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Currency OutlookMarch 2020
US
CURRENCY OUTLOOKUSD
© 2020 Associated Foreign Exchange, Inc. All rights reserved.
LOOKING BACK TO FEBRUARYRather than be weak at the end of the month as cycle analysis suggested, the dollar had a strong month, as it was seen as a safe haven in the face of the coronavirus. The market watched the democrat nominations with interest. Especially as Bernie Sanders is the current favorite for the nomination. There is a school of thought that he will be able to defeat President Trump in November, but the market is not of that persuasion. US equity markets enjoyed a good month, and ISM manufacturing PMI returned to growth, as it registered a reading of 50.9 from January’s 47.2. US December factory orders gained 1.8%, while the President was cleared of impeachment charges, as expected. January’s non-farm payrolls produced an increase of 50% on December’s job creation, as 225,000 new jobs were made. The Fed was on hand to repeat that the current policy is likely appropriate, barring a material reassessment. All in all, a good month for the US.
Dollar Index/Source: Bloomberg
MARCH EVENTS, OPPORTUNITIES AND RISKS When Apple decided to warn about supply chain issues in China because of Coronavirus, the markets did pause for breath. World trade may yet again slow down as China shuts down and tries to control the coronavirus outbreak. However, we should note that the US is a relatively self-sustaining economy. The US shopper continues to purchase goods, as long as they are available, and this engine combined with liquidity from the Fed is powering the US economy forward. US interest rates are relatively high at 1.5%, and the dollar is bought for its yield as well as a safe haven. Although the President did tweet about high interest rates last month and a strong dollar, while the world is buying dollars because it is scared of a viral epidemic, it is fair to stay quiet. Data from China regarding the rate of contagion of Coronavirus is unreliable, but it does appear to be spreading fast. As such, the economic effects of the virus may take six months or so to work through the system, and this could easily keep the dollar strong for a large chunk of that time.
FED FUNDS
US
$ F
UN
DA
ME
NTA
L D
ATA
GDP
INFLATION RATE
UNEMPLOYMENT
TRADE BALANCE
1.5% - 1.75%
+2.3% YoY
+2.5% YoY
3.6%
-$48.880 billion
US $ EVENTS, MARCH 2020• Markit manufacturing PMI• ISM manufacturing PMI• Construction spending
MONDAY | MARCH 2
• Factory ordersTHURSDAY | MARCH 5
• Inflation rateWEDNESDAY | MARCH 11
• FOMC interest rate decision• FOMC economic projections• Fed press conference
WEDNESDAY | MARCH 18
• GDPTHURSDAY | MARCH 26
• Services PMIWEDNESDAY | MARCH 4
• Trade balance• Average hourly earnings• Non-farm employment change• Unemployment rate
FRIDAY | MARCH 6
• Retail sales• Industrial production
TUESDAY | MARCH 17
• Durable goodsWEDNESDAY | MARCH 25
• Personal income/spendingFRIDAY | MARCH 27
LOOKING BACK TO FEBRUARYEarly in February, Bank of Canada (BoC) Deputy Governor Wilkins, said the neutral interest rate should be higher than where interest rates were. This was proven to be a precursor to USD/CAD ending its rally from the December 31 low. Wilkins also said that in light of the Coronavirus outbreak the BoC would look at the business and consumer confidence data and what it means for growth and inflation. The oil price dipped below $50 per barrel on expectations of a slowdown in economic activity, which didn’t help sentiment for the CAD either. On the other hand, Canadian housing starts beat expectations and improved to 213,000. Later in the month, the Canadian government lowered the rate needed to qualify for insured mortgages in an effort to sustain the housing market.
MARCH EVENTS, OPPORTUNITIES AND RISKS It seems like eight-year trendlines can take weeks and months to break decisively. At the time of writing, USD/CAD has managed to move back above the upward sloping trendline, suggesting that USD/CAD could be set for further gains rather than losses. However, when looking at the medium-term charts, the favored action for USD/CAD may actually be for it to stay in recent ranges. Canadian inflation is running at 2.4% with core inflation at 1.8%, close to the BoC target rate. GDP growth is an annualized 1.6% and may slip a touch considering expected supply chain disruption due to the coronavirus. Inflation data is due out on March 18, and we expect it to decline slightly to 2.3%. Oil has since bounced back to around $54 per barrel, so we could now be in for a period of relative stability for the loonie.
CADUSD/Source: Bloomberg
CAD EVENTS, MARCH 2020
CURRENCY OUTLOOKCAD
OVERNIGHT CASH RATE
CA
D F
UN
DA
ME
NTA
L D
ATA GDP
INFLATION
UNEMPLOYMENT
1.75%
+1.7% YoY
+2.4% YoY
5.5%
© 2020 Associated Foreign Exchange, Inc. All rights reserved.
• Markit manufacturing PMIMONDAY | MARCH 2
• Trade balance• Ivey PMI• Employment change
FRIDAY | MARCH 6
• Inflation rateWEDNESDAY | MARCH 18
• GDPTUESDAY | MARCH 31
• BoC interest rate decisionTUESDAY | MARCH 4
• Housing starts• Building permits
MONDAY | MARCH 9
• Retail salesFRIDAY | MARCH 20
LOOKING BACK TO FEBRUARYGermany is the most important and largest economy in the eurozone. In 2018, it exported 7% of its goods and services to China, making up 2.8% of national output. China is Germany’s most important and largest trading partner. At the start of this year, the eurozone economy was trying to recover from the US-Chinese trade war but was hit by the Chinese economy being severely hampered by the unexpected coronavirus (Coronavirus). In January, eurozone GDP slipped from +0.2% to +0.1% and core CPI fell to 1.1% from December’s 1.2%. To add to the negative news, German factory orders fell 2.1% and eurozone industrial production fell 2.1% in January. German politics didn’t help the single currency either, as Angela Merkel’s handpicked replacement, Annegret Kramp-Karrenbauer resigned after the CDU cooperated with the far-right AFD to elect a new regional governor. This was expressly against Kramp-Karrenbauer’s instructions, and it took Merkel’s intervention to stop the governor being elected. The euro had a difficult month in the face of all this negative news and dropped nearly 3% against the dollar in January.
MARCH EVENTS, OPPORTUNITIES AND RISKS It wasn’t the Iowa Democratic caucuses that caused EUR/USD to move, but, of course, the coronavirus. The latest media reports are that thankfully, although the mortality rate caused by the virus is very low at 2%, it can spread at a very fast rate. Indeed, the FT reports that a banquet was held in Wuhan for 40,000 families on January 18 even though the Chinese authorities knew of the virus three weeks previously. The official silence resulted in 5 million people leaving Wuhan before the city was quarantined. As Coronavirus is easily transferred from person to person, the probabilities are high that the virus will become a pandemic, meaning a worldwide phenomenon. If this is the case, then we haven’t seen the height of the virus infections yet, and as such, this will take months rather than weeks to be controlled. The biggest effects of the virus will probably be on the global economy, and in that case on the Chinese and German economies. EUR/USD has been trending lower in February, and if it does take a long time to control the spread of Coronavirus, EUR/USD could see 1.05 or lower before any sort of stability returns.
EURUSD/Source: Bloomberg
CURRENCY OUTLOOKEUR
EU € EVENTS, MARCH 2020
BASE RATE
EU €
FU
ND
AM
EN
TAL
DAT
A
GDP
INFLATION
UNEMPLOYMENT RATE
TRADE BALANCE
0.00%
+0.9% YoY
+1.4% YoY
7.4%
+€23.131 billion
© 2020 Associated Foreign Exchange, Inc. All rights reserved.
• Manufacturing PMIMONDAY | MARCH 2
• Final services PMI• Retail sales
WEDNESDAY | MARCH 4
• Industrial production• ECB interest rate decision• Press conference
THURSDAY | MARCH 12
• Trade balance• Inflation rate
WEDNESDAY | MARCH 18
• Flash services PMITUESDAY | MARCH 24
• Inflation rateTUESDAY | MARCH 31
• Unemployment rateTUESDAY | MARCH 3
• GDP growth rateTUESDAY | MARCH 10
• ZEW economic sentimentTUESDAY | MARCH 17
• Consumer confidenceMONDAY | MARCH 23
• Business confidenceMONDAY | MARCH 30
LOOKING BACK TO FEBRUARYFinal Services Purchasing Managers Index was released on February 6 at 53.9. GDP grew by 0.3% in January, and the Goods Trade Balance was actually a surplus of £0.8 billion rather than the £10 billion deficit expected. The Royal Institute of Chartered Surveyors (RICS) house price index jumped 17%, and for the first time since February 2016, a majority of surveyors said London house prices are rising. Chancellor Javid resigned and the market took this as a sign that the budget due on March 11 would be more expansionary under new Chancellor Rishi Sunak, then under Sajid Javid. So, GBP/USD weakened by over 2.5%. The weakness was caused by the posturing of the UK and EU before the start of the trade talks. In simple terms, the UK has said that it wants a Canada-style trade deal without any need to follow EU law. The EU has stated that to receive this sort of deal, the EU must oversee UK subsidies on industry, impose rules on the UK’s tax regimes, and the UK must commit itself to aligning with the EU’s standards for ever. At the end of February, PM Johnson publicly stated that the UK would not be following any EU legislation after it leaves the EU, and if a deal isn’t agreed by the end of June, the UK would prepare for a no-deal Brexit.
GBPUSD/Source: Bloomberg
MARCH EVENTS, OPPORTUNITIES AND RISKS The UK and EU have possibly only four months to agree on a new trade treaty. The UK government is suggesting that it will not agree to a trade deal if the EU insists on the UK continuing to be aligned with current and future EU regulation. This would lead the UK to trade on WTO terms. The Prime Minister has called this an Australian-type deal. If the negotiations maintain this type of rhetoric, the market will see this as the hardest of Brexits and it will start to price in a weaker sterling. GBP/EUR may well not weaken so much with the eurozone struggling with Coronavirus. However, in this case it wouldn’t surprise if GBPUSD possibly weakened to 1.2600. Our base case is that the government will manage to agree a Canada-style trade deal, and in the medium-term, this would suggest that sterling will strengthen into the end of 2020.
BASE RATE
US
£ F
UN
DA
ME
NTA
L D
ATA
GDP
CPI
UNEMPLOYMENT
TRADE BALANCE
0.75%
+1.1% YoY
+1.8% YoY
3.8%
£7.715 bio MoM
UK £ EVENTS, MARCH 2020
CURRENCY OUTLOOKGBP
© 2020 Associated Foreign Exchange, Inc. All rights reserved.
• Manufacturing PMIMONDAY | MARCH 2
• Services PMIWEDNESDAY | MARCH 4
• Average earnings• Unemployment rate• Claimant count change
TUESDAY | MARCH 17
• BoE interest rate decision• Retail sales
THURSDAY | MARCH 26
• GDP• Business investment
TUESDAY | MARCH 31
• Construction PMITUESDAY | MARCH 3
• GDP• Manufacturing production• Construction output• Goods trade balance• Industrial production
WEDNESDAY | MARCH 11
• CPIWEDNESDAY | MARCH 25
• Consumer confidenceMONDAY | MARCH 30
LOOKING BACK TO FEBRUARYSo, cycle analysis may suggest that EUR/CHF and USD/CHF will bounce higher through February, but Coronavirus had some input here. With the world and markets scared of the rapid pace of infection, it was the Swiss franc that was sought as a safe haven currency. To be fair, EUR/CHF only lost 0.5% while USD/CHF actually did gain some 3%. SNB Vice President, Fritz Zurbruegg said Swiss banks have adequate capital despite also having a high-risk appetite in the real estate segment. The Swiss banking market had a busy January with Credit Suisse (CS) CEO Tidjane Thiam resigning because of pressure from the rest of the CS board after a spying scandal.
The SEK managed to stay steady against a weak euro but lost ground against a resurgent US dollar. The Riksbank kept rates steady in February. This was despite the central bank cutting its inflation outlook for 2020 by 0.4%, although its does expect 2021 to see a price rebound. Headline inflation was very disappointing, as it dropped 1.4% in January to produce an annual rate of +1.3%, well below the 2% target. The reason for this being lower is because of domestic electricity prices. Stefan Ingves, the Riksbank Governor, confirmed that policy is in a “wait and see” stance.
MARCH EVENTS, OPPORTUNITIES AND RISKS The Coronavirus virus may well keep EUR/CHF under pressure for the short-term, as the market buys it as a safe haven. However, in the medium to long-term it wouldn’t surprise if the EUR/CHF managed a rally as the virus is contained, and the eurozone economy bounces back. It should be remembered that even though the euro has negative interest rates of 0.5%, the Swiss franc attracts a negative interest rate of 0.75%, and has a central bank actively trying to weaken it. Price is currently sitting close to support at 1.0585. There is further support at 1.0230, and then parity. So, at the very least, EUR/CHF declines should be slow.
EUR/SEK has been in an uptrend since 2012. Price has moved from 8.1700 levels to a high last October around 10.9300. This move higher has since late 2014 been slowing in its pace of ascent, and since the peak, it has actually broken support levels. Technically speaking, the market is slightly undecided now, and if the price were to exceed 10.7000, then we expect further gains. However, if the price breaks lower below 10.4000, then it could target 10.2000. Both the eurozone and Swedish economies are weak, so it could be the case that we stay in recent ranges for a time.
CURRENCY OUTLOOKCHF/SEK
CHF/SEK EVENTS, MARCH 2020
EURCHF/Source: Bloomberg
EURSEK/Source: Bloomberg
BASE RATE
CH
F FU
ND
AM
EN
TAL
DAT
A
GDP
INFLATION
UNEMPLOYMENT
TRADE BALANCE
-0.75%
+1.1% YoY
0.2% YoY
2.6%
+CHF 1.994 bio MoM
BASE RATE
SE
K F
UN
DA
ME
NTA
L D
ATA
GDP
INFLATION
UNEMPLOYMENT
TRADE BALANCE
-0.00%
+1.6% YoY
+1.3% YoY
7.5%
+SEK 0.3 bio MoM
© 2020 Associated Foreign Exchange, Inc. All rights reserved.
• SEK manufacturing PMIMONDAY | MARCH 2
• SEK services PMI• CHF inflation rate
WEDNESDAY | MARCH 4
• CHF FX reservesFRIDAY | MARCH 6
• SEK CPITHURSDAY | MARCH 12
• SEK trade balanceTHURSDAY | MARCH 26
• CHF trade balance• SNB interest rate decision
THURSDAY | MARCH 19
• CHF KOF leading indicatorsMONDAY | MARCH 30
• CHF GDPTUESDAY | MARCH 3
• SEK industrial productionTHURSDAY | MARCH 5
• CHF unemployment rateMONDAY | MARCH 9
• SEK unemployment rateFRIDAY | MARCH 13
• CHF SNB quarterly bulletinWEDNESDAY | MARCH 25
• Retail salesFRIDAY | MARCH 27
• CHF Retail salesTUESDAY | MARCH 31
CURRENCY OUTLOOKRoW
AUD EVENTS, MARCH 2020LOOKING BACK TO FEBRUARYIt was suspected that the AUD could at least try and stage a recovery at the end of February, as the Reserve Bank of Australia (RBA) held interest rates steady, and the Australian economy tried to recover from the bush fires, and the US-Chinese trade war. Thank goodness it rained in February, and the RBA held rates steady, even though the Australian economy was knocked again, as China succumbed to the Coronavirus virus. The important support level for AUD/USD was 0.6670 and the market bounced once from there before weak employment data was released, showing the unemployment rate growing from 5.1% to 5.3%. This was enough to encourage the AUD to properly breach the support level.
The market was looking to President Ramaphosa’s State of the Nation address, as hopefully a turning point for the fortunes of South Africa, but instead, it descended into farce. It was delayed by 90 minutes by a protest in Parliament, and when it was finally delivered, it didn’t contain any radical plans to solve the Eskom or South African Airways crises. Moody’s credit rating agency cut its forecasts for economic growth in 2020 to 0.7% from its previous forecast of 1.5%. At the time of writing, the budget is due to be delivered. If it is not well received, the Rand may weaken again.
MARCH EVENTS, OPPORTUNITIES AND RISKS The RBA will set interest rates on March 3 against a negative economic backdrop. Retail sales fell in January, and the trade surplus slipped to AUD 5.22 billion from AUD 5.52 billion. RBA Governor Lowe said recently that he could see the case for further easing, but could also see risks. The market currently gives a 50% probability of an interest rate cut in May, so a reduction in March would surprise. However, Coronavirus is having a huge effect on business and supply chains. In this case, it depends whether the RBA wants to get ahead of the curve and cut rates now or wants to wait for further evidence of the current slowdown before acting. Either ways, it seems as if the next move for interest rates will be down.
Eskom, the South African national power corporation, is in dire straits and is struggling to even pay the interest on its debt obligations, which amount to ZAR 70 billion per annum. Eskom also has a problem with being paid for its electricity generated. Last year, it was calculated that it was owed over ZAR 36 billion by municipalities, including Soweto. Since then, Soweto has improved its rate of payment from 12% to 25%. It is difficult for Eskom to turn off electricity for non-payment, as individuals in municipalities and townships just reconnect to the system directly. If this mindset doesn’t change, Eskom will quite simply go bust, and South Africa will not have any power. The Moody’s review will be conducted on March 27.
AUDUSD/Source: Bloomberg
OFFICIAL CASH RATE
AU
D F
UN
DA
ME
NTA
L D
ATA GDP
INFLATION
UNEMPLOYMENT
0.75%
+1.7% YoY
+1.8% YoY
5.3%
© 2020 Associated Foreign Exchange, Inc. All rights reserved.
• RBA interest rate decision• Building approvals
TUESDAY | MARCH 3
• Trade balanceTHURSDAY | MARCH 5
• NAB business confidenceTUESDAY | MARCH 12
• Employment dataTHURSDAY | MARCH 19
• GDPWEDNESDAY | MARCH 4
• Retail salesFRIDAY | MARCH 6
• Monetary policy meeting minutesTUESDAY | MARCH 17
TrevorCHARSLEY
Senior Markets Analyst
T: +44 (0) 207 004 3866E: [email protected]
afex.com
© 2020 Associated Foreign Exchange, Inc. All rights reserved.
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GDP INFLATION UNEMPLOYMENT
USD
CAD
EUR
GBP
CHF
SEK
AUD
3.6%
5.5%
7.4%
3.8%
2.6%
7.5%
5.3%
USD
CAD
EUR
GBP
CHF
SEK
AUD
+2.3%
+1.7%
+0.9%
+1.1%
+1.1%
+1.6%
+1.7%
-
-
-
-
-
-
-
USD
CAD
EUR
GBP
CHF
SEK
AUD
+2.5%
+2.4%
+1.4%
+1.8%
0.2%
+1.3%
+1.8%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
March Overview
