Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief Macro Strategist
Summary: Several EM currencies are staging a very significant rally to close the week on the support from key geopolitical developments: first, a very likely last-ditch Brexit deal in the works after a breakthrough in negotiations, and hopes for at least trade war détente from US and China, though we still await the official word from both sides on the shape of any deal. And broadly speaking, the EM space is a patchwork affair recently, performance-wise.
Many of the major emerging market currencies (RUB, MXN, ZAR, KRW) are surging on the hopes that the US and China are headed toward some sort of a trade deal, even if it is fairly narrow in scope – particularly pivotal for many currencies in the EM space will be the degree and nature of any agreement on the CNY exchange rate as a part of the deal.
But there is certainly a variety of EM currency performance over the last week, with the Turkish lira badly stumbling because it is struggling with geopolitical concerns as the EU may move to sanction the country for its military operations in Syria and even Russian president Putin was out expressing concerns. Given the market conditions, a significant further rise in risk sentiment will likely see a number of EM central banks continuing to feel comfortable in easing rates and the Russian Central Bank chief Nabiullina was out saying as much recently as the inflation outlook there remains benign, keeping real interest rates in Russia highly positive.
Chart: Saxo Bank Global Risk Indicator
The massive resurgence in risk appetite has not entirely been absorbed in our global risk indicator – perhaps as our corporate risk indicators haven’t had time to react today (no data for today as these are based on the US closing prices) relative to the massive resurgence in quick-reaction instruments like major equity futures and currencies. As well, because this has been a sudden comeback, volatility indicators in FX have not improved like those for equities. In short – we’ll need to see conditions continuing to improve in coming days to get traction for carry trades. We also have the economic cycle to contend with, as we suspect the US is headed toward a recession – so wondering how long the after-effects of a narrow US-China trade deal and Brexit can support global risk sentiment and carry trade interest. Some risk in coming weeks that a focus on weak earnings reports offers a more challenging headwind for carry trades.
Carry Trade Short Term Performance
The shorter-term performance of EM currencies shows the variety of performance levels, with TRY badly lagging on geopolitical concerns, the Brazilian real perhaps on concerns that China will promise significant US agricultural purchases and as coffee and sugar prices are weak. On the plus side are many of the bigger EM currencies rising on the general comeback in risk sentiment.
Carry trade performance*
Among the funding currencies, short SEK has been a winner, but JPY and CHF have put in a very weak performance late this week and could be set for a further drop if the US-China trade deal continues to drive a recovery in risk sentiment and higher bond yields.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)