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Richard Franulovich, Research Analyst at Westpac, suggests that the focal point for currency markets seems to have migrated several times as risk aversion sentiment has intensified.

Key Quotes

“We strip out the impact of the USD by looking at nominal effective exchange rates instead of USD pairs. Some of the more notable observations include;

  • Over the last 60 days G10 currencies have generally shown higher betas with respect to US equities and 10yr yields, while betas with respect to Italian sovereign spreads, oil prices and the Shanghai composite have been relatively lower;
  • JPY has meaningful negative betas with respect to both US equities and US fixed income yields, underscoring her safe haven qualities;
  • The USD has a positive beta with respect to US yields (of course). While it is not large it is the single largest beta for the USD, underscoring the importance of US growth and Fed tightening expectations for the USD;
  • NZD, AUD and CAD all have strong positive betas with respect to US equities and moreso than any other key market drivers;
  • EUR and GBP have relatively small betas with respect to each of our major global drivers – there is no one outstanding dominant factor.
  • Long term equilibrium estimate for the USD index based on growth, yield and fiscal balance differentials between the US and her major trading partners.
  • We find that there has been no let up in the ascent of the USD’s equilibrium value this year – it has continued to march steadily higher, led by growth and yield differentials. Larger US fiscal deficits have been a headwind for the USD’s fair value but not enough to offset the positive push from yield and growth.
  • The USD has if anything struggled to keep pace with its rising equilibrium value, leaving it about as undervalued now as it was at the start of 2018; about 6-8%.”