Risk perception on global financial markets remains high

Even though the monetary policy steps taken by the PBoC contributed to a calming of the situation yesterday, risk perception on the global financial markets remains high. On the one hand it is still unclear what effects the selloff seen over the past few days will have, e.g. for US monetary policy and for the stability of the global financial markets. 

And the outlook for the Chinese economy seems more uncertain than ever. What would the global economy look like with a permanently flagging Chinese economy? As a result secure investments remain en vogue. 

"That means for the G10 currencies, long carries are likely to have limited potential for a recovery over the coming days. A similar development is seen following the CHF shock in mid-January, it takes a while for carry trades to recover following a collapse. It seems that the FX market wants to ensure that immediate effects will be avoided before it takes fresh risk on board", says Commerzbank. 

It seems that following the strong exchange rate moves of the past few days it is time to "get things straight" again. According to G10 factor model, the exchange rate moves since the CNY shock were mainly dominated by USD weakness and risk off. Neither comes as a surprise. 

The exchange rate moves are adjusted by these effects. Only EUR and SEK were able to benefit, the currencies of the two central banks that are still actively pursuing QE programs. In times of crisis the possibility of being able to use a QE tool seems to be considered an advantage for a currency.