Risk rally has longer to run – RBS

Paul Robson, Research Analyst at RBS, suggests that encouraged by central bank easing and a steadfast Fed, the stampede for yield from the Summer liquidity pump has continued.

Key Quotes

“With major risk events still a few weeks away, we see this as a “go-with” theme and take on consensus/positioning risks. Yellen’s presentation at Jackson Hole (August 26) is the most immediate big near-term risk event, but the more significant events come in late September (FOMC and BoJ).

December (13/14) looks the most likely month if the Fed is to tighten this year, with 71% of economists (according to the WSJ) expecting short-term rates to be raised. The performance of the Chinese economy is likely to be very important in the FOMC’s thinking given Yellen’s “risk” approach to policy. As our China Economic Desk Strategist Harrision Hu notes here, faltering demand, as opposed to tightened supply, has dragged down credit growth. Credit stimulus in turn has been a key driver of growth and as such his leading index points to more weakness in Q4.

But for now, we see value in being selectively long carry based on carry-vol ratios on improving private sector fundamentals in some EM economies, yield levels, G4 central bank liquidity and fundamental EM FX valuations. Specifically, we see value in short EUR/INR, long INR/JPY, short USD/IDR, short USD/ZAR. Overall we favour short EUR, GBP, USD, JPY vs. long INR, IDR, ZAR.”