Financial markets have become palpably worried about the outlook for global growth, and with good reason. Data from JPMorgan shows worldwide manufacturing- and service-sector activity growth has been slowing since the beginning of the year. To drive the point home, figures from Citigroup reveal that global economic news-flow has increasingly deteriorated relative to baseline forecasts over the same period.
Against this backdrop, traders may well begin to envision a dovish policy bias shift from the world’s top central banks. The Fed has the most room to cut, but betting against the US Dollar on this basis seems ill-advised considering its appeal as a liquidity haven amid market turmoil. The BOC and the RBNZ are up next. Both have 175bps in cuts available. Their economies’ gearing toward commodities also makes them conveniently sensitive to the global business cycle.
Putting the Greenback on other side of the trade seems more attractive, but its ability to capitalize on risk aversion might prove to be uneven if the Fed is forced to scale back its tightening ambitions. The Yen does not present such ambiguity. Risk-off conditions are likely to stoke the unwinding of carry trades, boosting the go-to funding currency. As for the BOJ, it is already so far on the dovish side of the policy spectrum that there seems relatively little room to go further.
Taking all of this together, looking for opportunities to short NZD/JPY and CAD/JPY seems like a sensible strategy as the calendar turns to 2019. As of mid-December 2018, the former is showing signs of topping after an upswing and the latter is on the cusp of breaking support guiding prices higher since November 2016. That suggests opportunities for entry may present themselves in the near term, conveniently close to the start of the new year.
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