17 May, AtoZForex, London – A few weeks ago Royal Bank of Scotland (RBS) argued about an uneasy calmness in financial markets. Fed Chair Janet Yellen had just delivered her dovish speech, effectively pronouncing the end of monetary policy divergence. More divergence between the Fed and the rest of central banks across the globe was intolerable, because it boosts the USD, increases global volatility, and devalues equities. This only brings EM debt deleveraging, weighing on EM growth and hence global growth, all of which comes back to the US.
At the same time, policy makers globally seemed to cut back on competitive devaluation rhetoric, also referred as currency wars, lending credence to the idea that a possible unwritten G20 deal was made in March. Resulting in a more dovish Fed for longer. “This all speaks to a crushed volatility world for longer,” Royal Bank of Scotland noted.
Six major Forex risks ahead
Despite more dovish Fed, there are six major Forex risks ahead:
#1 The latest burst of Chinese credit-drenching, real estate boosting, commodity fueling stimulus is likely ending;
#2 Broader weakness in global earnings;
#3 Risks of more disorderly JPY strengthening as markets probe harder for Bank of Japan tolerance levels on the single currency;
#4 The chronic circularity of argument that now spread throughout the Fed debate. “According to the ‘hawks’, the Fed may now consider tightening because stock markets have recovered and the dollar has weakened relative to several weeks ago,” RBS noted. This is horribly flawed and circular, adds RBS, the conditions about which the Federal Reserve opines are 100% endogenous to earlier opining.
#5 Saudi Arabia may not restrict itself with a ‘no deal’ on Crude oil output freeze but may actually increase its crude production now that a new Saudi Arabia oil minister is in place;
#6 The ‘Carry’ game can result in weeks of carry given back in one day on idiosyncratic EM fundamentals, similarly as in Turkey and Brazil recently.
“To the extent that markets are calm, this is still a most Uneasy Calm,” Royal Bank of Scotland finished.
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