Most thematic FX baskets such as high-beta G10 and the haven bloc have returned only ~±1% on the year through substantial intra-quarter volatility in spot moves.
As beginning-of-year optimism around disinflation and a global cyclical upturn has given way to credit contagion anxiety. The only trend to survive this sentiment roller- coaster to a degree has been EM FX outperformance vis-à- vis DM, which is somewhat surprising ex-post in light of the poor performance of risky G10 FX that usually tends to be well-correlated to EM; the daylight between the EM and DM blocs is also reflected in the wide cross-sectional variation of TWI moves between the likes of MXN and CLP on the one hand vs. traditionally similar commodity currencies such as NOK, NZD and AUD on the other.
The high-water mark for China, EM and EM – DM quarterly growth /growth gap for the year has likely passed; JPM Economics projects global growth to step down to more sedate trend like pace in Q2. Financial assets tend to respond more to innovations in growth forecasts than the latter in absolute; on this front, it is probably not unreasonable to surmise that the bulk of our China growth upgrades are now in the rear view mirror after successive upward revisions that have lifted JPM projections from below consensus last year to above consensus now. March’s bank credit shock also preserves the risk of future downgrades to growth forecasts more broadly; previous research has found ~1-quarter lag for financial stress to propagate to growth revisions and in turn the USD weight on our FRI model, though strong concurrent activity dataflow and generally risk- positive early Q2 price seasonals suggest that such global growth de-rating will likely be a bumpy process.
- J.P. Morgan Strategy
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