Steven Englander, global head of G10 FX strategy at Citi, warns that the next few weeks offer several sources of risk that markets aren’t respecting.
In a note to clients, he bullets five of them:
- Payrolls — the early forecast for NFP is 188,000. This implies that investors expect the April release to be not much better than the trend prior to the severe winter. The potential for upside surprise is significant in our view, carrying positive implications for the USD and negative implications for other assets.
- Ukraine — crisis is hardly over. The G7 may be overestimating the impact of financial sanctions and underestimating how tempting it may be for Russia to continue to annex areas that it considers historically linked to Russia.
- China optimism flies in the face of limited policy options that they have. Investors have become confident in recent days that the Chinese will apply stimulus to the Chinese economy. However easing credit conditions can hardly be attractive to Chinese policymakers and straight out fiscal policy pushes against structural reform efforts.
- Japan sales tax increase hitting an economy that is already losing momentum. The trade so far is to buy JPY whenever bad news hits, whatever the source, and sell on good news. It looks more likely that economic weakness will force doubling down on policy stimulus and lead to JPY weakness.
- Australian data have been punching above their weight and may reverse to the downside. There is increasing discussion of a domestic demand driven Australian economy. This flies in the face of Australian integration with China. As a share of GDP, Australia exports more to China than France to Italy and Germany combined. So there is a risk that the strong data are a statistical fluke that will reverse in coming months.
Englander says most of these risks “appear to be asset market negative, involving higher U.S. rates, more geopolitical disruption and downside economic shocks.”
The exception is the Japan story — if the Bank of Japan dials up its efforts to ease monetary conditions, the Japanese yen could weaken, which would be potentially supportive for risk appetite.
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