Thrills after summer

Dünya Executive - - REPORT - Kit Juckes, strateg st, Soc ete Generale

January’s Central Bank policy pivot which, depending on your bias, is either a counteratt­ack in the face of mounting threats to growth and inflation, or a retreat in the face of the asset market weakness at the end of 2018, points to a protracted period of low volatility in currency markets, and probably extends a late-cycle tightening in credit spreads at the same time. It’s driven CAD/JPY, the currency pair which best captures ‘risk on/risk off’ back above its 200-day moving average for the first time since mid-December. All of these favors carry strategies in foreign exchange and suggests EUR/USD and USD/JPY is in ranges until the U.S. economic outlook deteriorat­es. NOK and CAD should be the pick of G10 FX for now. The publicatio­n of The Great Retreat saw updated growth, policy rate, bond yield and FX forecasts for some pairs and we have completed the exercises for the rest of the major currencies. A Fed that favors patience, a Chinese Administra­tion that favors currency stability, and ECB and BOJ policymake­rs who are pushing monetary policy normalizat­ion even further into the long grass, doesn’t translate into fireworks in the FX market. Idiosyncra­tic market drivers are more likely than overarchin­g themes, as an FX monthly performanc­e chart topped by GBP and tailed by ZAR show: fears of a no-deal Brexit are fading, concerns about the impact of a failing utility have grown. The carry-friendly low volatility climate can last until the summer, but not until the end of the year. It depends on expectatio­ns that the U.S. will suffer only the mildest of economic slowdowns being right. We think that’s over-optimistic and our forecast for U.S. growth, and for Treasury yields, suggest the dollar will be under pressure at the back end of 2019 and into 2020. That means our forecasts seem somewhat dull on a 3-6-month horizon, and more turbulent on a 9-12-month one. (March 1)

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