Millennium Global has released our Q3-2017 Macro/Currency Outlook, which discusses 3 main macro themes and their implications for currency markets:
Peaking but resilient global growth dynamics keeps global reflation alive
A synchronised, broad-based global growth recovery remains on track, but is expected to lose some momentum into H2 2017. The reflationary impulse from China is fading, but we expect domestic drivers in advanced economies to take over. Unemployment has fallen below equilibrium rates in most cases, with the exceptions of the Euro area and Australia. We look for the labour market overshoot in the US to translate into some rebound in inflation by the end of Q3. We still see some upside for EUR on a trade-weighted basis, as growth momentum remains positive, the ECB rate policy pricing is far from overshooting and valuation vs. USD is cheap.
Major central banks move closer to exit as financial stability concerns are weighed against persistently low inflation
While credit imbalances have not yet become a macro issue in the US, the tight labour market calls for further monetary policy normalisation. In Canada, the trade-off between financial stability risks and low underlying inflation is skewed towards an early rate hike as spare capacity is fast being reduced. In contrast, in Australia the RBA’s policy stance is fully appropriate given ample labour market slack despite elevated housing and household debt risks. Sweden stands out as financial stability risks combine with a strong cyclical position. Although the BoE may have most work to do on policy normalisation given the current unemployment/inflation mix, we believe a consumer-led slowdown in H2 should continue to delay monetary tightening.
Emerging markets’ steady recovery and smaller imbalances point to selective attractiveness
The gap between EM and DM growth has failed to improve, but disinflation has made rapid progress in EM. EM currencies that show rising real rates, a strong balance of payments position and cheap valuation should stay attractive even in the face of higher US yields. MXN fits this description. Central Europe and Turkey stand out as registering positive surprises on growth. This is positive for CZK and PLN. TRY should also be supported to the extent that the current account deficit stabilises and as the central bank is no longer under pressure to ease. In Asia, we view Korea as better placed than Singapore to ride the current tech cycle given its leadership in semiconductors and the stronger rebound in domestic confidence.
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