Risk appetite seem to be recovering, as shown by EUR/CHF testing 1.2000. Yet demand for emerging market currencies remains weak. Brent crude is nearing US$75/barrel on the back of supply concerns, declining US inventories and OPECs announcement that the supply glut is now gone. The correlation of FX and interest rate spreads has weakened, yet with US 10-year treasuries nearing 3%, markets are starting to find them attractive. Trump tax cuts will widen US deficits.
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If all this sounds confusing: yes, it is. Markets have been too quick to embrace flavours-of-the-month. Fashionable thinking makes us sceptical. Take India: despite solid structural fundamentals, a cyclical upturn in oil price has triggered fear of capital flight. The US Treasury has placed the rupee on the watch list of currencies, which has freaked out traders. However, India is far from a currency manipulator, due to persistent current account deficits. With global yields low, volatility low and growth solid – this is what we will trade on. If you must trade now, higher oil should support NOK, CAD, ZAR, BRL and AUD.
This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.
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