While a deteriorating global trade picture is unambiguously negative for EM, G10 have a more lukewarm risk averse quality and the latest escalation in trade tensions has instead produced generic USD strength vs G10, a shift from developments earlier this year, according to Richard Franulovich, Head of FX Strategy at Westpac.
Key Quotes
“There is some intuitive backing for that. US data remains robust vs persistent weakness elsewhere, suggesting the US has thus far weathered rising trade tensions better.”
“The stark contrast between the Fed and the ECB is another background factor; the former raised their 2018 GDP and penciled in a fourth 2018 hike two weeks ago, while the ECB cut 2018 GDP projections and pushed out the timing of their first rate increase.”
“Against that backdrop it’s not entirely surprising that rising trade tensions are producing broad USD gains. If trade tensions intensify on multiple fronts in coming weeks, generic USD strength will continue.”
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