The Dollar’s bull run - will it end?
Accurately forecasting a currency’s future value isn’t easy, that’s for sure. What we can do though is use the information to hand, along with analysis of past events, to understand what drives underlying value. For example, the US Dollar index; a representation of the Greenback’s trade-weighted value, hit a peak in October last year and this spike higher was mostly driven by the trade war between the US and China, which had raged on for over a year. You’d think that a trade war involving the US would be bad news for the Dollar though, right? Well, the alternatives at the time were not particularly appealing. Euro-area economic data wasn’t good, emerging markets had become collateral damage of the trade war and the UK was in disarray over Brexit. Fast forward to the end of 2019 where the US and China had agreed their phase one deal, Brexit was looking like a done deal and we saw signs of a return to growth conditions in the underlying data. This combination of factors left the Dollar index over 3% lower than that distant October high.
Since the outbreak of China’s coronavirus, there’s only been one direction for the Dollar index as it inches back towards that 2019 peak and conditions aren’t that dissimilar this time around. Euro-area data is still weak, highlighted by a deep-rooted manufacturing recession. Brexit has happened, but now the UK needs to negotiate a trade deal with the EU, and they’ve only given themselves until December to get it done. Even the Yen has been less safe than the Greenback in recent days, owing to Japan’s potential for an economic recession. We’ve seen the Chinese, Australian, Kiwi, Singapore and Taiwan currencies on the back foot against the Dollar, with the Aussie slipping to an 11-year low.
At this stage, the omens look bad for a fall in the US Dollar in the near-term. Hopes that there would only be a slight effect to global supply chains are beginning to dissipate, whilst there’s been more talk of further global central bank policy action. Analysts at Barclays have commented that US Dollar assets provides ‘relative attractiveness’ due to the resilience of the economy, which they don’t expect to be impacted by the virus. In similar fashion, a survey of 210 economists indicated that only 13% expect a US recession in 2020, compared to 38% in August as per Bloomberg.
Bottom line: Our base case is that the US Dollar retains its strength until either the spread of the virus comes under control and China resumes production or we see a run of shocking US data. In reality, we’re seeing no solid signs of a boost to growth conditions in the coming year and may have to rely on Governments to boost fiscal spending if the situation remains the same. After all, most are sceptical that monetary policy can deliver the same impact in the current environment.
The Pound closed last week in the red against the US Dollar and the Euro, as rhetoric from the UK and EU suggested conflicting stances on future trade arrangements. On a trade-weighted basis, Sterling remains trapped in a two-month trading range, as Brexit uncertainties linger and opens this week above the 50-daily moving average – a level that may support Sterling throughout the week. Last week’s positive economic data might take pressure off the Bank of England to loosen monetary policy, but a risk-off tone ripples through markets as we begin the week, causing money markets to increase bets on a Bank of England interest rate cut later in the year. This week we’ll hear from various Monetary Policy Committee members which will take the spotlight in this week’s light data schedule.
The Euro index’s year-to-date slump showed signs of bottoming out last week, climbing 0.75% from Tuesday’s lows. However, the Euro remains near two-and-a-half year lows against the US Dollar and will require a significant improvement in the economic data to recover the lost ground. In recent days, EU nations have been planning out their seven-year budget plan, finding a way to plug the near 70 billion Euro hole left from Britain’s departure. Heightened political tension within the bloc around the budget risks withholding any long-lasting rally for the common currency.
- German IFO Business Climate survey kicked off the week this morning with a reading of 96.1, beating expectations and improving on last month. The Expectations and Current Assessment surveys both also beat expectations.
- On Friday, German month-on-month CPI is forecast to be 0.3%, a significant improvement from last month’s -0.6% reading.
- French consumer spending is forecast to show an improvement on January’s reading on Friday morning. However, expectations are still negative at -0.1%.
The Dollar index reached nearly three-year highs on fresh Coronavirus fears as the number of confirmed cases outside China accelerated. A deterioration in the Japanese economy also added to demand for the US Dollar and had a profound effect on the index, due to the Yen’s large weighting. However, on Friday the Dollar dropped off and Treasuries soared due to poor US Purchasing Managers Index (PMI) data – services contracted, and manufacturing grew at a slower pace than expected. This surprise adds to the importance of this week’s economic data releases.
- On Tuesday, CB Consumer Confidence survey is expected to show an improvement from last month, coming in at 132.6. The measure asks 5,000 households about current economic conditions and expected future conditions.
- On Thursday afternoon, Durable Goods Orders is forecast to a change of -1.4% from January, while the core Durable Goods Orders – which excludes volatile transportation orders – is due to show 0.2% growth.
- Also released on Thursday, Preliminary GDP is expected to show growth of 2.2% on an annualised basis in the US, up from 2.1% previously.
- Friday’s month-on-month Personal Spending is expected to show growth of 0.3%, unchanged from last month’s 0.3% growth.