Will Risk Trades Continue the Decline in September?
Looking back at August we can see that risk trades got battered, with stock markets and risk currencies such as commodity dollars getting beaten down. We still have a few days to go, but the trends have closely followed the predicted patterns, with the USD benefiting the most in all this. As anticipated, this month has proven to be challenging for risk trades, aligning with the historical trend. Notably, there has been difficulty in AUD/USD, which is a typical characteristic of this month.
However, the one exception to the usual seasonal trend has been the movement of yields which have been increasing in August. Traditionally, August sees a decline in yields as bonds strengthen, but this year, rates reached new cycle highs instead. Alongside this, USD/JPY , which typically faces struggles in August, performed quite differently this year as it also kept going up, gaining almost 5 cents.
Looking ahead to September, a similar narrative unfolds. It is historically the worst month for the S&P 500 and the MSCI world index. Nevertheless, the FX market doesn’t always follow the same trajectory as stocks. For instance, NZD/USD tends to exhibit gains in September, and USD/CAD tends to decline (although this effect has diminished in recent years). The yen’s value also tends to remain on the lower side.
In energy markets, strong seasonality takes effect, with natural gas experiencing an uptick while crude oil prices tend to decline as the driving season comes to an end. Taking all of these factors into consideration, there are increasingly valid reasons to exercise caution when it comes to risk assets.
While China’s recent measures have momentarily boosted sentiment, they don’t bring much meat to the table, since they just reduce trading taxes rather than stimulating genuine demand. This might not be a sturdy foundation for a substantial recovery, and hence the cautious outlook persists. We have been selling commodity dollars and will remain short on risk trades, as long as the situation in China remains controversial.
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