Report11 February 2019Updated 51 seconds ago

FX Talking: Clear and present danger

A Fed pause and a trade truce has encouraged investors to put money to work in 2019. This environment has fostered recoveries in the activity and commodity–sensitive currencies which had been battered by protectionism last year. Our baseline views assume a continuation of this generally benign trend

Executive summary

The US Commerce Department is due to report back to Donald Trump, by 17 February, on whether US auto and auto-part imports pose a national security threat. If so, import tariffs would be recommended and world trade would face a major new headwind. Those most exposed to increased tariffs in the US auto sector would be Mexico, Canada, Korea and Europe. With Eurozone growth forecasts already being slashed, this story would see our alternative EUR/USD scenario materialise of a move below 1.10.

Assuming the above doesn’t happen, we expect European currencies, in any case, to lag recovery stories elsewhere. The deadlock in Brexit negotiations is not helping and what seems an inevitable delay in Article 50 prolongs the agony. SEK appears most vulnerable here, not helped by the hang-over from the housing boom.

The currencies most able to take advantage of current conditions should be those with high rates and credible central banks. Banxico’s credible performance in 2018 leaves the MXN well-positioned in 1H19. And Turkey’s CBT is now gaining some new admirers in its commitment to fight inflation. TRY outperformance may be the 2019 surprise!

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