Risk appetite seem to be recovering, as shown by EUR/CHF testing 1.2000. Yet demand for emerging market currencies remains weak. Brent crude is nearing US$75/barrel on the back of supply concerns, declining US inventories and OPECs announcement that the supply glut is now gone. The correlation of FX and interest rate spreads has weakened, yet with US 10-year treasuries nearing 3%, markets are starting to find them attractive. Trump tax cuts will widen US deficits.
If all this sounds confusing: yes, it is. Markets have been too quick to embrace flavours-of-the-month. Fashionable thinking makes us sceptical. Take India: despite solid structural fundamentals, a cyclical upturn in oil price has triggered fear of capital flight. The US Treasury has placed the rupee on the watch list of currencies, which has freaked out traders. However, India is far from a currency manipulator, due to persistent current account deficits. With global yields low, volatility low and growth solid – this is what we will trade on. If you must trade now, higher oil should support NOK, CAD, ZAR, BRL and AUD.
By Peter Rosenstreich
