Commodity prices are the more tactical risk – Goldman Sachs
|Kamakshya Trivedi, Research Analyst at Goldman Sachs, explains that setting aside their more constructive long-term view, on a tactical basis some consolidation or even a modest pull-back would not be unusual after such sharp moves. But we think lower commodity prices are more likely to be the catalyst for such a pullback rather than the rates backdrop.
Key Quotes
“A key takeaway from the past month is the speed with which FOMC speakers were able to raise the probability of a hike on the Ides of March from below 30% to nearly 100%. And the fact that markets absorbed it in a relatively untroubled fashion suggests that, while the odds of another hike in June are higher, the Fed will not need to rush into signalling it strongly until later in the spring – with more time to see if the hard data are indeed moving to the stronger path that the survey data have been pointing to.”
“We do expect long-end rates to continue to move gradually higher, and those tend to be more impactful than front-end rates for EM FX. But, as our rate strategists have argued, a much sharper steepening beyond forwards is likely to require a more convincing pick-up in inflation expectations in Europe (and Japan) – which is likely to be limited until the outcome of the French election is clearer.”
“So the more near-term risk to EM FX (including our stronger MXN forecast) may come from the recent weakness in oil and the commodity complex. External balances have improved across the EM complex since 2012, many of our ‘goodcarry’ EM FX candidates – for example RUB, BRL, COP, ZAR – are significant commodity exporters and would be negatively affected if commodity prices were to keep sliding. That is not the baseline expectation of our commodity team, but it is the key tactical risk to constructive EM views in the near term.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.