G10 Model: Policy uncertainty rising, September risks elevated, China financial conditions easing - Westpac


Richard Franulovich, Head of FX Strategy, updated their Model signals whereby their model undertakes a major overhaul of its exposures to the majors; sharply cutting its USD long to a bare 6%, flipping from EUR shorts to EUR longs and significantly upping its JPY exposure.

Key Quotes:

"Model themes: 

Policy uncertainty rising, September risks elevated, China financial conditions easing
Baker, Bloom and Davis’ global policy uncertainty index is surging. Yet “risk premia” remain mostly subdued even after the sudden surge stemming from the sharp slide in the Turkish Lira. 

That challenging backdrop likely intensifies in coming weeks, September especially brimming with event risk. Trump is threatening to shut down the US government if the appropriation bills necessary to keep government open beyond Sep 30 do not include border wall funding. Midterm fever election usually takes a hold in September too. The FOMC meets September 25/26 and is likely to sound more assertive” after upgrading their assessment of the US economy from “solid” to “strong”. The Trump administration is likely to make a decision on the threat of a 25% tariff on $200bn in Chinese exports (section 301 hearings slated Aug 20-23 and submission of final comments due Sep 5). Italian debt sustainability likely becomes a talking point in September once again too, the populist government to flesh out details of their highly contentious expansionary 2019 budget that will likely draw the ire of both ratings agencies and the EU.

Against that, financial conditions in China have eased measurably now that policymakers there have adopted a more pro-growth stance as a hedge against trade risks. The easier footing is a marked shift from the last two years when financial conditions were steadily tightening. Slide two shows a simple composite index of financial conditions based on equities, M2, the SHIBOR spread, China’s real effective exchange rate and 1yr and 10yr real interest rates. The link from financial conditions to growth is patchy (see slide two) and is arguably even more doubtful when deleveraging pressures are present. That said, the relationship from slide two is strong enough that we should at least expect China’s data pulse to broadly stabilise in the coming months."

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.

Feed news

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Forex News


Latest Forex News

Editors’ Picks

GBP/USD advances toward 1.26 amid upbeat inflation figures

GBP/USD is trading closer to 1.26 after UK CPI beat expectations with 0.6% YoY. The pound is benefiting from British fiscal stimulus and the safe-haven dollar is down on coronavirus vaccine hoeps.

GBP/USD News

EUR/USD flirts with 1.14 amid an upbeat market mood

EUR/USD is trading around 1.14 as investors are encouraged by Moderna's progress toward a coronavirus vaccine. Uncertainty about the EU Fund and US COVID-19 cases are in play.

EUR/USD News

Gold: Bulls gather pace for further upside

Gold consolidates the recent pullback well above the $1800 mark, as the coronavirus vaccine hopes boost the equities and downs the greenback. Are gold bulls bidding up for a test of the multi-year highs?  

Gold News

Bank of Canada Preview: Data confirms a bottom, policymakers to remain cautious

The Bank of Canada will have a monetary policy decision this Wednesday, the first lead by new Governor Tiff Macklem. A couple of weeks ago he offered his first speech as governor, and reaffirmed that the primary mission of ...

Read more

WTI faces rejection at key hurdle despite decline in US inventories

WTI surrenders gains after facing rejection at key trendline hurdle. Fears that OPEC+ may ease output cuts look to be capping the upside. The black gold rose nearly 0.5% on Tuesday, as US crude inventories fell by 8.3 million barrels in the week to July 10.

Oil News

Forex MAJORS

Cryptocurrencies

Signatures