(26/06/2019) It should come as no surprise that the US Dollar has weakened in recent sessions, primarily on the Fed shift towards rate cuts, of which the market is seemingly comfortable with a move in July, albeit the lesser 25bps as market pricing now implies. Yesterday’s comments from arch-dove Bullard reined in some of the uber-dovish expectations, and rightly so. A move of that size could actually prove counter-productive given the message (of panic) it would give out. Even so, another cut later in the year is also expected and on the balance of softening data in the US and a broader dovish stance among global central banks, this seems to be warranted.

Some of the regional data in the US has been pointing to some of the more obvious signs that the pace of economic activity has been slowing. The NY Empire State manufacturing index recorded an all-time drop last week, and along with some of the other major regions, this could point to some disappointment in the ISM PMIs due out next week. Recall, IHS Markit PMIs for manufacturing is already teetering over the expansionary/contractionary pivot, so the cautious outlook from the Fed is not out of place on this basis.

There is also the not-so-insignificant matter of currency advantage, something the White House administration is keen to address. The ECB president was criticised last week for talking up further stimulus, with accusations of policy aimed at weakening the Euro. The BoJ and SNB will be watching on with concern on this rising dynamic, with the ‘race to the bottom’ finally resurfacing as I expected it to, amid global trade tensions. As aggregate demand dwindles, trade wars can and will permutate into currency wars.

Given the long US Dollars is still one of the more overcrowded trades in the market, we sense heightened liquidation risk warrants greater attention. While few can justify a material strengthening of the Euro vs the Dollar, it is still the primary route to express Dollar sentiment, and repositioning could prompt a stronger move higher than the fundamental backdrop justifies.

The Canadian Dollar has frequently been a strong indicator of broader Dollar sentiment, due to Canada’s place in the growth chain vis-a-vis the US, and there is a distinctly bearish tone developing in USD/CAD which suggests that if a US-China period of calm can develop over the near term, then a test below 1.3000 and onto levels closer to 1.2800 are not unrealistic. Fair value based on OECD metrics is not too far off these levels.

Where this carries USD/JPY in the meantime is a much tougher question given its status as a stock market proxy, but here also, politics may play a bigger part in its direction which could take us back under 105.00 at some stage into H2.

For EUR/USD, we can see a move towards 1.1500-1.1600 over the medium term, if not sooner, and cross rate demand may well add fuel to this extension higher as the SNB look to contain the CHF rate.

Gains in EUR/GBP are naturally a primary function of Brexit risk, and we can assume UK corporates dealing with Europe have been transferring assets of various nature over to the continent in preparation for the worst. Coming up to the psychological 0.9000 level, we may attract a little more conviction that logic will prevail and both the UK and EU will somehow avoid a hard Brexit. As PM frontrunner Boris Johnson has confirmed, he is intent on leaving the EU at the end of October, so GBP continues to trade on fear for the most part. Delays have been to the detriment of the UK economy, which has seen anemic investment levels diminished further. As a result, Q2 GDP is set to flat-line at best as per BoE estimates, with analysts a little more pessimistic in looking for a contraction of around 0.2%.

Against the Dollar, GBP has found some support just ahead of 1.2500, but a lack of upside traction amid any prospective Dollar weakening could point to a retest of the mid 1.2400 lows seen in the ‘flash’ moves at the start of the year. Take out these levels and I’m afraid there is every chance we could be eyeing 1.2000 again.