Volatility continued to decline as political concerns fade into the background. VIX is now at levels seen before the James Comey memo rocked equity markets. Despite the nervousness in markets we anticipate investors will become numb to the scandal plaguing President Trump's administration as investigations tend to be protracted events.
In the absence of Trump-fuelled political risks, carry trade has again become attractive. USDJPY remain the barometer for investors should President Trump’s problems escalate. USDJPY’s move off 110.24 indicates easing of political uncertainties. Sentiment around the greenback has weakened and it will take a significant upside surprise in economic data to give yields the necessary push higher to boost USD.
Dovish commentary from the Feds Evans and Brainard (both voters) has lowered expectation for the FOMC minutes being released tomorrow. Both speakers highlighted the lack of strong price pressures and a historical pattern of inflation to undershoot the 2% target. Yet strong data leading up to the June rate decision could quickly shift USD bias.
Today’s US PMI and new homes sales could provide further clarity on US economic uncertainties. In addition, Fed Kashkari (voter) will speak. We see the current balanced environment positive for EM FX - specifically MXN, INR and IDR.
By Peter Rosenstreich