Global economy is surfing a cyclical upturn - SocGen

The global economy is surfing a cyclical upturn, and financial markets have been gorging on central bank accommodation, but as post-crisis policies are dismantled, the appearance of calm in FX-land risks being deceptive, explains the research team at Societe Generale. 

Key Quotes

“The Fed was first out of the blocks with a strong policy response to the global financial crisis, prompting the Brazilian finance minister to bemoan ‘currency wars’. The election of Shinzo Abe as Prime Minister of Japan brought the BoJ into the fray, and by the start of 2015, the ECB had joined in and a significant dollar rally was under way.”

“As the ECB edges towards normalisation, an undervalued euro has room to rise further, and even if the BoJ is committed to its current stance, the yen’s a dormant volcano only in the sense that it hasn’t erupted for a coupleof years. We trade uncertain yen timing via options. Sterling, too, reminds us that a cheap valuation means a disproportionately large reaction to ‘good news’ if and when any materialises.” 

“We see further 10% downside for the dollar from here. EUR strength should support the NOK and SEK, while global growth should support the AUD and CAD.” 

“EM currencies rely more on carry for returns. But valuations aren’t yet demanding and the growth backdrop offsets gradual Fed rate hikes. The PLN and CZK are our picks among low-vol EM currencies, and we think the MXN, TRY and ZAR look cheap.”