The macro environment favours cyclical currencies - ANZ

"With monetary policy taking a side step as a driver, risk appetite will likely dominate," ANZ Research Team notes.

Key quotes:

"For the cyclical currencies, the broader environment is likely to have a bigger influence. On this front, most signs remain positive. The big USD cycles are typically determined by the relative structure of growth in the US (as compared with the rest of the world) and by volatility. Neither of these factors supports the USD at the moment, and over the next month we do not expect this to change."

"On the growth front, we are in the midst of a synchronised global upswing. Most (90%) of countries’ manufacturing sectors are expanding, while most of those countries also have export orders that are expanding and inventory levels that are below forward orders. This is important because it suggests the trend won’t be shortcircuited in the next quarter. In addition, the ANZ Global Economic Advanced Reading signals expansion ahead. All of this suggests that the momentum we are experiencing should persist in the quarter to come; and, as such, the USD will continue to struggle for traction against cyclical currencies."

"This is important for volatility. While we are observing early signs of a turn in the structural drivers of volatility (most notably a tick higher in the volatility of economic data), it is too early to get excited. If growth remains strong, the outlook for volatility should remain contained. And, at least against the cyclical currencies, this also sets up a difficult environment for the USD."

"In the context of tension on the Korean Peninsula, this latter conclusion becomes important. Our work on the underlying sources of volatility shows that it is not just political uncertainty that drives broader volatility. The growth environment has an even stronger influence. We saw this earlier this year when spikes in European political uncertainty ahead of the French and Dutch elections failed to drive a broader rise in market volatility. We expect a similar result this time, provided there is no military engagement with North Korea (an unpredictable, but unlikely event). Headlines will drive contained and episodic spikes in volatility, particularly at times when risk appetite looks tactically stretched, but they will be corrective and provide buying opportunities."