FX Talking: The Teflon Dollar
On a trade-weighted basis, the dollar remains near the highs of the year. This is despite the likely prospect of three Fed rate cuts this year and Congress at war. The reason for the dollar’s resilience is the lack of attractive alternatives. And in a world of secular stagnation, no one wants a stronger currency right now
Executive summary
Deep challenges in Europe and Asia now mean that it will be Washington’s job to make the dollar weaker - either through trade conciliation or the Federal Reserve shifting to a full-on easing cycle. Neither of those outcomes look immediate, meaning that the risk environment could well deteriorate into year-end. We continue to favour the JPY.
All this means that EUR/USD should languish in the 1.05-1.10 range into year-end as the European slowdown broadens from the manufacturing to the service sector and the ECB resumes quantitative easing. The likelihood that the Brexit deadline is extended until next March means no resolution here either and that GBP could well fall another 5%.
Elsewhere in Europe, the Polish FX mortgage story could have been worse but the region is slowly showing signs of a slowdown and CE4 FX isn't immune. In the EMEA space, RUB may be the best performer on seasonal current account trends through 4Q19.
In Asia, we’re fearful that the PBOC allows more CNY weakness to show through as trade relations deteriorate further. Asian FX is following and it looks like the Monetary Authority of Singapore will have to join the easier bandwagon in October.
In Latam, the medium/long term prospects for the BRL are improving, just as those for the MXN are deteriorating. But timing is everything!
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