- FOREX.com expects further deterioration in global growth outlook
- Risk aversion levels will thus also remain elevated
- US dollar, yen and Swiss franc may strengthen on risk aversion
- Risk assets such as commodities unlikely to be favoured

By Chris Shaw

Entering the final quarter of 2011, FOREX.com expects further deterioration in the growth prospects of major economies, with an increasing spillover effect into emerging markets. This has the potential to raise the risks of a global recession.

Assuming such an environment, FOREX.com expects risk aversion will remain elevated. This implies the volatility seen on global markets in recent months will continue and suggests a more defensive approach is justified. FOREX.com has a bias towards safe haven assets and against riskier assets such as equities and commodities.

As FOREX.com notes, the September update from the International Monetary Fund (IMF) included cuts to global growth forecasts. The IMF now expects the major economies will deliver growth of just 1.6% this year and 1.9% in 2012, down from previous estimates of 2.2% and 2.6% respectively.

The 2012 forecast is based on Eurozone leaders being able to contain the debt crisis, the US finding a balance between further stimulus and reducing deficits and a stabilising in market volatility. As there is little certainty with respect to any of these factors, FOREX.com remains of the view investors are likely to remain risk averse.

IMF forecasts for emerging economies were also lowered but by a smaller degree, but FOREX.com continues to see risk of weak demand from major economies generating a more pronounced slowdown in emerging nations. Potentially this could deliver a global recession.

There are few bright spots at present, as even in the US FOREX.com notes the jobs/stimulus package proposed by the Obama administration is likely to be watered down at best. Assuming signs of partisanship in the process of passing a package investors are likely to be further unnerved, which would add weight to the risk aversion argument.

What should keep investor sentiment fragile in the view of FOREX.com is the key fundamental drivers of weak growth at present, such as high unemployment and consumer and business de-leveraging, are long-term sources of weakness. This suggests no material improvements in the shorter-term.

In such an environment, FOREX.com expects the US dollar will strengthen further on a safe haven basis against other major currencies. Other traditional safe haven currencies such as the yen and the Swiss franc should also see support, though upside here may be limited by interventionist policies by governments and central banks.

Downside volatility is expected to continue for the commodity linked currencies such as the Australian, Canadian and New Zealand dollars, as well as for various emerging market currencies.