Late-cycle blues, at the top of which is a Chinese recession – ING

FXStreet (Delhi) – Chris Turner, Global Head of Strategy at ING, suggests that as we close the year and the rout in commodity markets extends, investors have quite a clear view of potential tail risks in 2016.

Key Quotes

“At the top of these is a Chinese recession, followed by an EM debt crisis. Another highlighted risk is the surprise return of US inflation and the Fed being behind the curve. We discuss a lot of these concerns in our 2016 FX Outlook, ‘Late Cycle Blues’.

Most vulnerable are naturally those most exposed to the China business cycle and those running large external deficits – should abrupt Fed tightening trigger a sudden stop of portfolio flows. The Brazilian Real and South Africa rand stand out under these metrics, while Korea’s and Australia’s trade dependence on China could also heap pressure on their currencies.

Least vulnerable are those with the smallest trade exposure to China, such as many countries in the CEE, as well as the JPY. Despite its trade links to China, we think the JPY will prove the preferred safe haven of 2016, buoyed by its fast-improving current account surplus and its historically large Net International Investment Position.

For the benchmark EURUSD rate, we are still of the opinion that marginal new lows are possible (we see a low point just below parity in 2Q16). A large part of that call is driven from the Fed-side of the equation, where the sharp rise in headline US inflation early in the year can expose a US money-market curve which is too flat. Short-term swap spreads have driven a large part of the EURUSD trend this year and we see ‘peak divergence’ in 1H16. By year-end 2016, however, we would expect a little more optimism in the euro area to be coming through and EURUSD correcting higher from significantly under-valued levels.”

2016 stands to be a tricky year for GBP forecasters. The inter-play of monetary policy between the Fed, the ECB and the BoE, its impact on risk assets, and the event risk of the Brexit referendum all point to increased GBP volatility. We see GBPUSD vulnerable to 1.40 in 2Q16, while we have shaved the low point in EURGBP to 0.68 from 0.65.”

Chris Turner, Global Head of Strategy at ING, suggests that as we close the year and the rout in commodity markets extends, investors have quite a clear view of potential tail risks in 2016.

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