USD selling might only be a summer trade - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the US dollar is back under selling pressure as investors search for yield in quiet summer trading that has seen FX volatility in some of the key major currency pairs decline to levels we haven’t seen since late 2014 or early 2015.

Key Quotes

“The appetite for carry started in the EM space where yield pick-up was more obvious and EM FX indices are now at levels we haven’t seen in a year when selling intensified in response to the devaluation of the Chinese renminbi. We suspect this dollar selling can persist for now but doubt that the EM risk-on rally that signalled the beginning of this dollar slide will prove sustainable as we move beyond current summer trading conditions and into the final quarter of the year.

The search for yield that resumed in FX in the EM space is a reflection of the general improvement in risk appetite. The MSCI World Index this week closed at the highest level since August last year, again when global equity markets fell in response to the devaluation of the renminbi. We had an abrupt but ultimately brief disruption in that global equity market rally post-Brexit but this rally has been in place since February and the turning point coincided with the low of the year in crude oil prices.”