation expectations and curves will flatten. While we see upside to both IRS and bond yields, we expect bonds to continue to outperform IRS. Many Asian sovereign bonds remain attractive from a relative value perspective, against a robust economic backdrop and resilient fiscal positions.”