Currency Point: The new/old “war”

Currency Point: The new/old “war”

Have been turning decidedly negative on USD of late, I stated at the start of the year that I expected the USD to moderate through 2019. However, as we all know currencies don’t do things in halves. Thus, a year of moderation will likely mean a period of strong declines coupled with period of strength.

We a clearly entering a period of declines for two reasons

First, market and economic fundamental reasoning. This being monetary policy shifts coupled with significantly weak US data falling US bond yields (the US 10-year yield fell below 2% for the first time in 3 years last week).

Last Wednesday the Federal Reserve for the first time since it’s GFC ‘response’ is now forecasting a rate cut rather than a hike.

It is only one by the end of 2020, but the market is forecasting 4 over the same period – this will begin to weigh on the USD and don’t be surprised to see the Fed downgrade its outlook further still as the year progresses.

However, it is more than just the Fed’s rates forecasting – it’s the fact the supply side of the US economy is slowing.

The Empire State manufacturing PMI fell at its most rapid pace on record for the month of June and recorded its lowest level since the trough of 2016.

The US home-builder survey decline for the first time this year. The decline was blamed on rising construction costs coupled with a shortage of construction workers and rising trade concerns.

This is a weakening outlook for the US and will force the Fed to act and will see the USD lower.

The second reason is geopolitical – The President is revitalising the term ‘Currency Wars’.

We have officially entered the race for the 2020 Presidential election. It is clear from the President’s re-election ‘speech’ coupled with a typical Twitter tirade basically accusing the ECB of currency manipulation that he is looking to bring the USD down in his next term.

Tweet 1: “Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others,”

Tweet 2: “German DAX way up due to stimulus remarks from Mario Draghi. Very unfair to the United States!”

This has the potential to become quite problematic as the mechanisms at his disposal to physically pull the USD down are ‘limited’. But, trade threats, sanctions and even international litigation with the likes of the WTO are not out of realm of possibility for this President. Will be an interesting 18 months leading into November 2020.

When you combine these two factors – USD weakness is coming.

Preferred pairs: EURUSD and USDJPY

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