From USD to GBP: The Outlook On Major Currencies For 2019
Despite less volatile market conditions, the US Dollar Index (DXY) extended the bullish performance of 2018 to the first half of 2019, supported by relatively strong fundamentals in the US economy and the rising appetite of risk aversion driven by geopolitical conflict.
DXY peaked at 98.93 on July 31—its highest level in the past 26 months—after the US Federal Reserve (FED) announced the first rate cut since December 2018 in a “hawkish” tone.
How much further can the greenback run to the north in the rest of 2019? It will be a million-dollar question for investors who are keen to grasp the pulse of the market and seize a golden investment opportunity. Below, Biyi Cheng, Head of Greater China at CMC Markets, talks about the development of various major currencies for late 2019:
USD: Gradually retreating
In order to boost the domestic economy and become more competitive in the global market, many central banks around the world have eased their monetary policy to reduce potential recession and geopolitical risk.
President Trump has blamed the FED on different occasions for maintaining the benchmark rate at a high level, which has had a negative impact on domestic manufacturers. US decision-makers are also gradually abandoning the strong dollar policy introduced by former US Treasury Secretary Robert Rubin decades ago in order to reduce a large amount of deficit in their current account balance.
The change of policy direction will enhance the possibility that the FED will cut the rate again later this year. Meanwhile, the trade tension between China and the US sees no end in the short term, so tax tariffs will slow down economic growth and harm the revenue generation of US companies.
EUR: Tendency to stabilise
The statistics from the European Central Bank (ECB) suggest that the Eurozone has experienced capital outflow in the past several years, due to negative yields on treasuries and ECB’s prevailing quantitative easing policy. Nearly half of this capital flows to US dollar-denominated assets.
However, factoring in the gradually increased fiscal expenditure, historically low-interest rates and current low-value of the currency, a slow economic recovery in the Eurozone is expected.
Besides, as mentioned above, the bullish performance of the US dollar may be ceased, and EUR will be benefited from it. Thus, the signs of changes in the Eurozone economy are heavily dependent on the US.
GBP: Stumbling at the bottom
It is believed that the effect of Brexit, which has hampered economic growth in the UK for three years, will be broken in the coming months. All domestic investments that have come to a standstill or have been delayed due to Brexit will be able to grow again when a Brexit resolution is reached.
This removal will bring a short-term rise in the UK's domestic inflation rate, possibly making the Bank of England raise its interest rate by 25 basis points and thus supporting the GBP recovery.
However, this may only be a flash in the pan. The uncertainties that Brexit caused will continue to influence its economic growth in the long run. Meanwhile, economic advancement by overdraft in advance has been reflected in its recent economic indicators.
JPY: Long-term weakness
Bank of Japan (BOJ) has begun its open-ended monetary easing policy following its meeting at the end of July. With this policy, JPY is hard to walk its own way out.
Nevertheless, since Japan’s sustained current account trade surpluses offer a relatively solid foundation for JPY, and with geopolitical instabilities and global trade conflicts becoming increasingly fierce, the risk-off nature of JPY has made itself popular in the backdrop of global concerns of a second economic recession.
However, it should be noted that BOJ now adopts a wait-and-watch approach towards the FED's possibly more radical movement to cut interest rates. If the FED moves ahead, BOJ may also take actions accordingly.
Finally, strong demands from local organisations of Japan for overseas bonds and Japan's government pension fund hedging overseas assets have formed a zero-sum game, destabilising JPY’s performance in the short term.
AUD: Rebound in recovery
Due to sluggish growth of its domestic economy, negative impacts of global trade conflicts and a slowdown in imports from China, Australia’s largest trade partner—Reserve Bank of Australia (RBA)—has lowered its benchmark rate to an all-time low of 1% from the previous two interest rate decisions.
It will cautiously monitor what the two interest-rate cuts will bring in the following months. Thus, it is anticipated that RBA will not make any further interventions before November.
At the same time, USD is very likely to fall back later this year, which will ultimately support the AUD recovery. However, with the domestic inflation rate of Australia at much lower than the target range of 2-3% set by RBA, AUD’s recovery is able to see only one rebound and thus, reversal signs of AUD are not expected this year.
CNY: “7” is going to become normal
Holding the USD/CNY exchange rate below “7” has always been considered normal and an important psychological threshold. As the trade wars intensify and China’s economy goes global, the CNY exchange rate will move with higher flexibility to tackle the complex situation, both at home and abroad.
Thus, “7” will no longer be regarded as a special threshold. Instead, anything above or below seven will be considered normal as exchange rates fluctuate. In addition, China’s economic growth will gradually slow down, so the USD/CNY rate moving above seven is going to be seen as one of the key indicators reflecting the slowing trend.
To sum up, major economies around the world that are facing reconstruction of externally trade barriers, geopolitical instabilities and internally underlying crises, have intentionally or unintentionally stirred a “currency depreciation” competition. Its aim? To keep the domestic economies growing stably and enhance the competitiveness and market shares of domestic products in the global market.
Now, we have no idea who will win the “Currency War” in the end. But what we've seen is that keeping the domestic currency weak has become a global trend and we will not see any fundamental changes in this pattern by the end of the year.
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