FX Monthly – A goldilocks scenario?

door: Georgette Boele , Roy Teo

140528-FX-Monthly.pdf (246 KB)
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Are we experiencing a goldilocks scenario?

A goldilocks scenario is an environment that is just about right. Investors are optimistic about the global economic outlook, while they also expect central banks to leave the punch bowl in place for the time being. In addition, they do not seem concerned about possible difficulties further down the road. So fear of losing a part of their investment is not the main driver behind their behaviour. In fact, it is fear of missing attractive income and capital gains that drive their behaviour. Therefore, investors chase investments with relatively attractive returns. Are we currently experiencing a goldilocks environment in currency markets? Yes and no. Yes in the sense that currencies with relatively attractive returns, such as the majority of emerging market currencies, have been the currencies in vogue since the beginning of this year. In addition, currency volatility has moved lower, despite (geo) political concerns, while the global economy continues to improve. No in the sense that traditional safe-haven assets have not moved lower. In fact, the Japanese yen, German Bund and US Treasury prices have moved higher, while gold prices have lacked direction. The Swiss franc, however, has come under some pressure recently. We judge that the-near goldilocks environment for emerging market currencies will continue for some months while monetary policy and fundamentals have the upper hand in major currencies.

What does this mean for our currency views?

we have had recently scaled down our forecast upward trajectory for 10y US Treasury yields, emerging market currencies are likely to perform better than we have had foreseen with the exception of the Chinese yuan. Therefore, we have revised our emerging market currency forecasts to reflect a less negative overall view. However, we continue to hold on to our judgement that most of these currencies will remain rather volatile. They will be negatively affected if Treasury yields start rising and the Fed starts hiking official interest rates. In contrast, we have lowered our year end appreciation expectations in the CNY from 6.05 to 6.10 versus the US dollar as the central bank has continued to engineer a weaker currency longer than previously envisaged. We are keeping the Polish zloty (PLN), the Mexican peso (MXN) and the Chinese yuan (offshore versus the Japanese yen) as our top picks, as we are positive on fundamentals and expect them to be resilient when US Treasury yields eventually do rise. For major currencies, we have slightly adjusted our near-term forecasts to reflect a more modest upside in the US dollar, because of the Fed trying to anchor interest rates. However, we maintain the view that the US dollar will rally when financial markets to start to build expectations that the Fed will hike rates in 2015. Therefore, we are keeping our high conviction views. On the one hand, we remain negative on the euro, Japanese yen and Swiss franc. On the other hand, we remain positive on sterling and Swedish krona versus the euro.