FX MONETARY POLICIES Chart 2 – Te Totality of Monetary Policy
like on a chart of a broad based index. Our preference at the current time is that this support will hold and that the Dollar could soften in the weeks ahead. We are therefore looking for the topping process to continue a little longer, and for central banks to tighten policy further (obviously led by the Fed) and for economic growth to remain reasonable. But the risks do seem to be growing and investors need to remain alert.
Chart 3 – MSCI World Index ex. US with 40 week moving average (green)
Because of its global reserve status, changes in US policy are felt at home and abroad. Global markets
are also inf luenced
by changes in the US current account (a mechanism by which the US supplies Dollars to the rest of the World thereby helping growth) and the level of the Dollar. So, with the current account about half the level it was pre 2008 crisis, and the Dollar up 7% from the recent low, headwinds for the global economy and more especially emerging markets are becoming apparent.
We think that the Dollar could 46 FX TRADER MAGAZINE July - September 2018
be an important factor for global markets in the weeks ahead. Any further Dollar gains could easily tip markets over towards bear market territory, or a decline in the Dollar will help markets bounce from here. It is important, because as we show in chart 3 below, the MSCI World ex. US is testing a level of support that has been created over the last eight months, and it is trading below its own 40 week moving average. A break of this support could easily lead to further losses.
For months, we have been talking of a multi-month topping process, and this is what it looks
In the weeks ahead, we will continue to look at the current conditions of the economy, and how policy could affect growth in future quarters. As we tried to point out, the economy will only start to deteriorate after the turn in leading indicators and financial markets. We should certainly not confuse economic analysis with market analysis as waiting for an obvious deterioration in the economy will most
likely mean that
investors have overstayed their welcome. That said, we think the combination of both a financial and economic downturn will be comparable to 2008, and so understanding both is extremely important.
Stewart Richardson
Chief Investment Officer RMG Wealth Management
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