FX Talking: Toe-to-toe in a currency war
Now that the Fed has joined the dots between the trade war and the economy, expectations are that the dollar should also play its role in delivering easier monetary conditions. The problem is that the ECB is moving just as quickly, which may prevent USD/Europe from adjusting lower. The White House won’t be happy
Executive summary
Instead of the global investment story being one of diverging cycles and growth differentials, converging economic cycles could actually see the return of a currency war. It seemed an outrageous suggestion only a short time ago, but US frustration could even result in the President considering FX intervention to weaken the dollar.
The need for a weaker dollar to play its role in the US reflation story is giving investors’ confidence that the eight-year dollar bull-run may be over. At the least, dollar upside looks limited and we continue to believe USD/JPY will lead any dollar decline. This trend would be re-enforced were trade tensions to escalate or US fiscal fears to grow.
The EUR/USD outlook remains one of familiar ranges, where European challenges will keep the EUR subdued. GBP continues to face major headwinds – especially in the Sep/Oct period. Also expect EUR/CHF and EUR/DKK to come under pressure on ECB QE.
In the EM space, the Zloty looks set to be the outperformer in Europe, Asian FX should generally stay offered on trade/technology and the reform story looks good for BRL.
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