The wires continue to push rising geopolitical tensions and for good reason. Between the US Ambassador to the UN Nikki Haley's harsh warning to countries enabling trade with North Korea and US President Trump’s aggressive tweets against China, it feels as if rhetoric has reached a new high.
It’s likely the US will enact further sanctions on North Korea in the coming days and the possibility of a trade war with China has increased significantly. Like clockwork, FX markets shifted into safe haven JPY buying and KRW selling, with regional trade dependent currencies also weaker.
However, there is also the feeling that we have been here before under the Trump administration. The strategy of pushing advisories/issues to the edge only to back off at the last minute are hallmark Trump. So despite the threat of war, implied volatility in FX markets have been in decline for the last few days.
In our view, this shift has created an opportunity in FX EM. The macro story of solid external demand, higher interest rates, and low expectations for protectionism to stymie trade will continue to drive carry trades. We have consistently expressed that the key to 2017 will be to filter out the hype, and the current environment is a prime example.
By Peter Rosenstreich