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Juggling Policy Divergence, RMB Adjustments and Trade Downshift
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§ Divergence
(Policy and Asset Prices); Global Trade downshift; and Potential yuan
adjustments will be key themes in 2016.
§ Pace
of Fed tightening is a key FX focus in 2016. In an environment of a global
trade downshift, as long as growth between G7 and EM does not diverge too much
and too fast, EM will be in a comfortable position. Concerns about yuan
adjustments in 2016 could also continue to add to currency volatility. There is
downside risk for EM if growth fails to pick up with the risk of worsening debt
sustainability a possibility affecting EM FX.
§ Expect
USD to be supported. EUR and JPY to stay soft as risk sentiments remains
supported. USD/AXJs to see further upside for currencies with signs of weak
domestic demand, lower fiscal capacity and potential idiosyncratic risks.
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