Jane Foley, Rabobank 's FX Senior Analyst notes that the stock market has a solid start to the year that is bearing some of the risks to global growth that arise as a result of protracted trade tension from China and the US slowing growth and the perceivable risk of a US downturn early next year.
“While expectations of additional stimulus from China and reduced policy tightening from the Federal Reserve has helped to boost risk appetite this month, we see risk of falling investor confidence during the course of the year. This would boost demand for safe haven assets. Consequently we expect USD/JPY to end the year closer to the 105 area.”
“Despite efforts by China to staunch the impact of trade wars, surveys suggest that economists are expecting China’s manufacturing sector to shrink for a second straight month in January, with warnings from global giants such as Apple and Caterpillar feeding the anxiety. According to Reuters, China is planning to lower its growth target to 6 to 6.5% this year from 6.5% in 2018, despite its efforts to prop up demand.”
“Also of concern to the market is widespread acknowledgement that risks to growth have spread well outside China. Last week, ECB President Draghi recognized the increased downside risks to growth in the Eurozone while in the US Federal Reserve hawks such as Ester George have recognised that it might be prudent for the central bank to take a break in its hiking cycle. The market will be closely watching the policy signals provided by the FOMC at this week’s policy meeting. While the Fed may attempt to signal that it is preparing for another hike later in the year, in our view such a pause is likely to turn into the end of the cycle due to the risk of a US recession in 2020.”
“In the months ahead, we see risk that the warnings regarding the outlook to global growth will manifest in reduced appetite for risky assets. In this environment we expect safe havens such as the CHF and the JPY to trade well and expected USD/JPY to push lower.”
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