Politics and geopolitics driving currencies, central banks in stasis…for now
In line with our forecasts, the 60bp of central bank rate hikes in 2018 is contributing to the ongoing slowdown in global GDP growth, which we estimate will fall below 3% yoy in Q1 2019 for the first time since Q3 2016.
The broad-based moderation in global economic growth, along with the fall in crude oil prices, has pushed global headline CPI-inflation sharply back down to 2% yoy. Core CPI-inflation in emerging markets, which hit an 81-month high of 3.3% yoy in November, moderated to 3.0% yoy in January 2019.
Perhaps unsurprisingly, no major central bank has hiked its policy rate year-to-date, with the exception of Banco Central de Chile, and both the Federal Reserve and the European Central Bank have flagged possible measures to boost domestic liquidity.
The stasis in central bank policy rates in recent months has contributed to muted FX market volatility with government-centric and geopolitical events generating most of the price action.
The PBoC has allowed the Renminbi to appreciate over 3% in the past three months, in line with our constructive Renminbi view, but it is not immune to the albeit gradual slowdown in Chinese economic growth.
The breakdown in talks between US President Trump and North Korean leader Kim Jong-un and escalation in tensions between India and Pakistan have seen high-yielding EM currencies underperform but the safe-haven Swiss Franc has treaded water in the face of a slew of weak domestic macro data.
Mounting expectations that the UK will not leave the EU without a deal – our core scenario for the past six months – has seen the Sterling NEER appreciate 4.5% in the past two months. While there is still a great deal of uncertainty ahead, we maintain our long-held view that Theresa May’s government will ultimately be backed into calling a second referendum and we remain bullish Sterling, including versus the Dollar.
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Olivier is an economist and rates & FX strategist with over 22 years experience in financial markets. He is Director and Founder of 4X Global Research, an independent, London-based consultancy which provides institutional and corporate clients with substantive research, high-quality analysis and insight on emerging and G20 economies and financial markets.