More to FX markets than US-China trade war

Over-arching global themes, including the escalation in the trade war between the US and China since 5th May and global risk appetite jitters, offer a plausible explanation as to why the safe-haven Japanese Yen and Swiss Franc have both appreciated 2% in Nominal Effective Exchange Rate terms while the Chinese Renminbi has depreciated by as much.

However, global macro and geopolitical themes at best only partly explain the heterogeneous performance of other major currencies in the past two months, including:

 

  • Korean Won depreciation pre-dating the recent flare-up in trade tensions;
  • Kiwi Dollar and Sterling’s significant underperformance versus the Euro;
  • Swiss Franc’s inability to hold onto gains;
  • Ultimately unexceptional pace of depreciation in emerging market (EM) currencies (contrary to press reports); and
  • Significant outperformance of the Indian Rupee, Russian Rouble, South African Rand and Mexican Peso not just against other risk-sensitive peers such as the Turkish Lira and other Latin American high-yielders but also most low-yielding emerging market (EM) currencies.

 

Country-specific settings, including the domestic political landscape (treacherous in the UK), relative economic growth and inflation (weak in Switzerland) and individual central banks’ current and future interest rate policy (particularly dovish in New Zealand), have been and will likely continue to be forceful drivers of individual currencies, in our view.

In the EM space, we are bullish the Korean Won at current levels and point to the recent acceleration in foreign purchases of domestic bonds.

British Prime Minister May’s resignation, announced today and due to take effect on 7th June, has further muddied the Brexit waters but we maintain our long-held view that a second referendum remains the most likely outcome at this stage.

 

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