USD: Current conditions remain favourable for carry trades – MUFG
Lee Hardman, Currency Analyst at MUFG, notes that the foreign exchange market has been very stable during the Asian trading session leaving the US dollar on the defensive against high yielding and commodity related currencies.
Key Quotes
“The ongoing improvement in global investor risk sentiment, low financial market volatility and improving global growth outlook continues to encourage the outperformance of carry trades in the near-term. The Australian dollar, South African rand, Russian rouble and Brazilian real are amongst the best performing currencies so far this year having increased by around 6-7%. Even the signal from the Fed that it plans to raise rates further “fairly soon” has failed to rock the boat. The US interest market remains unconvinced at the current juncture that the Fed will significantly speed up the pace of rate hikes in the coming years. The strengthening global economy is better able to absorb the impact of tighter Fed policy which is helping to dampen the potential negative impact on emerging market currencies as well.”
“The comments yesterday from US Treasury Secretary Mnuchin have further dampened the risk of disruption in the foreign exchange market. He signalled that there was no urgency to designate China as currency manipulator, and that he wants to wait until the US Treasury’s regular semi-annual review of the foreign exchange market in April to decide if China should be labelled a currency manipulator. He noted as well that he’s had “very good conversations” with his Chinese counterparts. The more methodical approach adopted by Treasury Secretary Mnuchin stands in contrast to comments from President Trump who told Reuters yesterday that “I think they’re the grand champions at manipulation of currency…we’ll see what happens”. His comments highlight that there is still a high risk that the Trump administration will adopt a more confrontational trade policies with China in the coming years.”
“US Treasury Secretary Mnuchin also provided a few further insights into the Trump administration’s tax plans. He stated that they wanted to pass “very significant” tax reform by August which appears ambitious in terms of timing. He believes that the tax reform and deregulation would help to boost US economic growth to at least 3%, potentially as early as next year. As part of the tax reforms, he is looking closely at border adjustments although he has “some concerns”. We continue to believe that a border tax adjustment is unlikely to be implemented given it lacks support within the Republican party, although we will continue to watch ongoing developments closely as it poses material upside risks to our current outlook for the US dollar.”