Countenancing implications of a slow economic slowdown

Given that evidence of a global (and US) economic slowdown continues to build, bond markets have been the main beneficiaries, according to a leading City analyst. 

In a note to clients, Kit Juckes, Head of FX at Société Générale, said while equities are torn between the negative impact of slower growth and the feel good factor of accommodative central banks. 

“In the forex market, a synchronised global slowdown feeds nervousness about emerging markets but doesn't throw up many answers in developed ones. The yen is likely to benefit from falling bond yields, as in the past, but the euro remains firmly anchored for now.”

The current soft economic data contains echoes of 2015, Juckes added, but noted that it doesn't yet point to recession, in the US or elsewhere. 

“However, the global economic cycle is either in a downturn or a soft patch, and for now, there's no sign of imminent respite. The most striking feature of this, for global markets, is that that this downturn is more synchronised than its recent predecessors.”

Since global trade is the epicentre of the global stress, that's not all that surprising but it's hard to get excited about buying the dip in trade and growth sensitive currencies, the SocGen expert added.

These include most emerging markets currencies, Australian, New Zealand and Canadian dollars and the Swedish krona.

“With politics holding back the pound, growth and deeply negative yields holding back the euro (and by association the Swiss franc) that leaves FX longs crowded into the oil-boosted Norwegian krone, the yen and an expensive dollar,” Juckes noted. 

(Source: Société Générale CIB)

The yen is re-coupling with US yields while EUR/USD is still completely stuck. 

“Relative to PPP, EUR/USD is almost as undervalued today as it was overvalued in late 2008. EUR/USD has drifted from 25% above PPP to 25% below PPP in the past decade. That doesn’t mean it can't fall through the bottom of the current 1.1120-1.1266 micro-range, but it makes it a tough sell long-term. What bulls need is a catalyst to trigger short-covering, but maybe they'll get that in EUR/JPY before they see it in USD/JPY, if recent poor global data continue.”