The week in FX: US dollar’s fate increasingly tied to Trump
Nordine Naam, Senior Forex Analyst at Natixis, explains why the dollar is under the cosh, and how the summer is shaping up for G10 currencies…
Last week, the US dollar corrected against virtually all G10 currencies undermined by a series of negative factors. The primary factor, however, was a raft of disappointing macroeconomic indicators including retail sales, the Empire State Manufacturing Survey, Philadelphia Fed Survey and consumer confidence. As a result, the greenback weakened – particularly given Donald Trump’s latest setback in repealing and replacing Obamacare. Certainly, such developments highlight the President’s incapacity to push through reforms and, in turn, do not bode well for the much awaited tax reforms.
Meanwhile, Robert Mueller, the special counsel investigating possible ties between the Trump campaign and Russia in last year’s election, is also to examine a broad range of transactions involving Trump’s businesses. All these factors combined bear down on the US dollar and lessen expectations of a hike in the Fed Funds rate. The market’s positioning is likely to continue to be affected by this. Speculative accounts have reverted to being neutral on the US currency and could turn short on the currency if the political and economic environment remains as downbeat.
This week, watch out for the Federal Open Market Committee (FOMC) meeting statement where the Federal Reserve is expected to maintain a neutral stance. The figures for 2017’s Q2 GDP are also set to be published. Given Trump’s political setbacks, the US dollar could remain downbeat in the absence of a significant improvement in US growth in coming months.
EUR/USD new range between 1.15 and 1.20 this summer
Despite dovish statements made by the European Central Bank, the euro failed to check the US dollar’s decline. Certainly, the central bank was particularly dovish at last week’s meeting, insisting that inflation remained excessively low and that the market must be patient with regards to new, or any, QE recalibration. In fact, Mario Draghi, ECB President, stated that the repricing of the euro’s exchange rate was only now receiving some attention.
All these announcements underscore the ECB’s concerns there will be an unwanted rise in Eurozone long interest rates and in EUR/USD at the slightest confirmation of a monetary normalisation. In short, the ECB is seeking to its communication carefully to avoid a significant, not to mention premature, tightening of monetary and financial conditions.
While Eurozone long interest rates corrected in reaction to expectations of a hike in the ECB’s key policy rates in H1 2018 but despite having subsided slightly EUR/USD in fact appreciated in reaction to the greenback’s slump. In other words, there are factors outside the ECB’s control that impede its capacity to act, which will make it even more cautious in its communication.
This week, there will be few macroeconomic indicators except for the PMI surveys. This suggests that EUR/USD could extend its rise towards 1.18 in coming weeks as the ECB meeting approaches. At the end of the year, EUR/USD is expected to return to 1.15 when the Fed will raise its key rates.
JPY: USD/JPY likely to be stable around 111 in the short term
USD/JPY was affected by the bout of weakness experienced by the US dollar, weakening to 111.50 despite the Bank of Japan (BoJ) stating that it will pursue an ultra-accommodating monetary policy until 2020. In fact, the pair tracked the downturn in US long interest rates. In the short term, USD/JPY is likely to hold around 111 given the weakness of the latest US macroeconomic indicators, which will curb any upturn in long rates.
GBP: EUR/GBP to head towards 0.91
Despite the publication of some good indicators (rebound in retail sales and rise in house prices, weaker inflation), sterling depreciated against all G10 currencies. Indeed, the pound was penalised by the government’s seeming absence of a Brexit strategy, its lack of preparation and negotiations over the total amount of the divorce bill. EUR/GBP could appreciate to 0.91 in coming weeks.
Commodity currencies riding the wave
Taking advantage of the bout of weakness experienced by the US dollar and from the upturn in commodity prices, commodity currencies appreciated last week. In the wake of the recovery in iron ore prices, AUD/USD tested an all-time high at 0.7980 before correcting. This followed a dovish statement from Guy Debelle, the Reserve Bank of Australia’s (RBA) Deputy Governor, playing down the likelihood of an interest rate hike in the short to medium term and expressing concerns about the strength of Australian dollar. This week, watch out for Q2 2016 consumer prices particularly given that inflation is expected to accelerate slightly to 2.2%. In this context, AUD/USD still has upside potential towards 0.82 in coming weeks.
The Canadian dollar continued to appreciate on the back of the rebound in crude oil prices, some good macroeconomic data (0.6% month-on-month increase in May retail sales) and continuing expectations of an interest rate hike by the Bank of Canada. In the short term, USD/CAD could go on to test 1.246, before stabilising around 1.25. The New Zealand dollar tested an all-time high of 0.7488 against the US dollar, despite inflation weakening to 1.7% in Q2 2017. The weakness of the US dollar and the firmness of New Zealand’s economic growth can be expected to bolster NZD/USD towards 0.754.