FX Talking: Blind optimism

The turnaround in the energy market has probably played a big factor in driving appetite for commodity FX, including EM. A further, immediate rally in crude is not our team’s call right now and suggests an extension in the global equity rally will have to rely on larger earnings multiples, also a difficult call given poor visibility on corporate earnings and on the economic environment after lockdowns ease.

Helping the risk environment would also be some transparency on Washington’s strategy on China this year. Our assumption would be that President Trump would not want to open a fresh round in the trade war so close to November elections. More evidence of that, allowing a broader sell-off in $/Asia, would help confirm signs of the dollar topping.

Before that, however, we suspect EUR/USD consolidates near 1.10 over coming months and GBP underperforms as the UK refuses to extend its EU transition period. European FX should stay reasonably supported. Latin FX has seen a big turnaround as local authorities show greater resistance to weakness, while Asia FX should continue fragile.