FX (1)

Last week’s US employment data were taken by the market as modestly disappointing. In this context, it is curious to see the USD stronger against most currencies since then. In our view, the single biggest driver is the sudden surge in fears of a renewed bout of risk aversion stemming from China. What muddies the waters somewhat though is that this impact is not being seen in the wider global equities complex. The decline in Chinese equities in the past week has not led to a meaningful spillover into key DM equity markets. Even within the FX market, it’s not clear that risk-off is necessarily going to be the order of the day, despite recent weakness in traditional barometers like CNH, AUD and MXN.

China risks and weaker commodity prices can pressure commodity and EM currencies, even as more defensive currencies like the EUR stay bid. Also, if the Brexit vote on 23 June leads to a “remain” outcome, the entire European currency complex could get a very specific lift. Price action remains mixed for G 10, AUD and CNY seem to be most bearish on rate cuts, iron ore prices and failing stimulus. USD Index had been trying to push higher but the recent drop in global rates have proven to be fatal after last weeks somewhat disappointing payrolls. EM currencies remain selectively bearish, TRY, MXN and BRL had been bearish until today but seem to be stabilizing now. Asian Emerging Markets remain weak on rate cuts and China fears.It seems short term performance will be outcome of local monetary policy of central banks for currencies as global markets lack a catalyst for momentum except commodity weakness in metals.

GFX (1)