[iForex]

EM and commodity linked FX still outperform in the context of rising risk appetite, while defensive currencies like the JPY and CHF still underperform. What is different is the general behavior of the USD and the specific behavior of EURUSD.

There are three factors to note regarding the USD:
1. It is less vulnerable to swings in sentiment as the US trade deficit narrows. Re-balancing is reducing the dollar’s funding requirement. That the hoped for global recovery is likely to come via EM not US consumption reinforces this.

2. The inflation/USD debasement story has not taken root. Rather than worry about an inflation surge, investors seem to have settled into the early-cycle view of strengthening growth and relatively low price risks.

3. Third, an important part of the transmission mechanism between increased risk appetite and USD weakness is currently suspended. This link is usually FX reserve accumulation by EM central banks and rapidly rising oil prices.