Week Ahead: A Turning Point For Risk-Off Markets Or Not Yet?
Risk aversion reigns supreme in the markets fuelled by two fears – that a global recession is looming large and that the central banks around the world are powerless to prevent it. Worse still, some clients now fear that, by perpetuating the global currency war and compressing credit spreads, negative policy rates (or FX interventions) will only aggravate global disinflation, and slow down global trade and growth. Policy divergence has given way to convergence, and USD has lost ground against JPY, EUR, CHF and gold. GBP, the risk-correlated and commodity G10 currencies remain close to lows with only liquidity and undervaluation considerations stopping investors from selling.
Risk aversion could persist next week with the Chinese data calendar filling up again after the holidays. While Fed and ECB speakers should try to allay the worst of the market fears, the prospects for more accommodation may fail to prop up risk sentiment. Indeed, at this stage, investors are likely to respond more positively to plans about (concerted) fiscal rather than monetary stimulus. Such plans could be announced at the G20 finance ministers gathering on 26 and 27 Feb. In the interim, however, markets will continue to fear the worst.
Gold and JPY should remain the preferred safe havens with the BoJ seemingly having run out of bullets in the midst of the ranging currency war. Elsewhere, the EU summit on 18 and 19 Feb is expected to agree on a reform package to avoid a Brexit. Some of the reforms remain quite controversial and uncertainty ahead of the summit should linger. That said, confirmation of the Tusk’s reform proposal could be seen as increasing the chance of a pro-EU vote and help GBP consolidate.
What we’re watching:
FX Focus –While the risk is for further rising risk aversion, CHF upside may be limited still against its safe haven peers.
GBP – Although it will be active in terms of data releases, the main focus should be on next week’s EU summit as a currency driver.
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