The re-opening of the US-China trade war has come as a surprise. We suspect a deal is concluded in 3Q19, but until then investors look set to play-it-safe. This should see JPY out-performance across the board and the continuation of the dovish re-pricing in open economies. It looks too early to re-buy into EMFX
The motives for the Chinese reneging on its part of the trade deal are uncertain at this stage. Are they prompted by a little ‘fine-tuning’ or a more fundamental re-assessment of Trump’s tolerance for a total trade war? Until this becomes clearer we expect investors, who have so far enjoyed a strong year of returns, to turn more cautious.
With its negative correlation to equities and its lack of correlation with the Renminbi, we expect the JPY to perform well over the near term. We favour the JPY over the dollar, where the latter could prove a little vulnerable were US equity markets to correct.
We still think there is a window for EUR/USD to trade 1.10 this summer. The renewed trade conflict risks stamping on the green-shoots of the Eurozone recovery. US tariffs on auto imports and European elections pose two further risks to the Euro in May.
Elsewhere we expect positive trends in CE4 FX to be re-assessed. A poor performance by the ruling PiS in European elections could raise fears of fiscal profligacy in Poland. Hungarian rates look far too low given near 4% CPI. We think the CZK bull trend will reverse now that the hiking cycle is over. And RON looks to be living on borrowed time.