What a start to the year it’s been. Turbulence and turmoil has been replaced by tranquility in just a few months, boosted by monetary policy easing, significantly reduced expectations for US rate hikes in the year ahead and a stimulus-induced surge in Chinese economic activity.
To Daniel Been, a FX strategist at the ANZ, investors could well be forgiven for thinking that it’s 2010 all over again.
“With the industrial and construction complex in China once again accelerating, and the growth pulse in the US struggling, it looks a lot more like 2010 than 2015 right now,” he wrote in a research note released earlier today.
As a result of this outcome — expected by very few just months ago — Been suggests that investors are unlikely to sell Asia or commodity currencies aggressively as long as it continues.
“While global growth is by no means shooting the lights out, in a world where fears of global stagnation reign, a more stable trend in survey data and a very tentative improvement in the hard data for some economies has been sufficient to provide the market with the confidence needed to continue buying currencies exposed to the global growth cycle,” suggests Been.
One doesn’t have to look far to see what Been is talking about. Asian currencies have been on a tear in recent months, mirroring the inflows into emerging markets in Asia after years of constant selling.
The table below, supplied by ANZ, tells the story. Over the past three months the US dollar has been hammered, helping to underpin strong gains in many Asian currencies.
And, as you would expect given money moving into emerging Asia currencies, a proportion of these funds are being put to work in emerging market stocks.
Been suggests that the recovery in risk assets across Asia is looking “entrenched”, thanks largely to a pick-up in China’s property market leading to a broader recovery in the broader economy.
“The improvement that we have seen in China and a number of other emerging market economies has been offset to some degree by a disappointing growth outcome in the US and Japan,” he says, adding that “this mix of growth is proving to be a more digestible one for markets”.
In other words, despite concerns about the rebound in China being driven by credit and construction — heralding back to the “old” drivers for economic growth — with data in the US and Japan ensuring ultra-loose monetary conditions are being maintained, investors are more than happy to funnel funds back into emerging markets.
Been believes that only a rapid decline in the China growth pulse, or a more hawkish Fed, will be enough to shake the status quo near-term. Neither, in his opinion, are likely to eventuate.
However, beyond the near-term, he suggests the trend of US dollar weakness and emerging market inflows is unlikely to persist.
“In terms of US policy, we think there is little room for further accommodation to be added,” he says. “The Fed has become very conservatively priced, and while we do not expect a near term (and drastic) change in its rhetoric, current pricing – of less than one hike in 2016 – is starting to shift the balance of risks for the direction of the next sharp move in US rates.”
He also describes the belief that the growth momentum in China’s economy will continue as “questionable”.
“We think that current market pricing of USD/Asia and commodity currencies is dependent on the recent improvement in growth being sustained,” he says, adding that selling the US dollar does not represent a good risk-reward for investors in his opinion.
“With Q1 GDP now close to the official government target, the question of how much more improvement can be seen is worth asking.”