USD: Tide turning back in favour? - AmpGFX

According to Greg Gibbs, Analyst at Amplifying Global FX Capital, on several fronts the tide, at least for now is turning back in favour of the USD as the flow of capital into emerging market assets may have passed its peak. 

Key Quotes

“Global growth indicators have moderated, and global asset markets have been much more volatile over recent months.  The ongoing tough trade rhetoric in the US, specifically against China, and a turn in sentiment in the high tech sector, are spreading uncertainty more clearly to emerging markets.”

“It may be the case that equity-related capital flows are now mixed and will play less of a role in overall currency direction.  This may shift focus back to interest rate differentials,  which have improved significantly for the USD against most currencies over recent months; accelerating again in the last week.”

“Political risk in the US remains high and may increase towards the mid-term elections in November.  The Mueller investigation hangs over the US government.  However, Trump has appeared more decisive and confident in recent months, and this may be starting to pay dividends.  His poll numbers are still dismal, but his trade policy agenda appears to be gaining acceptance in policy circles in the US and cracking the doors open to more access to Chinese markets, even if the risks to global growth remain elevated.  He has made progress in dealing with North Korea.”

“Global leaders are still lining up to smooch with Trump, including Macron and Merkel this week.  The notion that the US is withdrawing and becoming more irrelevant, descending into an internal crisis of government, diminishing the reserve status of the USD, is no longer sucking confidence out of the currency.”

“Trump is more assertive in his global agenda, including toward Korea, Syria, Russia, and Iran.  This may, on one hand, appear to raise geopolitical risks, while on the other restoring some lost status in the USD as a safe haven.”

“With this in mind, we think the market may shift attention back to relative economic trends and interest rates.  These have improved markedly for the US in recent weeks.  This is perhaps surprisingly in light of the weakness in global equities but is consistent with still robust US economic indicators.”