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JPY, EUR, USD: Key G10 currencies to out-perform - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 20, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that the Asian equity markets are all lower again today with risk aversion intensifying as investor concerns over global growth persist.

    Key Quotes

    “The sentiment wasn’t helped by the announcement by the IMF of a downgrade to its global growth projections for this year and next of 0.2ppt with a warning that the global economy could be "derailed" by a failure of authorities to navigate successfully key transitions in the world economy.

    The current go-to for measuring global investor sentiment - crude oil prices - are sharply lower this morning, hitting a new cyclical low. But more worrying are the sharp declines in Asian equities pointing to another bad day ahead for Europe and the US.

    The Abe government and the BOJ are surely becoming very concerned with the scale of decline in Japan equities. The Topix index closed 3.7% lower and the closing level today officially placed the Topic index in bear market territory, being 20.8% below the closing high set last August. 16.4ppt of that decline has come since the start of December. On top of that the yen continues to surge with USD/JPY down another percent today and a break of the August low of 116.18 looks plausible now which would likely fuel further gains for the yen.

    The BOJ meets on the 29th January and current financial market conditions are doing real damage to the BOJ’s attempts to lift underlying inflation pressures. Speculation of additional monetary easing is likely to intensify but it is difficult to envisage action under current circumstances that would have any meaningful impact on reversing equity market declines and yen strength. It is being well reported this week that speculators have turned long and the performance of the yen may well attract additional speculative demand that lifts the yen further over the coming days and possibly weeks.

    Like the yen, the euro is now beginning to derive support given the upturn in risk aversion. This makes sense to us as like Japan, the euro-zone is running a very large current account surplus (3% of GDP) which needs recycling through financial account capital exports that may be diminishing given current market conditions.

    We calculate that the overall portfolio net flow for the euro-zone in the six months to November (latest data available) amounted to a net outflow from the euro-zone of EUR 196bn. But renewed risk aversion since then has likely reduced appetite amongst euro-zone investors for buying foreign securities. Declining expectations of Fed rate hikes along with increased risk aversion will continue to support the euro versus the dollar.

    The performance of the euro is more muted than last Aug-Sept (EUR/USD surged over 6% to 1.1700) and that reflects speculation of additional ECB easing. This may well prove correct but we do not expect any changes at tomorrow’s ECB meeting.”
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