Talk of the reflation trade has stepped up a gear, after comments made by the chairman of US Federal Reserve to the house committee on financial services in late February.
Jerome Powell said that an increase in interest rates was not on the cards and that bond buying would continue. The prospect of further fiscal stimulus saw interest in commodity-linked currencies increase.
Investors are keener than ever to better understand flows
Daniel Tenengauzer, BNY Mellon Markets
The view that the world is in a risk-on environment after the result of the November US presidential election and in light of the progress of coronavirus vaccine programmes is supported by Sam Lynton-Brown, deputy head of global macro research and head of FX strategy Europe at BNP Paribas.
“Monetary and fiscal policy is exceptionally (and asymmetrically) supportive, which combined with global economic recovery as vaccine deployment occurs creates a reflationary risk-on market environment,” he says.
“Such an environment is, we believe, consistent with continued structural USD depreciation, albeit in a more selective fashion than in 2020.”
FX flows are fleeing carry strategies, but holdings of carry positions remain positive – which is a risk-seeking indicator, explains Daniel Tenengauzer, head of markets strategy at BNY Mellon Markets.
“Investors are keener than ever to better understand flows throughout global asset classes such as FX,” he says.
Clients are looking for value additive, actionable market views and trade ideas
Sam Lynton-Brown, BNP Paribas
“We have invested considerable time and resources into enhancing our iFlow product (a web-based application for analysing global capital flows across asset classes) over the past year and in expanding both our European and Asian strategy teams, which has given us more capacity to engage with clients around the world.”
Lynton-Brown says that the level of engagement between investment management clients and BNP Paribas’s FX research team has risen significantly since the start of the coronavirus crisis.
FX strategy client interactions increased by 40% last year compared with 2019, with a particular rise during periods of peak Covid stress, while interactions between the bank’s FX strategy team and what he describes as “targeted institutional accounts” almost doubled during the same period.
“Clients are looking for value additive, actionable market views and trade ideas,” says Lynton-Brown. “They value global macro top-down views, but with a strong quantitative input.”
Deutsche Bank clients are more interested than ever in discussing the macro outlook, according to the bank’s global head of FX research, George Saravelos, who notes that the Deutsche Bank FX research team has held more than 130 client calls since the start of this year.
We live in unprecedented times for global macro
George Saravelos, Deutsche Bank
“We live in unprecedented times for global macro, with topics of discussion ranging from the vaccine rollout to the impact of unprecedented fiscal and monetary stimulus on inflation and the dollar,” he says.
“Client risk-appetite remains strong as confidence in the global economic recovery has increased, although with the dollar being more range-bound in recent months, capital deployment is stronger in cyclical assets such as equities and credit rather than FX.”
BNY Mellon Markets’ Tenengauzer is another who refers to a considerable increase in client engagement with his strategy team during the past 12 months.
“We have found that most investors are interested in building an investment thesis and then developing tools that enable them to test and validate that concept,” he says.
One of the challenges facing the banks’ FX research is ongoing travel restrictions, which have not only negatively affected their ability to meet clients but have also adversely impacted their access to policymakers – a crucial selling point for investment management clients, explains Luis Costa, head of CEEMEA FX strategy at Citi.
“This is important because our focus is on trade idea generation,” he says. “Clients expect us to understand how policymakers are thinking and to take account of the forecasts produced by our economists, even if sometimes we might challenge those forecasts.”
