july 2020 currency outlook · 1.12 1.15 j a s o n d j f m a m j usd by joe manimbo, currency...

July 2020Currency outlookMarket insight into global currencies

June reviewThe U.S. dollar wavered but mostly weakened amid nascent signs of a rebounding world economy. The tenor of markets continued to swing between recovery hopes and fears of another wave of coronavirus infections. After America bled a record amount of jobs in April, more than 20 million, May proved another month for the record books when payrolls surged by 2.5 million.

y Early evidence of the world’s biggest economy shaking off the devastating effects of the coronavirus boosted risk assets at the expense of safer plays like the greenback.

y Still, recovery optimism lacked conviction amid fears that a sharp rise in Covid-19 cases could herald renewed economic shutdowns.

y A record 18% surge in U.S. retail sales gave the dollar a fundamental lift above three-month lows.

July risk events and key themesBarring a breakout catalyst, major currencies appeared poised to maintain well-trodden ranges. Sentiment continues to shift between recovery hopes and fears of another wave of the coronavirus. Political factors are likely to become influential ahead of America’s approaching presidential election in November.

y U.S. second quarter growth, due in late July, is forecast to show the world’s top economy took an unprecedented plunge of at least 30%.

y Good data would tend to be risk-positive and negative for safe bets, while great news might allow for some fundamental strengthening in the greenback.

y Barely positive: The dollar index was up less than 1% for 2020.

Source: Reuters, 2018

EUR/USD (12 months)Economic data

July events

01Wed

ISM manufacturing index

02Thu

Nonfarm payrolls

06Mon

ISM non-manufacturing index

14Tue

CPI

15Wed

Empire State index

16Thu

Retail sales

29Wed

FOMC decision

30Thu

GDP Q2

1.06

1.09

1.12

1.15

J A S O N D J F M A M J

USD By Joe Manimbo, Currency Strategist – North America

Base Rate: 0-0.25%

GDP: -5.0%

Inflation: 1.0%

Unemployment: 13.3%

Trade Balance: -$49.4 Bn

June reviewThe Canadian dollar received an energy boost as oil markets extended a recovery from historic lows. USD/CAD slipped to three-month lows as oil climbed to $40 from below zero in April. While stronger, Canada’s currency largely zigzagged higher with bouts of strength checked by worries about another wave of the coronavirus, a scenario that could impede recovery and potentially lead to renewed business closures.

y USD/CAD fell nearly 2% in June as recovery optimism, while fluid, supported currencies with the closest links to global growth.

y In June Canada welcomed a new central bank chief in Tiff Macklem, who embarked on a 7-year term.

y Oil markets pushed higher after ending April below $20 and May at $35.

July risk events and key themesCanada’s loonie, named for the bird on the one-dollar coin, kept to a broad range that hinged mostly on global recovery prospects. Bank of Canada Gov. Macklem, sketching a long and slow recovery from the coronavirus suggests continued range-bound trade over coming weeks.

y Oil and coronavirus-related developments will help guide the Canadian unit over the weeks ahead.

y Canada’s June jobs report, if stronger than May, would bolster confidence in the nation’s economic recovery.

y While down for June, USD/CAD remained up about 4% year-to-date.

USD/CAD (12 months)Economic data

July events

02Thu

Trade balance

07Tue

Ivey PMI

10Fri

Employment

15Wed

Bank of Canada decision

17Fri

Wholesale trade

21Tue

Retail sales

22Wed

CPI

31Fri

GDP (May)

1.28

1.34

1.40

1.46


CAD By Joe Manimbo, Currency Strategist – North America

Base Rate: 0.25%

GDP: -8.2%

Inflation: 0.7%

Unemployment: 13.7%

Trade Balance: -C$3.25 Bn

June reviewAs lockdown restrictions gradually eased, focus turned to economic data and signs of a speedy recovery. Despite the resilience of the UK labour market and a rebound in retail sales, the UK economic outlook still appears very fragile. Forecasts from intergovernmental organisations pointed towards Britain potentially suffering more so than any other developed nation as a result of the coronavirus crisis. Moreover, ongoing and deadlocked Brexit negotiations exacerbated fears of a slower economic recovery as an extension to the transition period was ruled out resulting in no-trade deal concerns resurfacing. Sterling, driven primarily by risk sentiment, was taken on a rollercoaster ride throughout the month as the tussle between risk-on and risk off dominated.

y GBP/USD jumped to $1.28 on soaring risk appetite before taking a U-turn and falling back towards $1.23 as new coronavirus cases began to rise. GBP/EUR had pressed towards €1.13 before testing the €1.10 handle.

y The UK government’s debt exceeded the size of the UK economy in May for the first time in more than 50 years as borrowing surged to pay for coronavirus mitigation measures.

y The Bank of England boosted its bond-buying programme by £100bn to maintain extremely low government borrowing costs.

July risk events and key themesDespite UK PM Johnson’s confidence that a UK-EU trade deal can be achieved by the end of the July amid weekly intensive talks taking place, it remains an unlikely scenario. Economic uncertainties tied to Brexit may impede the recovery hoped for later in 2020 and in the years to come. Sterling will also remain sensitive to wrestling risk sentiment that is driving FX markets more so than ever. The underlying risk of a new wave of coronavirus cases as nations gradually emerge from lockdown, will continue to haunt financial markets and likely cap extensive risk appetite. This may weigh heavier on the pound given its increasing vulnerability to risk sentiment as a result of its sensitivity to political news.

y Amidst a pandemic-induced depression of unknown duration, a no-trade deal Brexit would cause additional trade shocks to an already ultra-uncertain environment.

y If the UK and EU do make positive shifts in the Brexit spectrum though, sterling is expected to claw back gains lost in June.

y As lockdowns ease though, COVID-19 cases may climb and if risk aversion gains more traction as a result, the pound will likely depreciate.


GBP/USD (12 months)Economic data

July events

14Tue

Average earnings

14Tue

GDP

15Wed

Inflation (CPI)

24Fri

Retail sales

24Fri

Flash PMIs

31Fri

Consumer confidence

1.14

1.18

1.22

1.26

1.30

1.34


GBP By George Vessey, Currency Analyst – United Kingdom

Base Rate: 0.1%

GDP: -1.6%

Inflation: 0.5%

Unemployment: 3.9%

Trade Balance: £0.31 Bn

June reviewThe euro hit a three-month high against the greenback ($1.14) and five-month high against the Swiss franc (₣1.09) in June, before dropping in the absence of new catalysts to underpin another rally. This surge of confidence came with the announcement of a massive European bail-out plan (€750Bln) but gradually ran out of steam as political divergences remained strong and a deal remained pending. Growing concern about a likely second wave of the coronavirus worldwide also drove market demand toward traditional safe haven currencies at the expense of euro.

y The European currency took a natural break in its rally as markets returned to a risk-off mode.

y Flash PMI surveys confirmed a “V-shape” recovery of the activity after the lockdown.

y Euro weakened by -3.5%, -2.0% and -1.7% against the Japanese Yen, the Swiss franc and the US dollar respectively, after peaking in the early days of the month.

July risk events and key themesAfter a phase of consolidation in June the euro could resume its rally in July. This will depend on three factors: the ability of the European economy to keep up a strong momentum, EU leaders striking a deal on the stimulus package, and the ECB convincing markets of its unconditional support. If any of those prerequisites is not completed, euro sellers will have the upper hand over buyers and potentially send the currency lower. Without good news in Europe, investors will likely become more bearish about the euro which does not perform well in a risk-off environment.

y European stimulus is key for ensuring a sustainable recovery momentum of the economy.

y Confidence in the euro is new and still fragile, leaving it susceptible to a sudden switch of sentiment if market expectations are not fulfilled.

y The euro could fall back to its early May low level ($1.08 - 1.10) in the event of bad news, while the announcement of a European deal could make the euro bounce above $1.15.


GBP/EUR (12 months)Economic data

July events

02Thu

Unemployment rate

03Fri

Final PMI Composite index

06Mon

Retail sales

06Mon

Sentix index

10Fri

Fitch credit rating on Italy

14Tue

German ZEW index

16Thu

ECB rating decision

24Fri

Flash PMI surveys

31Fri

Flash Q2 GDP

31Fri

Flash inflation

1.05

1.09

1.13

1.17

1.21


EUR By Guillaume Dejean, Currency Strategist – Europe, Middle East, Africa

Base Rate: 0.0%

GDP (annual basis): -3.1%

Inflation (annual basis): 0.1%

Unemployment: 7.3%

Trade Balance: €2.9 Bn

June reviewThe Swiss Franc has whipsawed through most of June rising over 2.3% against the euro at the beginning of the month before wiping those gains. A risk on sentiment was seen in global markets as some economies eased lock down measures, however, mid-June a second wave of COVID cases hit China and the US. This second wave hit all riskier assets classes, which spurred a second round of safe haven buying.

y The Swiss National Bank (SNB) maintained its stance on intervening with FX markets where it deemed necessary. Thomas Jordan reiterated its currency is ‘highly valued’ whilst keeping interest rates unchanged.

y EUR/CHF currently trades around the SFr1.07, a fall back below the SFr1.05 mark could see intervention again.

July risk events and key themesThe outlook for the safe haven currency will depend on the global outlook of COVID. Another consideration is the euro bailout fund which has been agreed in principle among EU members but is yet to be finalised. Any fractures which show from the next EU bailout talks could bring about fears of another EU break up, pushing the Swiss Franc higher.

y The SNB forecast that the Swiss economy is expected to contract by 6% contraction this year, the most since 1970s. Inflation is expected to remain negative on average for 2020 and 2021.


USD/CHF (12 months)Economic data

July events

01Wed

Manufacturing PMI

02Thu

CPI

07Tue

Forex reserves

08Wed

Unemployment Rate

22Wed

SNB policy announcement

30Thu

KOF indicator

31Fri

Retail sales

0.92

0.95

0.98

1.01


CHF By Adam Ma, Currency Strategist – United Kingdom

Base Rate: -0.75%

GDP: -1.3%

Inflation: -1.3%

Unemployment: 3.4%

Trade Balance: –

June reviewThe Central and Eastern European region has suffered significantly during Lockdown, given its extrovert nature and reliance on global demand. According to the Organization for Economic Cooperation and Development (OECD) Central Europe will shrink by 8.3 to 10.9 percent this year. Against this setback, policy makers have committed themselves to achieving a comparative advantage in the expected recovery phase. In its minutes of the last interest rate decision the Polish central bank expressed that the Polish Zloty is overvalued and should depreciate gradually. Fears of a currency war in the region quickly faded with the Polish finance minister saying that solid macroeconomic fundamentals support the Zloty’s recent ascent.

y The Polish central bank underpinned its loose monetary policy at the June meeting and kept the benchmark interest rate at 0.1 percent.

y Corporate sector wage growth slowed to a seven-year low. In the meantime, industrial output fell 17 percent in May, after falling 24 percent in April.

y After falling to an 11-week-high EUR/PLN has reversed course and has recovered some ground lost in May.

July risk events and key themesCivil protests in the United States and first signs of recovery in leading economic indicators have put the Covid-19 pandemic in the background for a short period of time. With an increase in coronavirus cases in Beijing, Tokyo and the US Investors again turn to the infection rate as a key market mover. In addition to global issues, market participants will closely watch the Polish central bank’s interest rate decision. No change in rates is expected. Still, forward guidance on possible currency interventions and a potential increase of quantitative easing programs are on the table.

y The Polish Zloty has officially overtaken the Hungarian Forint in having the lowest real interest rate in the region. This could become a disadvantage to overcome in a risk-off environment.

y A slight rebound in Polish economic activity is expected to follow the recent easing of lockdown measures.

y EUR/PLN is currently positioned for further gains, given slight risk-off sentiment and technical factors favouring the euro. This advantage could turn if the currency pair falls below support at 4,37 zl.


USD/PLN (12 months)Economic data

July events

01Wed

Markit Manufacturing PMI

08Wed

NBP interest rate decision

16Thu

Inflation

17Fri

Employment

17Fri

Corporate sector wages

21Tue

Retail sales

23Thu

Unemployment

31Fri

CPI

3.70

3.90

4.10

4.30


PLN By Boris Kovacevic, Currency Strategist – Central and Eastern Europe

Base Rate: 0.1%

GDP: 2.0%

Inflation: 2.9%

Unemployment: 5.8%

Trade Balance: 146.85 M

June reviewMonths of significant volatility on the financial markets have been followed by a contrasting stability in Central Europe. The Czech Crown has especially profited from recent improvement of risk sentiment and capital inflows from abroad. Therefore, June was a quiet month for the currency with movements against the euro not exceeding 2%. With monetary policy expected to be on hold, the fate of the currency lay with global exchange rate drivers.

y The last patch of economic data from April has confirmed the month as one of the worst in recent history. Industrial output plummeted 33.70% and retail sales fell 20.00%.

y Czech inflation has been steadily declining for the third month in a row, after finding a more than ten-year high in February 2020.

y The Czech Crown therefore follows the Polish Zloty on the way up and appreciates to a 11-week high stabilizing at around EUR/CZK 25,50.

July risk events and key themesThe Czech crown has started to gain traction with the third monthly appreciation against the euro and has been immune to weak domestic data points. Markets have priced in a significant slowdown of the economy and are expecting some improvement going forward. This will put new data releases in the spotlight, given that the Organisation for Economic Co-operation and Development expects the Czech Republic to be the worst regional performer this year.

y Global sentiment will continue to drive the exchange rate as well. A new period of risk-off flows, given the recent fears of a second infection wave and geopolitical risks rising, could pressure the Czech crown.

y Due to the strongly negative correlation between the US dollar and the central European currencies, further appreciation of Czech Crown remains determined by global market dynamics and movements of EUR/USD.


USD/CZK (12 months)Economic data

July events

01Wed

Markit PMI

07Tue

Industrial output

08Wed

Retail sales

09Thu

Unemployment

10Fri

CPI

31Fri

Preliminary GDP Q2

CZK By Boris Kovacevic, Currency Strategist – Central and Eastern Europe

Base Rate: 0.25%

GDP: -2.0%

Inflation: 2.9%

Unemployment: 3.6%

Trade Balance: Cz 8.628 Bn 22.0

23.0

24.0

25.0

26.0


June reviewThe Australian dollar was higher for the third straight month in June. The AUDUSD climbed to the highest level since July last year as the improving COVID-19 situation boosted sentiment.

Economic data was mixed, with the employment market worse than expected. Unemployment rose to a 19-year high of 7.1%. However, retail sales were unexpectedly strong with a massive jump of 16.3% in preliminary results for May.

y The AUD was higher versus most currencies with the best gains seen versus the low-yielding markets like the euro and Japanese yen.

July risk events and key themesThe Australian dollar is likely to remain driven by global risk sentiment.

The AUD’s gains have been boosted by gains in global sharemarkets. Any reversal in equity market sentiment might pressure the AUD. Ongoing tensions with China, between both the US and Australia, remain a major concern.

y The Reserve Bank of Australia next meets on 7 July.

y The AUD has been boosted by more positive commentary from Reserve Bank of Australia governor Philip Lowe. Lowe said the COVID-19 downturn is likely to be shallower than previously thought and upgraded forecasts for employment.


AUD/USD (12 months)Economic data

July events

03Fri

Retail sales

03Fri

Trade balance

07Tue

RBA decision

16Thu

Employment

17Fri

RBA minutes

29Wed

CPI

AUD By Steven Dooley, Currency Strategist – Asia Pacific

Base Rate: 0.25%

GDP: 1.4%

Inflation: 1.8%

Unemployment: 7.1%

Trade Balance: AUD 8.8 Bn 0.57

0.60

0.63

0.66

0.69

0.72


June reviewWith the global economy showing signs of a reboot post lockdown, the Japanese yen started the month on a negative note. After tumbling to a multiple month low against the euro and the Aussie dollar, the Japanese yen bounced a little as uncertainties returned. The sudden spike of coronavirus cases in China revived concerns about a second wave of infections, shadowing the momentum of economic recovery. New geopolitical tensions emerged in Asia causing investors to realize that the pandemic is not the only market risk right now.

y A new coronavirus cluster was discovered in China forcing officials to reestablish lockdown rules in Beijing including a temporary shutdown of airline traffic in the capital city.

y Tensions emerged between China and India, but also between North and South Korea.

y The Japanese yen fell to a 13-month low against the euro (124 ¥) and the Aussie dollar (77 ¥) in early June before retracing up.

July risk events and key themesJune sent warnings that caution should remain the primary rule in a post-crisis environment. Recent volatility suggests that as the global economy begins to recover, the harder life will become for the yen. It also became clear that investors are nervous about any stories relating to a second pandemic wave, or trade tensions. As November’s US election approaches the coming months could see renewed tensions between China and the United States. That may sound like déjà vu, but the China-US trade war keeps getting the attention of market participants.

y The “V” shape volatility of the yen in June confirmed that market sentiment is fragile. Recent hiccups in global stock exchanges confirmed that idea and propped up the demand in yen.

y Risks of a second wave of coronavirus, trade tensions and geopolitical conflicts are threatening to put a hard brake on the ongoing recovery of the global economy.

y Both EUR/JPY and GBP/JPY rates should be driven by takeaways in some key regional political themes (EU bail-out program and post-Brexit talks), the USD/JPY rate by global market sentiment.


GBP/JPY (12 months)Economic data

July events

01Wed

Tankan Q2 sentiment index

05Sun

Tokyo Gubernational election

15Wed

BoJ rating decision

20Mon

Trade balance

22Wed

Flash manufacturing PMI

27Mon

Summary of opinions of the July BoJ monetary meeting

31Fri

Unemployment rate

31Fri

Industrial output

JPY By Guillaume Dejean, Currency Strategist – Europe, Middle East, Africa

Base Rate: -0.1%

GDP (annual basis): -1.7%

Inflation (annual basis): 0.1%

Unemployment: 2.6%

Trade Balance: ¥-833 Bn 124

129

134

139

144

149


June reviewThe Chinese yuan remained under pressure with the currency falling to record lows versus the trade weighted basket. The CNY climbed from levels near 12-year lows against the US dollar.

y The Chinese economy continued to display some signs of recovery but while business and manufacturing is improving, the consumer sector remains cautious.

July risk events and key themesThe CNY might remain driven by geopolitical issues with US-China relations key. This relationship might be tested over the next few months as the US presidential elections raise the possibility of increased anti-China rhetoric.

y Chinese second-quarter GDP, due on 16 July, will be closely watched.

y The USDCNH market remains focused on the major 12-year highs at 7.2000. A move above this level might see further CNH losses.


USD/CNY (12 months)Economic data

July events

01Wed

Caixin Manufacturing PMI

03Fri

Caixin Services PMI

09Thu

CPI

14Tue

Trade balance

16Thu

GDP

CNY By Steven Dooley, Currency Strategist – Asia Pacific

Base Rate: 3.85%

GDP: -6.8%

Inflation: 2.4%

Unemployment: 5.9%

Trade Balance: USD 62.9 Bn 6.80

6.90

7.00

7.10

7.20


June reviewThe New Zealand dollar was stronger in June, in line with gains in most “risk sensitive” currencies helping the kiwi climb to its pre-COVID levels. The gains came despite a weaker result from March quarter economic growth, which suggested the impact of COVID-19 might be greater than expected.

y The NZD was helped as the NZ government ended most lockdown measures after its world-beating performance in fighting the virus.

y The NZD was higher versus most major currencies last month but remains down for the year so far.

July risk events and key themesThe New Zealand dollar, up an incredible 17% versus the US dollar since mid-March, remains a key concern for the Reserve Bank of New Zealand. The RBNZ has been clear that it believes a lower NZD is a key transmission point for monetary policy.

Back in March, RBNZ governor Adrian Orr said: “A low OCR is understood for its intent and implications on borrowing and lending rates and, in part, the level of the NZ dollar exchange rate.”

y The NZD remains likely to be driven by global risk appetite with any reversal lower in US shares potentially weighing on the currency.

y There is no RBNZ meeting this month with the next decision scheduled for 12 August.


NZD/USD (12 months)Economic data

July events

07Tue

Dairy prices

16Thu

CPI

21Tue

Dairy prices

24Fri

Trade balance

NZD By Steven Dooley, Currency Strategist – Asia Pacific

Base Rate: 0.25%

GDP: 1.5%

Inflation: 2.5%

Unemployment: 4.2%

Trade Balance: NZD 1.2 Bn 0.55

0.58

0.61

0.64

0.67

0.70


June reviewThe USDSGD fell back to three-month lows as gains in global sharemarkets boosted sentiment towards Asian currencies like the Singapore dollar. A weaker US dollar also added to the USDSGD losses.

y The SGD was mixed versus other markets, falling to three-month lows versus the euro and climbing to three-month highs against the Japanese yen.

y The sustained improvement in oil prices provided support for the SGD.

July risk events and key themesThe SGD, like many other regional Asian currencies, is likely to remain driven by risk sentiment in July.

y The SGD’s fate will also remain tested by relations between the US and China. As a major trading hub, trade relations between these two powers remains key.


USD/SGD (12 months)Economic data

July events

03Fri

Manufacturing PMI

03Fri

Retail sales

17Fri

Exports

23Thu

CPI

24Fri

Manufacturing output

SGD By Steven Dooley, Currency Strategist – Asia Pacific

SIBOR: 0.54%

GDP: -2.2%

Inflation: -0.3%

Unemployment: 2.4%

Trade Balance: SGD 4.5 Bn 1.34

1.37

1.40

1.43

1.46


June reviewMexico’s peso pushed off three-month highs amid elevated uncertainty about the global recovery from the coronavirus. The peso drifted lower in June and remained in a sizeable year-to-date hole. Rising cases of Covid-19 in some of the world’s largest economies restrained emerging markets and stoked concerns about renewed business lockdowns.

y The peso lost ground as a resurgence in Covid-19 infections kept a cloud over the global economy.

y Brighter days may lie ahead for emerging markets if the sprouting of green economic shoots proves sustainable.

y The severity of the global downturn suggests the Bank of Mexico may not be done cutting interest rates.

July risk events and key themesJuly marks the start of the year’s second half when many expect a global recovery to begin in earnest. The tempo of any rebound may serve as a barometer for emerging currencies. A slow but steady recovery could help the peso gain traction.

y Risk sentiment looms large for emerging markets as the third quarter gets underway.

y USD/MXN was little changed in June.

y So far in 2020, USD/MXN has appreciated by around 18%.


USD/MXN (12 months)Economic data

July events

01Wed

Manufacturing PMI

09Thu

Inflation

10Fri

Industrial output

25Sat

Inflation preliminary

28Tue

Jobless rate

30Thu

GDP Q2

MXN By Joe Manimbo, Currency Strategist – North America

Base rate: 5.0%

GDP: -1.2%

Inflation: 3.64%

Unemployment: 3.3%

Trade Balance: -4.29 Bn 18.0

20.0

22.0

24.0

26.0


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july 2020 currency outlook · 1.12 1.15 j a s o n d j f m a m j usd by joe manimbo, currency...

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