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LongJohnSilver

Monthly FX Commentary

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LongJohnSilver

Dear All

 

Each month I receive various research reports from banks and brokers on foreign exchange news and forecasts.  One such report aggregates the consensus views of 27 leading investment banks. I find it quite useful for my work, and figured many here would to. 

 

So each month I will post here some extracts and commentary on what’s happening in the FX market for USD/EUR/GBP/AUD/THB. Usual disclaimer applies that this is not investment advice, use at your own risk, no recourse etc. 

 

Enjoy!

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LongJohnSilver

Key events over the past month

  • USD caught up in global synchronisation of economic slowdown driven by trade war and Brexit.
  • Recent G20 summit reduced risks of further trade action, but a lack of detail on key differences such as intellectual property means standoff isn’t over yet. Observers are sceptical about material progress on removing existing tariffs on $250B of goods
  • Domestic US data was positive; business investment isn’t as soft as thought while June payrolls recovered strongly from a dismal May. However under pressure from Trump, the Federal Reserve has turned dovish indicating interest rate cuts are ahead

 

USD

  • USD started to weaken towards the start of July as the Fed confirmed its Dovish stance despite a strong wage report – their view appears to be that US growth is no longer as vibrant as it was in 2018, with mixed Q2 indicators overshadowing the improvement in Q1. This with a lack of immediate inflation risks and pressure from Trump has the market estimating 1-2 rate cuts are imminent.
  • However, this risks creating financial imbalances and future problems, though most market participants are pricing in cuts, with the next move expected to be 0.25% cut and Fed Funds range (currently 2.375%) reducing to 1.925% by June 2020.

 

EUR

  • Outgoing ECB President Draghi signalled that further stimulus measures are available should the Eurozone economy falter – queue retail sales declining 0.3% month-on-month in May, while forward-looking indicators appear weak
  • Inflation remains a problem at only 1.2% YoY meaning a rate cut could come as early as 25 July; however a newly-dovish Fed does give room to the ECB to wait another month before making a move
  • What may factor into their decisions though is Trump’s accusations of currency manipulation and state support to Airbus risking sanctions
  • CONSENSUS VIEW: EUR/USD to remain range-bound between 1.13 by Q3 and to 1.14 in 2019, with a gradual appreciation in 2020

 

GBP

  • Pound languished again as the market awaits the Tory leadership contest; while the two front-runners attempt to establish their eurosceptic credentials by makig comments on a ‘hard Brexit’. No Deal option remains against parliament wishes but there is little appetite for the alternatives being a second referendum or another general election. Paralysis continues.
  • The increased political uncertainty is affecting UK economic output, which contracted 0.4% in April (month-over-month), while the PMI fell to 50.2 which is just above a contraction. Construction and manufacturing sectors though continue to contract at an alarming pace.
  • Consensus view: short-term depreciation to continue, with a cloud of Brexit uncertainty and possible Bank of England rate cuts to sure up a spluttering economy, with a target of about GBP/USD 1.23-1.24 before a recovery into next year with a narrowing rate differential with the US Dollar

 

AUD

  • A back-to-back rate cut saw the AUD back below 0.70, though with lower interest rates and tax cuts on their way, the economy is expected to bounce back. If wages, retail sales and property prices remain weak, then expect further rate cuts from the RBA and possibly even unconvential monetary policy (such as quantitative easing)
  • The only thing holding up the AUD at the moment is buyount commodity prices, especially iron ore which is benefitting from supply issues in Brazil. How much higher can commodity prices go given China’s economy appears to be weakening?
  • Consensus view: varies widely from 0.65 to 0.73 – it all depends on whether the fiscal stimulus measures and monetary easing improve the economy, and how much longer iron ore prices can remain where they are. Most see a gradual appreciation in 2020 and 2021 to between 0.74-0.79.

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WhiteThai

Your report seems to ask more questions than it answers.

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Man7

Thanks for sharing. Seems like the world is waiting for a quiet a few big questions to finally be answered!

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THAJEC

Many political influences and many issues and events that affect forex courses do not allow for forecasting any developments in this period. One Trump tweet is enough and there is a fuss in the financial markets as well as a statement by the FED president or the ECB.

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LongJohnSilver

We’re in completely in chartered territory. There are $17 trillion in negative yielding debt. That’s the equivalent of you putting $1,000 in the bank for a year and getting $980 back. All of this filters into the FX market, so countries like Thailand who have large current account surpluses and interest rates around 1.75% suddenly look more attractive, and that’s why the Baht is one of the worlds strongest currencies the past 12 months. 

 

The Bank of Thailand has taken some measures to cool the Baht this week but I don’t think it will make much of a difference while their interest rates and current account surplus are where they are relative to the rest of the world. 

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pdiddy544

And to top it all off ... we're not even in a recession yet! Wonder what the fed will do when the recession hits (yield curves are inverted/inverting) when the rate is less than 1.5%.

I also love how any weak wage growth is interpreted as a deadly threat of inflation, rather than a welcome sign of progress. Despite the fact that there has been virtually no inflation even with the loosest monetary policy.

The question is will we see a true recession like 2009 or will we simply enter the same Twilight Zone that is gripping Europe, Japan, and Australia - low growth, stagnated wages, low inflation, no GDP growth.

Edited by pdiddy544

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LongJohnSilver

I don’t think we will see a 2009-like recession. More likely we will see a Japan-like stagnation simply because there is so much debt. Debt brings forward consumption to boost the economy today at the expense of consumption in the future. Rates can’t go much higher now because of all the debt so you’ll end up as Japan is baring major fiscal reforms. 

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Fart sniffer

So..buy bitcoin? Right?

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taylor1975
8 hours ago, LongJohnSilver said:

I don’t think we will see a 2009-like recession. More likely we will see a Japan-like stagnation simply because there is so much debt. Debt brings forward consumption to boost the economy today at the expense of consumption in the future. Rates can’t go much higher now because of all the debt so you’ll end up as Japan is baring major fiscal reforms. 

I'm making nice stable returns from personal and commercial debt. As long as unemployment doesn't drop by a huge amount, the debt should be repaid. 

Government debt (gilts) hold no interest for me at this point.

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