Downside risks are hard to predict: Bank Julius Baer

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It is a sea of red all across Asian markets , they have opened sharply lower. V Anantha Nageswaran , Hd-Invst Research at Bank Julius Baer believes that the downside risks are very hard to predict at this point in time because there is plenty of law of unintended consequences at play. He told CNBC-TV18 that Central Bankers will have to try to break the illiquidity cycle.

Here is a verbatim transcript of the interview with V Anantha Nageswaran on CNBC TV-18. Also see the accompanying video.

Q: It is again a red start for Asia, with Nikkei tumbling down 4%- do you see some sort of rate cuts coming in considering there is 29 October meet to look forward to and looking at yen- do you see Yen Carry trade as effectively dead considering yen seems to be a counter cyclical currency giving gains?

A: With regards to rate cuts, the dollar strength in recent times has not been so much because of any fundamental consideration but because of illiquidity of the dollar. Dollar is in short supply, so it's going up and that needs to be arrested or basically this will be a downward spiral.

So rate cuts are due, now the question is whether they will do it in a coordination fashion or whether they will do it individually. A coordinated rate cut is now becoming more and more possible and not just probable.

As for the yen; carry trade was over long time ago and it is now beginning to strongly overshoot on the strong side because of risk aversion and yen has always been a kind of a currency when global risk aversion goes up, yen goes up and so I don't yen is done with its upward move against the dollar, the euro, the Australian dollar, the New Zealand dollar etc.

Q: How much more downside is there because a problem that clearly started with the US is now trickling into the Emerging markets, Europe and there is new phenomenon of the commodities also collapsing- how much more downside do you suspect?

A: The downside risks are very hard to predict at this point in time because there is plenty of law of unintended consequences at play for eg Wells Fargo bid for Wachovia spiked Citigroup shares on Friday. So these kinds of things, which we may think are good things happening because there is M&A activity and restructuring, spike somebody somewhere and that creates a chain reaction elsewhere.

So it's really hard to say where the downside will end. But certainly Central Bankers will have to try to break the illiquidity cycle, but that means printing more money but if all Central Banks print money then which currency will go up against another is very hard to say. So I think its becoming more and more complex.