The monetary loosening cycle is set to kick off this month. The European Central Bank (ECB) and the Bank of Canada (BoC) are expectedto cut their rates as soon as next week. Others are set to follow in the coming months: the Bank of England (BoE) in August and the Swiss National Bank (SNB) in September. In contrast, rate cuts by the Federal Reserve (Fed) remain uncertain. This is the key issue. If the Fed is slow to loosen its monetary policy, this will create a gaping interest-rate differential with the rest of the world, something historically synonymous with monetary turbulence. Watch out!
Four main factors explain the euro’s appreciation against the dollar: profit taking on the dollar after an excellent first quarter; visibility on the eurozone’s monetary policy in the short term; capital inflows that will be recycled in the European equity market in search of undervalued companies; and a little good news on the eurozone manufacturing front. But none of this will last as these are all short-term factors. Above all, economic history teaches us that a wide interest-rate differential has always been a major factor behind currency shifts. With the ECB set to cut rates well before the Fed, everything suggests the euro is bound to weaken.
Inflation in services surprised on the upside in April in the UK. This does not cast doubt on the disinflationary trend but it may lead the BoE to exercise some caution. We think a first rate cut in August is a wiser option than one in June. In any case, the impact on the pair is weak. The announcement of an early general election on 4 July may create a little volatility on sterling without modifying its underlying trend.
We think sterling’s appreciation is unsustainable and due to the wrong reasons. The market forecasts today a Fed rate cut in September, explaining profit taking on the dollar. We disagree with this scenario. We think the Fed may cut its rates far later (in November of December), or even decide not to cut them at all this year. At present, this last option is widely ignored by the market. If it materialises, expect a fresh spike in volatility.
For months, analysts have been fearing a devaluation of the yuan. Is this a real risk? Not in our view. China has a large current account surplus of around 1-2% of its GDP. The trade surplus stands at 3-4% of GDP and the manufacturing trade surplus at more than 10% of GDP. Given the size of the Chinese economy – 18,000 billion dollars, or 15% of GDP – these sums are enormous. A devaluation of the yuan would have fairly few positive effects on these surpluses. In contrast, it could trigger a massive capital flight – a scenario that Beijing does not want to relive after experiencing it in 2015-16.
There is not much to say about the EUR/CHF. The pair remains on an upward trend. It is only a matter of time before it becomes anchored above parity. The SNB seems to have halted its forex interventions for the time being.
The currency pair is on an upward trend. From a technical analysis perspective, the next target stands at 1.4910. We think this will be attained shortly, triggering profit taking as usual.
The Australian dollar is the only G10 currency in which short positions increased last week. The underlying trend on the AUD is still downwards, in our view. Uncertainty about the direction of Australian monetary policy is not helping. The central bank’s meeting on 18 June will need watching closely to get a better idea of where interest rates are headed in the months ahead. The market is deeply divided, with some analysts even forecasting a rate hike!
Intriguingly, the Bank of Japan (BoJ) intervened on at least three occasions in May for a total of 60 billion dollars – a significant amount. The objective was to drive up the yen, but this failed: the Japanese currency is weaker today against the US dollar than prior to these interventions. The market does not believe in an appreciation of the yen either: asset managers and hedge funds still have predominantly short positions in the currency. Like the market, we do not expect the BoJ to tighten monetary policy at its 14 June meeting, a move that could give the currency a little support. The weak yen is here to stay.
It is hard to know exactly what the Hungarian central bank will decide in June. As things stand, a 25-basis point rate cut makes as much sense as a 50 basis point cut. Indicators are mixed, but not as much as all that. That said, we fear renewed volatility on the HUF in the short term because of Fitch’s forthcoming revision of Hungary’s sovereign rating (bad news on this subject is not impossible). Caution is therefore necessary. From a macroeconomic standpoint, our main source of concern is the plunge in industrial production. It will be hard to turn things around.
The US dollar’s depreciation is not a sustainable phenomenon, in our view. It reflects profit taking after an excellent first quarter and, above all, mistaken expectations of possible monetary loosening by the Fed in September. The truth is that to judge solely by US inflation statistics, the likelihood of a rate cut is extremely low. No doubt we are contrarians in thinking the Fed may not cut rates at all in 2024. If this materialises, it would lead to major shifts in the currency market.
| DATE | CURRENCY | EVENT |
| 05/06 | CAD |
Central bank meeting |
| 06/06 | EUR | Central bank meeting |
| 06-09/06 | EUR | European elections |
| 07/06 | USD |
US employment figures in May |
| 12/06 | USD |
Consumer prices in May |
| 14/06 | JPY |
Central bank meeting |
| 18/06 | AUD | Central bank meeting |
| 18/06 | HUF | Central bank meeting |
| 20/06 | CHF | Central bank meeting |
| 20/06 | GBP |
Central bank meeting |