In past weeks, we have seen the USD surge fizzling out, and depending on one’s measure of what a strength and weakness, we can see that the greenback is losing some of its shine, however temporary this may prove to be. Even so, our fundamental view that with the DXY at these levels, the key feature of the USD is that it offers the only attractive option away from the risks attached to all other currencies. With the Fed path through 2019 now thrown into doubt, we can see that despite uncertainty over the EUR due to multi-political factors and GBP with Brexit, there is some room for relief, though, at this stage, we are not getting our hopes up for any major recovery in either case.
For EUR/USD, there seems to be a never-ending interest to sell ahead of the 1.1450-1.1500 zone, and unless this can be overcome, we are still vulnerable to printing fresh lows, though the prospect of a material fallout is looking slimmer by the day. As weak as the Eurozone data is at the moment, if the US and China can resolve some of their differences to alleviate fears over global trade, then the major European exporting nations can hopefully regain some confidence and add to poor growth prospects. Only this morning, we heard Germany’s IFO institute downgrading 2018 GDP from 1.9% to 1.5% while 2019 is seen worse still at 1.1% – also previously 1.9%.
While Brexit continues to hang in the balance, GBP will also remain under pressure – also adding weight to the EUR – and the heavy discount to longer-term fair value will continue. On Tuesday morning, we saw the announcement of the leadership challenge pushing Cable back under 1.2500 again though notable was the support seen here. For now, this could have been anticipation that Theresa May would ‘win’ the contest – which she did – though the recovery back to more familiar levels is facing plenty of resistance into 1.2700. Unless the EU offers some material assurances on the backstop, the deal on the table will not get the votes, so no deal or no Brexit are the options for MPs to consider on all sides of the House. The ERG will look to avoid any threat of the latter, though whether this will be used as bait to get them to back the current proposal is another unknown factor, but potentially a prop for GBP. Anything is possible at this stage, so downside momentum has eased off at the very least. We also saw EUR/GBP fended off 0.9100, though sentiment is harder to gauge from this cross rate given the single currency’s own detractions.
Moving onto the JPY, the market seems happy enough to go along with the BoJ’s assurances over maintaining ultra-loose domestic monetary policy. Despite the sell-off in stocks, the divestment story continues to play out, and USD/JPY stays in the lead as we continue to see dip buyers propping up the exchange rate. At the point, when these outflows show any signs of fading, we may see some fresh downside materialising here, but for now, any expectations of repatriation seem to be slim given investors switching to US Treasuries if scaling down on stocks and related ETFs. It is worth considering the inflation backdrop, however. If we see global disinflation taking hold – oil prices just cannot recover at the moment – then the relationship to consumer prices in Japan could be a potential flashpoint for JPY strength, especially with oil importing nations (much like German) benefiting from profitability levels (assuming core rates hold up). For now, we continue to press for 114.00 despite notable resistance seen well ahead of this. A move above 115.00-50 paints a completely different picture despite our conviction over a JPY turnaround in coming weeks, though more likely months.
Finally, USD/CAD has managed to push on to new highs through the 1.3400 mark. As a level, 1.3500 is purely psychological at this stage, but enough to contain the last upturn in the cycle. Oil prices have made an impact, and the lack of recovery in WTI is proving CAD negative for now. Against this, domestic prices (Western Canada Select) have risen sharply, but to limited, if any effect on the exchange rate. Pipeline issues continue to offer a modest input to headline GDP, though on the domestic front, strong job gains as reported in the employment report last week suggests consumption can offset some of the negative factors weighing on the economy such as household debt levels as well as a house price correction in the major provinces. Technically, 1.3625-75 is a strong area of resistance should risk shocks push us up here and this could include another sell-off in Oil.