FxWirePro: Lingering geopolitical pressures across the globe, which are currencies to watch out for?

The geopolitical risks remain a key concern for all asset classes across the board (especially highly sensitive FX markets). The geopolitical risks continue to linger across the globe. The heightened geopolitical tensions have kept global equity markets also under pressure. 

First, overnight, President Trump increased tariffs of $200bn worth of Chinese goods to 25% (although suggested a deal could still be reached). 

Second, following two recent missile tests in North Korea, the US seized a coal-carrying North Korean vessel after it violated international sanctions. AUDJPY, a good barometer of risk sentiment in FX, sits at its 5-month lows, with some measures of volatility also starting to rise. This is perhaps a sign that the market is starting to pay greater attention to some of the downside risks in the global economy.

This morning’s focus will be on Q1 UK GDP. Following relatively lackluster growth in Q4 of last year, strong outturns for monthly GDP for January and February mean the pace of growth is likely to have risen in the first quarter. We expect a rise of 0.5%q/q (in line with the BoE’s projection). The boost looks to be underpinned by activity reflecting firms’ preparations, including stockpiling, for a ‘no deal’ Brexit (in March / April).

Given the UK has secured an extension to Article 50 to October, there is scope for some of these stockpiles to unwind, meaning the acceleration in Q1 may prove temporary.

During the US trading session, the market would be keenly observing April’s US CPI release against a backdrop in which interest rate markets remain dovish on the future Fed funds rate. The data, however, is unlikely to support the case for lower rates.

We expect annual ‘headline’ inflation to rise to 2.1% (from 1.9%), driven primarily by higher energy prices and a small uptick in ‘core’ inflation.

In Russia, geopolitics will remain a concern and its fiscal oil revenue rule should continue to weigh on RUB sensitivity to the crude oil, we uphold USDRUB call spread.

Finally, we are underweight MXN on political uncertain (USMCA), long positioning and foreign outflows.

For instance, fiscal rules have been implemented to help moderate budget volatility in higher and lower-price environments, while CAD has struggled with oil pipeline capacity that has caused local price shocks, subsequently forcing mandated cuts to production. Politics has also featured for both currencies (RUB geopolitical risk and CAD NAFTA renegotiations) and hence diluted the oil- impact.

On the other hand, NOK’s beta to oil has been comparatively stable. NOK is also the currency best- explained by changes in the crude oil price over the last twelve months. Courtesy: Lloyds

Currency Strength Index: FxWirePro's hourly EUR is at 38 (mildly bullish), while hourly GBP spot index is inching towards -46 levels (which is bearish), while hourly USD spot index was at -20 (mildly bearish) while articulating (at 11:07 GMT). 

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