Monthly Currency Outlook

MARCH 2019 – IN BRIEF

 

What happened

  • February witnessed the buck recover by around 0.7%, about half of its January losses per the Bloomberg Dollar Spot Index
  • Resource-based currencies dampened their outlooks as BRL and ZAR sank dramatically
  • Australian Dollar and Kiwi (NZD) slowed their roll after central bank pessimism, labor lag
  • GBP surged another 1.4% on improved chances of avoiding a “No-deal” Brexit
  • Slightly more positive indicators prevented Euro from sinking more than half a percent
  • Global equity markets felt revived by positive trade-issue talks with Dow Jones rising 3.4%

Tempus’ view

  • March 29th may lose its importance in the Brexit realm as a delay is requested
  • Euro will return to gains if economic performance shows expansion in indicators
  • Mexican Peso could be set to lose ground after central bank downgraded GDP estimate
  • The prospect of a negotiated trade deal between China and the U.S. could set the spark for greenback weakness
  • Low volatility in markets due to uncertainty could fade in March and thus foster the increase in value of other assets

 

IN FOCUS

Sterling is on a tear since December as Brexit endgame marks its presence
GBP Bloomberg Chart

 

The European Union wants to know what the U.K. wants, but it’s not a “No-Deal”
  • As seen on the Bloomberg GBP graph, Pound rose by 5.4% since mid-December
  • After years of struggle and confusion over talks, it seems clear some deal must be made
  • While wages and other key economic figures have stayed positive, the Bank of England has warned that damage has been done
  • Simply put, if March 29th arrives and no delay or deal is set, a recession could be inevitable
  • Labour Party supports calling a 2nd referendum. Chances of a delay to Brexit stand at 55.0%

 

THE VIEW – Drive towards resolutions could mean greenback reversal

The end of the first quarter is upon us and so may be the finalizing of some deals

The year is flying and yet we have seen a lot of work being done to fix or attempt to contain the problems that afflicted markets in 2018. As highlighted, Brexit is now in a place of no return and something must be worked prior to March 29th to avoid leaving empty-handed. The separation may indeed be the biggest risk-event of the year, but we are aware other items have piled up.

Fortunately, the U.S. and China are committed to see an end to the tariff impasse, having sent people to Beijing while U.S. Trade Representative Robert Lighthizer has spoken cautiously about the hopes to get something accomplished soon. Maybe now optimism will be on the side of the globe as problems are dealt with and doubts over trade fade.

Thus far, 2019 has seen its swings derive from a lack of clarity and no exposure to details. The threats of a major slowdown in economic activity and possible recessionary pressures aided the narrative favoring the dollar throughout last year, naturally as a result of a simple comparison between quarter-on-quarter productivity domestically here in the U.S. at above 3.0% and the anemic 0.3% for the other side of the Atlantic.

Furthermore, Chinese manufacturing turmoil and lower demand for imported products positioned the buck as a safe-haven asset. Nevertheless, February meant the end of a consecutive three-month slide for the U.S. Dollar, a reprieve that comes as markets-friendly solutions are being drafted, which could combat the recent appreciation.

On Chinese trade talks, the big break was getting President Donald Trump to agree to not increase taxes and continue talks past March 1st. Since now the tone seems friendlier, the two parties are actively working on achieving a diplomatic and mutually beneficial business relationship. Also, the economics of both countries demand some sort of answer.

Little by little, farmers and others industries leaders have contacted the White House over concerns that the Chinese are retaliating with quite a calculated strategy that has made commerce virtually impossible, exacerbating losses in already fragile and low-margin sectors. Additionally, China’s own gauges have shown contractions that go beyond what has been understood as a new turn in the country towards a more service-driven economy with less dependence on manufactured goods.

The two world leading economies can only afford to nip at each other so much and for so long, which is why we are confident a comprehensive pact as well as terms will be set and eventually completed. Naturally, we expect stock indexes to rise on risk-appetite, subsequently softening the American tender.

In the Euro-zone, member nations are aware their bloc looks feeble, but there have been some signs of recovery: Retail Sales in Germany finally expanded in January by 3.3%, having receded by almost as much the two months prior; the French Manufacturing Purchasing Managers Index (PMI) expanded in February and was better than the prior reading; and overall inflation for the continent is on the rise in the form of Producer Price Index (PPI) as well as Consumer Price Index (CPI). The Euro may have lost momentum in February, but there seems to be growing faith in the region’s ability to manage the obstacles of a slow economy.

Huawei, a Chinese communications and technology company recently in headlines for butting heads with U.S. officials, has been given the go-ahead by the EU parliament to commence the ambitious set-up of 5G mobile networks in the continent. Ambitious projects are in the works as Italy looks to exercise its new budget to propel a revamp in infrastructure and France looks to find peace with labor unions that protested President Emmanuel Macron’s government.

It is possible that the determination to get rid of austerity and re-build countries can further integrate the European Union. On the monetary front, officials do not seem that scared as even influential head of the Deutsche Bundesbank (Germany central bank) Jens Weidmann said that policy normalization should be pursued no matter if current Q4 figures seem lagging. We certainly see the Euro as susceptible, but an air of optimism is surrounding it based on the concept of European economic resurgence and more accommodative trade environments once issues are put to rest.

Although our forecast for some of the buck’s major counterparts are materializing in the midst of swings, we did not foresee a contraction in GDP in Canada that now seems to put the “Loonie” in very negative territory. Nevertheless, surveys on the chances of a recession in the U.S. show 30.0% for 2020 and just 15.0% for 2019, plus oil prices have been on the rise. We will not revise our estimates yet as we see growth eventually hurting greenback.

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