Official measures to manage FX volatility in China as well as better than expected data of late have failed to boost market risk sentiment.
More decisive policy action is needed to put an end to the market morass. For a growing number of investors, however, the real issue is that the global central banks have reached the limits of their ability to stimulate growth, boost inflation and support risk sentiment.
Further tightening of global financial conditions seems therefore inevitable, leaving risk-correlated and commodity currencies vulnerable while supporting safe haven currencies like JPY and EUR.
The GBP decoupling trade has imploded under the weight of Brexit fears and concerns about the USD decoupling trade are starting to mount.
We remain cautious on risk-correlated currencies and think that CAD could be particularly vulnerable ahead of the BoC meeting next week.
The market theory about the crumbling central banks’ put will be put to the test by the ECB. Falling inflation expectations and depressed commodity prices should make for a dovish outcome with Draghi likely to reiterate that the ECB can further ease aggressively if required. We are bearish on EUR but are mindful of risk from further risk aversion.
What we’re watching:
Brexiting the GBP – A lot of negatives seem to be in the price of GBP by now .
USD decoupling threat – Evidence of accelerating core inflation could help the USD but mainly against risk-correlated and commodity currencies.
EUR – ECB President Draghi may consider a more dovish rhetoric as part of next week’s press conference. This should keep the EUR a sell.
GBP – Next week’s labour and retail sales data should confirm constructive domestic conditions to the benefit of rate expectations, and the currency.
CAD – Even if the BoC were to refrain from easing monetary policy further as soon as next week, they should consider a dovish rhetoric. This should prove sufficient in keeping the CAD a sell on rallies.
NZD – Any better than expected inflation data is likely to prove an opportunity to sell the NZD anew.