Currency traders should watch Europe for risks, says top-ranked strategist

US President Donald Trump has created a lot of noise since he started in office in January. The controversies swirling around him, meanwhile, have created a smokescreen that conceals risks to currency traders. That’s the message from a leading currencies strategist in Asia, who cautions that Europe has risen considerably on the risk radar – and other traders should pay attention. If you think Trump stirred up markets, wait until you see what unfolds as the votes are counted in France, Germany and the Netherlands – all countries that are experiencing a backlash from citizens fed up with the tide of immigrants washing in from Africa, the Middle East and Asia. Geopolitical risks are underpriced, cautions Cheung, as he evidently braces for significant volatility with Europe as the epicentre in the months ahead. – Jackie Cameron

By Narae Kim

(Bloomberg) – From Paris to Paju? Asian currency-watchers focused solely on the impact of U.S. President Donald Trump’s policies on the dollar or Beijing’s fight against a weakening yuan are ignoring risks emanating from upcoming elections in Europe, according to the region’s most accurate foreign exchange forecaster.

US president Donald J. Trump

“Europe is not on a lot of our clients’ radar but it really should be,” Standard Chartered Plc’s Eddie Cheung, the top-ranked Asian emerging-market currencies strategist in the most recent Bloomberg ranking, said in an interview. “As Asia’s supply chain into the U.S. and Europe goes through China, any volatility in Europe will impact Asia via trade.”

Elections are due this year in France, Germany, and the Netherlands, with anti-establishment candidates attempting to ride a rising tide of global populism that has already helped push Donald Trump the U.S. presidency. While the euro has so far been resisting political risk – gaining 1.5 percent against the dollar this year – investors including Aberdeen Asset Management Plc and Credit Agricole CIB have said the rally might prove short-lived. 

“At the moment markets are not driven just by pure economics and fundamentals but also by geopolitical risks, which are currently underpriced,” said Cheung. “Should they arise, there will be downside pressures on the euro, sending the dollar stronger.”

Asian currencies including China’s yuan, South Korea’s won and Taiwan’s dollar, are also vulnerable to any tightening in Europe’s liquidity conditions because their economies rely on external funding and trade with Europe, Cheung said. The EU accounted for about 15 percent of total trade with China and 10.4 percent with South Korea at the end of 2015, according to Bloomberg, while the European Central Bank is weighing its monetary policy in the face of accelerating inflation.

Bloomberg’s dollar index has fallen for six straight weeks after surging to the highest in more than a decade after Trump election victory. Markets were “overly optimistic” about Trump’s campaign promises to boost growth and government spending, Cheung said, with much of the new administration’s initial pronouncements aimed at trade.

“People are really focusing on the U.S. and China at the moment, but they seem to be ignoring Europe and its geopolitical risks, which could potentially add volatility this year,” Cheung said.

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