Currency tensions among advanced countries are on the rise, driven by the perception that the US Dollar could be overvalued. We now use our currency valuation framework to examine US Dollar valuation, and look today at the size and composition of the US current account. The US current account deficit is almost entirely (80%) with China. Dollar overvaluation, if it exists, is therefore mostly versus EM Asia.

Vietnam has further integrated into regional supply chains. It has benefited from US trade diversion away from China, and production reallocation and investment by Chinese firms. The key risk is the US changing its policy stance towards Vietnam.

Geopolitical risks have declined markedly, helping the TRY to remain stable, despite growth concerns prompting the central bank to cut interest rates by 425 bps. Large external financing needs and a worsening fiscal outlook present significant challenges going forward, while further stimulus could hurt external stability following last year’s sharp correction.

Weak growth will weigh on tax revenues, leading to sizable revenue shortfalls, while the frontloading of financial support to Eskom will cause spending overruns. Taken together, the fiscal deficit will far exceed the government’s targets. This increases the risk of a rating downgrade by Moody’s to non-investment grade status.

Central banks poised for easing as clouds gather over the global growth and earnings outlook; Policy uncertainty remains a key risk with no-deal Brexit and potential U.S. FX intervention in the spotlight ; China accelerates market opening for foreign investors in a bid to stoke growth and ease trade tensions; Leveraged loan issuance is over 50% below H118 levels; lower global rates reduce the appeal of floating-rate securities; Who holds leveraged loans? Institutional investors may have significant exposure via collateralized loan obligations (CLOs)    

Speculative positioning in the CFTC’s CoT report shows Dollar longs have scaled back sharply and are only modest at this point. Data from option markets suggest positioning may even be modestly short the Dollar versus the Euro. After many years of large Dollar longs in the foreign exchange market, we read these data as saying Dollar positioning is now essentially flat.

We estimate that Ukraine’s debt should stabilize at around 55%. The exchange rate depreciating roughly in line with inflation is key, as about two-thirds of Ukraine’s debt is issued in foreign currency. A 2014-style FX shock would bring the debt-to-GDP ratio to 100%. We are more concerned about the financing gap in 2020 than debt.