Credit Ágricole: FX Risk - FJElite
- Despite higher oil prices and the continuing rise in global yields, investors remain confident. Investors could be waiting to see how central banks react to the move back higher in oil prices as well as rises in other commodity prices. Indeed, while the ECB hiked rates last week, it did not commit to a hawkish tightening cycle, and our ECB Strategist thinks the market remains overpriced for further rate hikes.
- The Fed, BoE and BoJ meetings could therefore be important for risk sentiment. Moderately hawkish approaches to rising inflation risks would be a positive for sentiment. Investors expect the Fed to raise rates later today. While FOMC Chair Kevin Warsh will likely continue his hawkish rhetoric from Jackson Hole, he is not expected to provide explicit forward guidance, leaving investors to focus on the renewed dot plots. Our US economist thinks that if the Fed raises rates, the dots could show a limited hiking cycle with two 25bp hikes (including today) by year-end. This outcome would be in line with current market pricing and potentially support sentiment.
- The BoE could be on hold on Thursday, pointing to a stagflationary environment in the UK. The BoJ is expected to raise rates Friday and to hike rates again by year-end, but Governor Kazuo Ueda could fail to live up to these hawkish expectations in his press conference.
- Weighing on our Risk Index over the past week have been falling gold prices, private credit spreads and the outperformance of defensive stocks by cyclical stocks. Higher equity market volatility and rising EM- Sovereign spreads supported the Index.
- Among G10 currencies, only the CHF, CAD and SEK have significant positive correlations with our Risk Index. The GBP, USD and NOK have significant negative correlations with the Index.