Monthly Currency Outlook
MAY 2019 – IN BRIEF
- Feeling like déjà vu as the U.S. Dollar managed another month of swings and 0.8% rise in April
- Economic performance divergence remains a plus for the greenback as others struggle
- Mexican Peso was best performer, rose 1.0% based on Latin safe-haven and oil prices
- Euro finished the month with no gain/loss, as it swung back from weakest level in 2 years
- New Brexit deadline is Halloween, spooky, scary. Doubt on strategy hurt Pound by 0.5%
- No safe-haven love this time with Yen even and Swiss Franc suffering a 2.0% slide
- A split between U.K. Conservatives will lead to PM Theresa May reaching out to Labour
- Euro could see better fortunes if Q1 indicators of expansion continue and data steadies
- Type random note of hope about China and the U.S. having more than just productive talk
- Venezuela and tariffs from the U.S. could add to MSCI Emerging Market Currency Index April losses of 1.0%
- Staying up is what the buck has done best in 2019 with just a half percent gain from start of the year per the Bloomberg Dollar Spot Index
Who knows what May may do in May? The U.K. Prime Minister has until OCtober 31st
Britain needs to get it together by the Fall after a much criticized Easter break
- Since March 15th, Sterling had six straight weeks of losses, sliding by 1.3%
- Changing the deadline for leaving is now worrying businesses that held back investment
- Losses in property value, companies leaving London, and hesitation in future spending have left many companies in critical distress or limbo
- Consumption is down with Gfk’s Headline Consumer Sentiment near a three-year low
- The Labour Party declared support for a 2nd referendum, but only as a last resort measure
THE VIEW – Low volatility for the time being keeps USD dominant
An optimistic Fed sees no reason to loosen monetary policy, nor tighten in this economy
Without any regards for fears abroad, the U.S. economy managed to see its economy grow by over 3.0% once more. Plenty of the news items that we have been wrestling with have not gone away and volatility is very low in FX, but the buck is cruising primarily because the world’s largest economy keeps on going.
Other places have not been so lucky, like our main trading partner and neighbor Canada seeing less than 0.0% growth and Italy dragging down the EU with a technical recession. The buck being strong certainly makes sense as value must be given to the currency of an economy improving by a quarterly average of 2.91% since Q4 of 2017. However, activity seems to be picking up in other regions and some fear a strong USD.
Finally, there was some light out of the Euro-zone where things were looking dire after a weak fourth quarter that seemed to find further evidence of a major slowdown in business in its revisions. The momentum that saw the Euro rise from the ashes of the 2008 financial crisis not only faded, but turned into declines across multiple measures, particularly Industrial Production as well as manufacturing gauges.
Indeed, the bloc’s economy began an anemic trend since Q3 2018 dropping from 0.4% GDP to just 0.1% and then climbing very little. Per 2019 numbers, it looks like maybe the bottom was reached as GDP returned to 0.4% in Q1. Nevertheless, the shared currency remains quite fragile, especially susceptible to the negative commentary that flows from EU financial leaders that see the European Union’s markets under attack.
While France and Germany cope with major challenges to the status quo, Italy’s forced alliance government is showing cracks, and some Eastern European countries want to test the limits of their sovereignty while being members of a continental agreement that defines freedom of movement and commerce as part of membership.
Dissatisfaction with matters of justice and travel has never dissipated and member nations are facing opposition to staying in the EU. However, there are some formerly problematic countries looking to enhance their place in the continent after overcoming adversity in the midst of recovery.
Spain has dealt with separatism, terrorism, and plenty of pessimism. Previously seen as a problem of the periphery as part of the P.I.G.S. (Portugal, Ireland, Greece, Spain) the fourth largest economy of the Union is now growing at a faster pace than the rest of bloc at 0.6% for Q4 and a recent release of Q1 2019 growth of 0.7%. Elections at the end of March looked to change the current leadership, but the socialist coalition survived a campaign that witnessed the return of far-right nationalism in the form of the party VOX. The Iberian nation is looking to continue its stable run and EUR could benefit.
Political stability will be a major key component of the Euro’s ebb-and-flow as we go into the second half of the year with new European Union leadership in mind as elections for the EU Parliament will be held between May 23rd and the 26th. The governing body, made up of 751 delegates representing over 500 million people, will hopefully capture the needs that must be addressed such as issues with wages and immigration. The integrity of the continental agreement has been in doubt since the financial crisis, but now more than ever those mandated to make policies and laws need to abide by the principles established.
Indeed, cohesion and cooperation have led to great results such as it has been with Greece. At a moment when European stocks as a whole are looking unattractive and yielding no gain, Greece’s ASE Index is thriving as the best equity benchmark according to Bloomberg when measured against all other exchanges being tracked. It is up by 26.0% thus far this year and while it is not trading yet at pre-Great-Recession levels, many experts feel the best is yet to come.
Part of the cause for the success lies on disciplined accountability and the build-up of political optimism for the country. National elections are scheduled for October and an opposition party gaining popularity, New Democracy, is making investors happy that their investment-friendly agenda could lead to another 10.0% in domestic stock gains for 2019.
While the U.S. economy stays steady, Fed Chairman Jerome Powell believes things should be mostly left alone. Additionally, the Fed does not think any aid is needed, as Powell mentioned that he believes the recent slowdown, in inflation in particular, is temporary and that the Fed’s targets across the board will be met. For now, going into summer may get interesting towards end of May as developments from elections and Q1 data revisions shoot to have a meaningful impact on FX markets.