The Middle East and North Africa region accounts for 6 per cent of the world's total population, has 27 per cent of the global oil supply and a very strategic link to three continents.
The region has a large market of 410 million consumers of which more than 30 per cent are aged below 14. The combination of fast-growing populations and high wealth offers significant scope for standalone growth. Furthermore, the current account surpluses in many key countries of the region provide a cushion against further shocks.
We keep in mind that as we head into 2012, oil markets are at risk from ongoing issues surrounding Iran's quest to enrich uranium. If there were circumstances that resulted in Iran deciding to cease oil exports to the Organisation for Econ-omic Cooperation and Dev-elopment (OECD), some combination of Libyan, Iraqi and other Gulf production might be able to take up the slack. Nonetheless, we believe that oil prices remain well bid into 2012 despite declining expectations for GDP growth. If a crisis occurred in Iran, oil prices would likely head higher.
The combination of a more relaxed mood on the European sovereign debt crisis front, marginally more supportive Eurozone dom-estic economic news and a dovish Federal Reserve may have convinced FX participants to start refocusing on US considerations early this year. Once one removes the deleveraging argument, dollar supportive forces are thin on the ground.
The US cyclical environment remains bearish, as notwithstanding an improving US economic climate, the more dovish bias embraced in the January Fed policy statement suggested that rate rises are clearly off the agenda for now and hat QE3 (the third tranche of quantitative easing) talks could resurface should the economy disappoint later this year. The latter is arguably not priced in the market at this point and such a scenario would add to the bearish dollar sentiment.
Given an adjustment to a slightly less dovish ECB rate outlook, this also implies that the overwhelmingly dollar supportive US-euro rate differentials trend may come to an end. This is a dollar negative. In addition, we highlight persistent structurally bearish forces: a high budget deficit is not just a Eurozone problem. This year, the US budget deficit to GDP ratio is expected at a high 7 per cent and comes at a time when the current account deficit to GDP ratio is seen at 3 per cent (Bloomberg consensus).
We also note that central banks across the globe will continue their reserve diversification policies, which is a long-term structurally bearish dollar force. This is a theme that has not been talked about in recent months, but it is an important one. All this has implications for the dollar versus cyclical/EM currencies, validating our longer-term bearish dollar call and reinforcing our view that pull-backs present good buying opportunities for currencies such as the Mexican peso, Indonesian rupiah or again the Canadian dollar.
Perez is Chief Investment Strategist, J.P Morgan EMEA while Childe-Freeman is Global Head of Currency Strategy, J .P Morgan.