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Mar 04 - 02:55 PM

TD: Emerging Focus on Risk, Growth, and the Global Inflation Outlook; How to Trade it in FX?

By eFXdata  —  Mar 04 - 01:30 PM

Synopsis:

TD Securities outlines a growing focus on risk and growth in the global financial landscape, emphasizing the potential for carry trades despite a decline in risk-adjusted performance. The firm highlights a cyclical shift towards a more risk-friendly environment, contingent on upcoming activity data and continued disinflation trends. Their analysis suggests that a significant portion of core inflation is globally interconnected, with China playing a key role in exporting deflation, particularly to nearby small open economies, alongside lower commodity prices.

Key Points:

  • Emphasis on Risk and Growth: TD notes an increasing market emphasis on risk and growth dynamics, suggesting a more favorable cyclical backdrop for risk-friendly assets as markets navigate through transitions.

  • Global Inflation Trends: Their global inflation principal component analysis (PCA) tracker indicates that around 80% of core inflation trends are globally shared, pointing to a widespread inflationary environment influenced significantly by China's deflationary exports and lower commodity prices.

  • Currency Strategies: TD maintains a bearish stance on the Swiss Franc (CHF), favoring short positions in CHFJPY. The firm also expresses a tactical preference for the Euro (EUR) or the British Pound (GBP) to appreciate against the CHF, attributing this to EUR's strong performance linked to risk and equities. Additionally, TD identifies downside potential in USDKRW, highlighting the Korean Won's upgraded position and its strong correlation with China's growth factor.

Conclusion:

 TD Securities anticipates that the evolving focus on risk, growth, and global inflation trends will shape market dynamics in the near term. The firm advises monitoring upcoming economic data and inflation indicators closely, as these will play a critical role in confirming the shift towards a more risk-tolerant investment landscape. TD's currency strategy reflects a nuanced approach, leveraging insights into global inflation patterns and regional growth dynamics, particularly emphasizing opportunities in EUR, GBP, and KRW against a backdrop of declining CHF strength.

Source:
TD Bank Research/Market Commentary

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