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- GBP and EUR set for appreciation, USD for depreciation.
- Growth, interes rates, lift GBP and EUR as USD retreats.
- AUD outlook neutral, temporary CAD strength up ahead.
Currency markets are still due a regime change in 2019 as the global economic league tables turn agains the U.S. economy, according to CIBC Capital Markets forecasts, but a resolution of the U.S.-China trade war will be necessary first.
The Dollar has been much more resilient in 2019 than the market had imagined at the start of the year, largely due to the continued outperformance of the U.S. economy, but safe-haven flows have also helped prop up the greenback since the beginning of May.
President Donald Trump lifted in early May, from 10% to 25%, the tariff charged on $200 bn of imports from China. He's also threatening to impose a 25% tariff on all of China's remaining exports to the U.S., which clock up to roughly another $300 bn each year.
This was already threatening to stok an even more protracted slowdown in the global economy when, in the middle of May, the White House placed Chinese technology giant Huawei onto what can only be described as a blacklist that exiles it from the U.S. market.
Other western companies are now reported to be following suit by severing ties with the firms and, despite China promising to retaliate against the move, rumours are swirling that suggest Trump could soon target a range of other Chinese technology companies in a similar manner.
"If there are signs of progress in trade talks, investors could slowly move away from the dollar as a safe haven currency, generating broad-based DXY weakening in the medium-term. That’s still a big and less certain “if” than it appeared only weeks ago, but while it may take some months to resolve, we still see economic interests pushing the US and China towards a deal," says Avery Shenfeld, chief economist at CIBC Capital Markets.
Dollar strength and resilience is what's keeping other major currencies under pressure this year. An end to the U.S.-China is a preqequisite for a change in the market mood toward the major currencies but it's not the only thing likely to be required before the greenback retreats from close to a two-year high.
Further signs of an economic slowdown in the U.S., combined with a clear pickup in places like the Eurozone, could also be necessary to turn the tide of global capital flows against the Dollar. That too might also require time but, nonetheless, CIBC says it's in the pipeline for 2019.
If the U.S. economy slows notably the Federal Reserve could be forced to cut its interest rate from the more-than decade-high of 2.5%, and at a time when financial markets could well be contemplating the likely timing of an initial European Central Bank interest rate rise.
Below is a selection of CIBC's views on what this environment is likely to mean for major currencies and individual exchange rates.
The Dollar index was 0.07% higher at 98.10 Thursday and is now up 2.2% for 2019. The Euro-to-Dollar rate was quoted -0.18% lower at 1.1135 Thursday and has now declined by 2.9% for 2019.
The Pound-to-Dollar rate, meanwhile, has continued its Brexit and trade-driven descent. It was quoted 0.15% lower at 1.2644 Thursday and is now down 0.76% for the year, after having thrown away what was, in February, a 5% gain.
Above: CIBC exchange rate forecasts.
"UK parliament is breaking for recess until June 4th, after which lawmakers will get to debate and vote on the Prime Minister’s latest Withdrawal Agreement Bill. This fourth attempt by May to pass her bill is almost certainly likely to fail."
"In spite of continued political uncertainty, the UK economy remains fairly solid, as the BoE has upgraded its GDP forecasts. Barring the possibility of a hard Brexit, BoE Governor Carney has warned that rates in the UK should be higher than what the market has currently priced in, but for now, the market is currently preoccupied with political risk rather than fundamentals."
"GBP has come off the 1.32 mark over the past few weeks, and there are signs that levels are a bit oversold. Handicapping Brexit is an impossible task, but our current assumption is that an accord with the EU will somehow be reached which supports an upward profile in GBP."
"Justifying the Fed’s decision to step aside from its tightening cycle, we’re seeing underlying momentum in the US economy wane. Interest-rate sensitive components of the economy continue to decelerate and industrial production has flattened out, leaving final domestic demand decelerating to 1.4% in Q1, a sign that growth in Q2 will slow. The need to pare inventories will see Q2 give back some of the surprise in GDP growth in Q1."
"Overseas, we’re beginning to see signs that global growth indicators are starting to recover, despite ongoing uncertainty surrounding international trade and local issues like Brexit. The accommodative shift in monetary policy around the world has helped the easing of financial conditions in several G10 countries, with some also seeing a fiscal ease."
"If there are signs of progress in trade talks, investors could slowly move away from the dollar as a safe haven currency, generating broad-based DXY weakening in the medium-term. That’s still a big and less certain “if” than it appeared only weeks ago, but while it may take some months to resolve, we still see economic interests pushing the US and China towards a deal. That leaves unsettled trade issues with Europe as one of the key risks to our call for a US dollar retreat."
"We expect the euro to begin finding some support versus the USD, as it appears to already be breaking out on a trade-weighted basis. We look to early signs of stabilization for cyclical indicators of the Eurozone economy as the reason behind that movement. The key confirmation of this will be the German economy’s performance going forward."
"From a balance of payments perspective, we’ve already seen net portfolio outflows reduced as the ECB QE program has wound down. The commensurate gain in the EUR has yet to be realized, but we expect that it simply requires more time."
"The RBA’s decision to stay on hold last week was coloured by its new ‘indicator-based’ guidance. The Bank has sent the signal that a rate cut is looming - unless there is some improvement in an already-tight labour market. That implies that the bank wants to see further improvement on the wage front, given their concerns regarding consumption."
"‘Further improvement’ in an already tight labour market represents a high bar for the status quo. As such, we may see a rate cut from the RBA in the next few meetings. The market already has more than one cut priced in by the end of this year and positions in the futures market have already moved in that direction...we’re maintaining a neutral bias on the AUD for the time being."
New Zealand Dollar
"The RBNZ cut rates last week to a new all-time low, while reducing the trajectory for its benchmark rate. Moreover, the Bank now also expects to ease again next year. Despite this, the Bank indicated that the outlook is balanced for now, though that was tempered with concerns regarding developments in key trading partners (specifically Australia and China)."
"Going forward, market players will need to watch key barometers for domestic spending, including retail sales and business investment. We’re not expecting the RBNZ to ease further at this point, though a turn for the worse in global trade tensions may lead to a revision of that view. We remain neutral on the NZD, with a bias to fade rallies."
"The Bank of Canada meeting and corresponding April MPR highlighted the Bank’s retreat from its earlier hawkishness, following the trajectory of other global central banks against a weakening global backdrop. Along with removing the mention of any potential rate hike this year, the BoC downgraded its 2019 growth forecast from 1.7% to 1.2%."
"While Q1 data was in line with that view, the early news on Q2, from March indicators and April employment, looks decidedly better. That opens up room to top the BoC’s projection even if the coming months will be more of a rebound from a weak base than the start of an extended trend of economic strength."
"Firmness in the US dollar and the brightening in Canadian reports has delayed our prior call for a temporary loonie rally. But if, as we expect, the US pays for some of the upside surprise it registered in Q1 with a weaker Q2 , the US dollar could fall enough out of favour to send USDCAD to 1.31 by the end of Q3."
"We retain our 1.38 dollar-Canada target for year-end 2020, with levels above 1.40 lying beyond that forecast horizon."
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