Shift in sentiment: currency markets react calmly, while bond markets do not

The view taken by financial market participants vis-a-vis the global fundamental environment has changed considerably in recent months. While economic momentum in the eurozone had already eased noticeably during 2018, estimates in particular for the growth prospects of both the US and the global economy have become less favourable in the past few weeks. Potential reasons for this are easily identifiable: on the one hand, we have the trade disputes between the world’s most important economic powers, the longest government shutdown in US history and the uncertain outcome of Brexit, to name a few. Various central banks have reacted to the new environment impacting on monetary policy. Examples include the downward revision of growth prospects and warnings about heightened risks for the still dominant economic outlook. On the other hand, central banks such as the Federal Reserve and the Reserve Bank of Australia have rejected the idea of previously envisaged key rate hikes and have adopted a neutral stance.

The changed parameters have impacted significantly on the bond markets. Ten-year US treasury yields fell by almost 50 basis points since mid-November – a time where the prospects for global growth were still viewed as being considerably more optimistic and US money markets had for the most part factored in further restrictive steps by the Fed – while their Australian counterpart declined as much as 60 basis points. At nearly 30 basis points lower, Swiss and German securities with the corresponding maturities declined to a lesser extent. However, the yields in both countries have reached their lowest levels since autumn 2016, which is clearly negative for the alpine republic.

The currency markets paint an entirely different picture. The G10 currencies are hardly affected by the downturn in sentiment. Only the yen has made significant gains (more than 3%) over the dollar in the past three months, whereby at around 110 yen the currency pair is currently trading at what can be considered an unremarkable level for the recent past. The Swedish krona is the worst-performing currency with losses of somewhat over 2%, while the European single currency is trading at an almost unchanged level.

The currency market’s supposed ignorance is probably mainly due to two factors: on the one hand, market participants have clearly shifted their assessment for all G10 currencies “downward in parallel”, without drawing any significant distinction at national level. On the other hand, significant decisions with a global reach are on the agenda in the weeks ahead, including the trade talks between the US and China, as well as Brexit. Against this backdrop, numerous market players are likely to bide their time for now, to avoid being caught on the wrong foot.

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