Jane Foley, senior FX strategist at Rabobank, points out that for the markets, risk appetite appears to be in flux with signs of inversion in the US yield curve amid talk of a US recession.
Key Quotes
“A number of commentators appear to be taking the view that cheap money will be supportive of risk appetite in the months ahead.”
“US stocks closed higher last night, albeit off the day’s best levels, though Asian stocks were mixed and European bourses are trading moderately lower.”
“The USD index has softened a little this morning. However, in recent sessions the USD has been trending higher from the low that followed last week’s Fed meeting. It remains our view that the USD will remain firm in the months ahead, given that its safe haven credentials are set to be given a boost by relatively attractive interest rate differentials.”
“There is little doubt that the debate over the outlook for the US economy is likely to be a dominant market influence in the coming months. It is our house view that the US economy will suffer a technical recession in the latter half of next year and that the FOMC will be lowering rates in H2 next year. However, as we have previously argued, it would be a mistake to assume that the worsening of domestic fundamentals will guarantee downward pressure on the USD.”
“On paper the present of both a current account and budget deficit undermined the USD’s credentials as a safe haven. However, there are no tangible concerns regarding the integrity of the US Treasury and a current account deficit only becomes a currency negative factor when domestic fundamentals sour significantly relative to other markets. The greenback is the global reserve currency and an increasing number of foreign currency debt has been issued in USD in recent years.”
“For many practical reasons the USD serves the purpose of safe haven currency very well for a large number of investors around the globe and these reasons are likely to be given a boost by the relatively attractive yield on offer compared with the traditional safe havens which are the JPY and the CHF. Consequently, in an environment in which the outlook for risky asset is being undermined by doubts about global growth the USD is likely to find support. On a 6 month view we see scope for a move towards EUR/USD1.10.”
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