FX Talking: The beginning of the end of the dollar’s rally
Now that the global trade war has resonated with the Federal Reserve it seems appropriate to start talking about whether the eighteen-month dollar rally is over. Our house view of an escalation of the trade conflict over the coming quarters – and more importantly at least two cuts from the Fed – suggest USD/JPY has indeed peaked
Executive summary
We doubt EUR/USD is able to take advantage of the soft dollar environment.
The ECB looks very close to easing again – potentially in September with a deposit rate cut and re-starting asset purchases geared more towards corporate debt. Brexit and Italian politics suggest EUR/USD may remain trapped in a 1.10-15 range until year-end.
We are also revising down our GBP numbers this month. EUR/GBP can trade to 0.92 and possibly to 0.95 this autumn as investors digest the trade-off between a No Deal Brexit and early elections. Relative value trades within Europe will also be of interest, where the SNB will struggle to contain safe haven CHF inflows, while the SEK under-performs.
We expect Chinese authorities to pull out all the stops to keep USD/CNY trading below 7.00. Yet escalating trade wars and the technology slump will mean that Asian FX remains fragile. Counter-productively Washington ends up with weaker Asian currencies.
Latam FX may be best placed to weather the global trade storm. Social security reform can trigger a re-rating of the BRL this summer (USD/BRL to 3.30/3.40). Challenges lie ahead for Mexico, but tight policy rates suggest the MXN can outperform its forwards.
This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more