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27 Jan 2014
Flash: This month's events not a trigger for sustainable risk off environment - JPMorgan
FXstreet.com (Bali) - According to Jan Loeys, Strategist at JP Morgan, traders should not get carried away by the increase in FX volatility, noting this month's events are unlikely to trigger sustainable gains on risk-off trades.
Key Quotes
The baseline view on China remains one of sub-trend growth with recurring volatility in financial markets. But we note sub-trend China growth alone doesn’t justify a multi-point move in FX volatility nor trend strength in JPY and CHF.
In our view, that market outcome requires a more extreme deceleration in Chinese growth to perhaps 6% and/or widespread defaults across the various credit sectors always under scrutiny (trust loans, wealth management products, local government debt).
We still think the authorities are targeting a growth floor closer to 7% than to 6%, and that they possess the control mechanisms to allow selective defaults rather than contagious ones.
Hence, our reluctance to see this month's events as the early-stage equivalent of the US sub-prime crisis or Europe’s peripheral debt crisis, two events which were powerfully bullish for vol. JPY and CHF.
Key Quotes
The baseline view on China remains one of sub-trend growth with recurring volatility in financial markets. But we note sub-trend China growth alone doesn’t justify a multi-point move in FX volatility nor trend strength in JPY and CHF.
In our view, that market outcome requires a more extreme deceleration in Chinese growth to perhaps 6% and/or widespread defaults across the various credit sectors always under scrutiny (trust loans, wealth management products, local government debt).
We still think the authorities are targeting a growth floor closer to 7% than to 6%, and that they possess the control mechanisms to allow selective defaults rather than contagious ones.
Hence, our reluctance to see this month's events as the early-stage equivalent of the US sub-prime crisis or Europe’s peripheral debt crisis, two events which were powerfully bullish for vol. JPY and CHF.