• Overview

    The currency market is beginning to show signs of growing risk aversion as investors debate a global economic slowdown.

    The top-performing G-10 currencies so far this quarter – by a long way – are the yen and the Swiss franc, which are up 1.7% and 1.3% respectively against the US dollar.

    JPY/AUD climbed out of a year-and-a-half downtrend – a pair which is often used as a gauge of global risk sentiment. Strength in the yen means the currency market has now joined bonds in signalling an aversion to risk. That leaves equities where investor sentiment remains reasonably solid.

    Chart 10: Australian dollar falls against the yen  

    Source: Bloomberg


    Crude oil is struggling, with global benchmark Brent at risk of retreating to the lowest close in three months. Prices are taking a twin hit, with demand hurt by the delta variant’s spread while OPEC+ keeps on easing supply curbs.

    The US central bank meeting minutes showed most participants want to start reducing the pace of asset purchases this year, which isn’t a total shock to markets. In any case, a Fed forging ahead with tapering in the face of rising virus, slower growth, isn’t exactly a recipe for boosting risk appetite. Oil could go lower which given the number of oil supply companies in the index, will push high yield down (spreads wider).

    Chart 11: Slower growth weighs on oil which weighs on high yield

    Source: Bloomberg


    The combined balance sheet of the four largest central banks surged by more than $10 trillion since the end of February 2020. That is roughly $1,300 for every man, woman and child that was alive on the planet at the start of that period. Except that rather than be handed out to the world’s population, that $10 trillion has essentially gone into financial assets. This at a time when the universe of listed public assets is shrinking. Is it any wonder equity markets keep hitting record highs?

    Chart 12: Combined balance sheet of the 4 largest central banks (USD tn)

    Source: Bloomberg

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