Global Currencies 4Q19: Resilient dollar
The US dollar has been resilient to the two Fed cuts this year. Global trade tensions have kept the US economy and the greenback strong relative to the rest of the world. The Federal Reserve did not subscribe to US recession fears implied by the inverted US yield curve. The Fed considered its rate cuts in July and September to be a “mid-cycle adjustments” to global growth risks – especially trade war-related risks that weighed on the US economy. Until US data stop surprising on the upside and falter, and drag the major US stock indices sharply lower, the greenback is unlikely to give up its relative strength. We expect the USD Index (DXY) to keep grinding higher toward 100 for the rest of the year.
Multiple risks are threatening to push the euro lower into a 1.05-1.10 range. The Eurozone’s three largest economies – Germany, Italy, and the UK – are vulnerable to recession risks. Besides a more fragmented EU Parliament elected in May, the increased prospect of a disorderly Brexit, another re-escalation in the US-China trade war, and US trade aggression are looking to target Europe next. Germany is putting together contingent stimulus measures for a possible recession. The ECB has lowered its deposit facility rate by 10 bps to -0.50% and is scheduled to resume its asset purchases programme in November. Christine Lagarde, who succeeds Mario Draghi as ECB President come end October, will inherit the dovish legacy of her predecessor.
A no-deal Brexit is not the only threat to a weaker British pound below 1.20. It is no longer an absolute certainty that political hurdles can overpower UK Prime Minister Boris Johnson’s determination to accept, if necessary, a no-deal Brexit on 31 October. A hard Brexit is seen tipping the UK economy into recession and leading to debt rating downgrades and interest rate cuts. The BOE reckoned that even if the UK exits the EU with a deal, there will be a one-in-three chance for a UK recession. Real GDP growth has, for the first time since 2012, contracted by 0.2% q/q in 2Q19. Historically, GBP has not been known to dodge a selloff from recession or UK-specific event risks.
This information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. This publication is intended for DBS Bank and its subsidiaries or affiliates (collectively “DBS”) and clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank.
This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to you to subscribe to or to enter into any transaction as described, nor is it calculated to invite or permit the making of offers to the public to subscribe to or enter into any transaction for cash or other consideration and should not be viewed as such.
The information herein may be incomplete or condensed and it may not include a number of terms and provisions nor does it identify or define all or any of the risks associated to any actual transaction. Any terms, conditions and opinions contained herein may have been obtained from various sources and neither DBS nor any of their respective directors or employees (collectively the “DBS Group”) make any warranty, expressed or implied, as to its accuracy or completeness and thus assume no responsibility of it. The information herein may be subject to further revision, verification and updating and DBS Group undertakes no responsibility thereof.
All figures and amounts stated are for illustration purposes only and shall not bind DBS Group. This publication does not have regard to the specific investment objectives, financial situation or particular needs of any specific person. Before entering into any transaction to purchase any product mentioned in this publication, you should take steps to ensure that you understand the transaction and has made an independent assessment of the appropriateness of the transaction in light of your own objectives and circumstances. In particular, you should read all the relevant documentation pertaining to the product and may wish to seek advice from a financial or other professional adviser or make such independent investigations as you consider necessary or appropriate for such purposes. If you choose not to do so, you should consider carefully whether any product mentioned in this publication is suitable for you. DBS Group does not act as an adviser and assumes no fiduciary responsibility or liability for any consequences, financial or otherwise, arising from any arrangement or entrance into any transaction in reliance on the information contained herein. In order to build your own independent analysis of any transaction and its consequences, you should consult your own independent financial, accounting, tax, legal or other competent professional advisors as you deem appropriate to ensure that any assessment you make is suitable for you in light of your own financial, accounting, tax, and legal constraints and objectives without relying in any way on DBS Group or any position which DBS Group might have expressed in this document or orally to you in the discussion.
If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of the Information, which may arise as a result of electronic transmission. If verification is required, please request for a hard-copy version.
This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Singapore: This publication is distributed by DBS Bank Ltd (Company Regn. No. 196800306E) ("DBS") which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore (the "MAS").