According to analysts at ANZ, for the global markets, the major shift of the past month has been the deterioration in the tone of US-China trade negotiations.
“Since the last round of talks, when disagreements on the final text of the agreement arose, both sides have hardened their stance, and the likelihood of a resolution has diminished.”
“Added to these concerns is the possibility that some of the recovery we saw in demand for semi-conductors was driven by Chinese companies front-loading purchases. This combination means that the hopes of recovery, which were underpinning market sentiment and liquidity, are looking fragile again.”
“In particular, the recent rise in the liquidity index looks like it could be short-lived and the market will again find itself in a low growth and low liquidity context, where the momentum for both is once again negative. This is an environment where volatility is higher and where cyclical currencies underperform.”
“The policy reaction function will, in our view, be too slow to come to the rescue (via a large scale shift in official liquidity) in the near term. The Chinese response remains targeted, while the US Fed will need to see a substantial and sustained deterioration in financial conditions before it acts, given the strength still evident in the labour market. Within this context, we remain bearish on cyclical currencies.”
“While the outlook for the major currencies has remained largely unchanged, we have drastically cut our forecasts for risk sensitive, cyclical currencies.”
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