Richard Franulovich, an analyst at Westpac explained that the relatively stronger growth and yield qualities of the US, Canada and the UK continue to compel the model to hold outsized long positions in the USD, CAD and GBP.
Model themes:
“The positive momentum in US data surprises is beginning to wane. In the wake of weaker than expected updates for the July Markit and ISM PMIs, July headline payrolls and the Q2 employment cost index our US data surprise index has fallen below its six-month average.
As slide one shows there has been a reasonably decent positive relationship between the cycle in US data surprises and positioning in the USD. With the US data no longer pointing to exceptional outperformance on the activity front and positioning aggressively long the USD may be vulnerable.
Global markets have been acutely sensitive to developments in China of late, as growth there has faltered, US/China trade tensions have ratcheted higher and the CNY has fallen sharply (all inter-related). For some G10 currencies the yuan has become a dominant driver.
Slide two over shows the (20 day) beta of the G10 currencies with respect to the yuan and other key global drivers, including US yields, commodity prices and equities (based on daily log returns). For the purposes of this analysis we ignore idiosyncratic factors and focus only on global drivers. We strip out the impact of the USD by looking at the CFETS basket value of the yuan rather than USD/CNY or USD/CNH. The G10 currencies are all measured as nominal effective exchange rates instead of USD pairs.
As slide two shows the betas reveal many usual suspects. EUR, CHF and JPY for example have negative betas with respect to equities, while AUD, CAD and NZD have outsized positive betas with respect to commodity prices. There are also some “flawed” betas at the moment; all the G10 currencies for example have a positive beta with respect to US 10yr yields, which of course does not match either economic logic or longer term empirical analysis.
However, the most startling beta is vis-a-vis the yuan. All the G10 currencies, with the exception of CHF and NZD, have a notably higher beta with respect to the yuan than any of their standard drivers such as US yields, US equities or commodity prices. The beta of the AUD, CAD and JPY TWIs with respect to the CFETS basket is notably high at around 0.5. While a weaker run of US data as noted above could be expected to stabilise currencies the yuan is the more dominant driver at the moment.”
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