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China Bearishness Spell Out Bullish Europe

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There is extreme bearishness on the outlook of major economies most specially China and the US. This trend is inverse with the actual increase in the manufacturing cycle, which rendered strong undercurrent to cyclical assets as according to the forex strategies differentiated by Barclays’ economists. This supported cyclical assets to rebound after a sharp sell off driven mainly by tapering expectations.

G4 Development

Economists recently studied that the rise in G4 business confidence is a key ingredient in forex strategies. The rise will spur output growth for various economies over the long term. Barclays identified the strongest boosts will come from those in Europe, then developed Europe, Asia and the Americas. Economists argued that the rise in G4 business confidence will drive increased activity in industrial activity and material sectors like machinery, construction and metals.

Barclays likewise measured the magnitude of assets that were intertwined with the cyclical improvement. They examined their forex strategies by looking at each country/sector equity index and currency versus the USD returns since June 2013 and compared these with the implied impact on country growth owing to global spill overs. The broker found out that at the level of cross-country, asset prices specifically country equity indices and currencies, to a lesser extent, do not reveal the better growth prospects. The variables relationship showed that a slightly stronger FX market rather than equities, which vary as according to its sector concentrations.

Barclays economists exactly mentioned that higher uncertainty brought on by fears of a Fed exit and sometimes poor market liquidity have led to sharp/idiosyncratic movements for assets of countries with large external vulnerabilities most particularly with Emerging Markets. This intuition is reinforced by the stronger correlation between improved growth prospects and equity sector returns, with a closer correlation of Developed Markets equities with increased sector output than for Emerging Markets.

EUR Forex Strategies

Meanwhile, BNP Paribas noticed that reserve managers are returning to purchase the EUR. They said that it is plausible that reserve managers are buying again as FX reserve growth recovers. But they would play down the impact of such purchases on price action. Their forex strategies further revealed that private investors and reserve managers bought eurozone debt in tandem for a better portion of the periods 2000 to 2010. But after the euro area crisis, the global economic slowdown, along with the contraction in FX reserve growth, the reserve managers did not support the EUR. According to them, there may be pent up demand for the EUR.

However, these forex strategies seem less compelling as BNP Paribas argued that:

(1) Reserve managers were diversifying heavily into other currencies, like the AUD and CAD, even as reserve growth flattened and;
(2) Reserve managers may have become underweight on the USD thus limiting the scope for a diversification of capital flows in the near term.
This takes into account that the economy is coming out of a period of heavy emerging market USD selling intervention.

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