FX Talking: #FeelGood
It has been a positive start to the year for most asset classes and in the FX space the currencies hit hardest on the trade war have been the biggest beneficiaries. With G3 central banks unlikely to take away the punchbowl of cheap money anytime soon and strong inflows to the asset management industry, the risk environment looks encouraging for the near future
Executive summary
The dollar story is playing out in line with our FX 2020 outlook – namely weaker against activity FX but staying firm in the G3 space. Talk of a Republican Tax Cut 2.0 may cement that trend – at least in the G3 space. US macro weakness looks less of a concern now, but the market will soon turn to US election risks – especially were Warren or Sanders to win the Democratic nomination.
In Europe, GBP once again is the outlier given the prospect of a Bank of England rate cut over coming months. The EUR remains grid-locked and a lot more interesting are developments in the CEE space. Here inflation is surging and how central banks respond - and what that means for real interest rates – is in focus. The Czech National Bank looks the most likely to respond, the National Bank of Hungary the least likely and Poland somewhere in the middle. CZK to outperform HUF. Political changes in Russia so far look Rouble neutral – expect a $/RUB 62-64 range.
Asia once again remains a high-beta on the global risk environment – especially KRW – but the roll-out of 5G looks a positive for some in the region. In Latam, we still like the BRL despite its soft start to the year and feel that MXN strength starts to fade.
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