21st May 2020

USD πŸ‡ΊπŸ‡Έ - Neutral / Bullish 

 

Dollar Fundamentals: The high demand for U.S Dollars has eased in recent weeks as Global stock markets have staged a short recovery due to Global Central Banks and governments dramatically increasing fiscal and monetary easing to pump trillions into the global economy.  

 

Scenario’s 

 

Global Stocks Rise: Dollar Weakens 

 

Global Stocks Fall: Dollar Strengthens

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Explanation: The Dollars demand increasing or decreasing is down to whether investors are putting cash to work in the stock market or pushing cash into U.S Government treasury bonds.

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 1. If stock markets fall, investors sell stocks in international markets and exchange foreign currencies into US dollars to purchase US Treasury bonds as a safe place to park cash. This increases the dollars demand in exchange rates and causes the dollar to strengthen. 

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 2. If stock markets rise, investors sell U.S treasury bonds to put cash back to work in international stock markets and sell U.S Dollars in exchange to buy foreign currencies. This decreases the dollars demand in exchange rates, causing the dollar to weaken.

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Canadian Dollar πŸ‡¨πŸ‡¦ - Bearish 

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The Canadian Dollar looks set for more weakness as Oil prices continue to slide to the downside due to falling global demand and an increasing supply of Oil from Saudi Arabia and Russia as they continue their ongoing price war to grab market share of the Oil market.

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Crude Oil is Canada’s main commodity export making up 20% of total exports.

The Canadian Dollar trades in tight correlation to the price of Oil and is likely to see more weakness as Oil prices slip below $20 per barrel. 

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Canada is also exposed to any slowdown in America as the U.S buys 73% of all Canadian exports. 

 

Trade Analysis:

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Therefore, if the U.S goes into an expected deep recession due to the lockdown being imposed by President Trump to combat the Coronavirus. Markets will price in this reduction in trade between the U.S and Canada by selling the Canadian Dollar.

If the U.S Economy re-opens, and trade between Canada and the U.S recovers, demand for the Canadian Dollar will increase in the currency markets. 

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Oil Analysis: 

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If Oil prices recover because we see demand for Oil increase once the coronavirus pandemic eases and countries around the world relax the extreme social distancing rules, we will see a marked recovery in the Canadian Dollar.

However, if Oil prices remain under pressure, expect the Canadian Dollar to remain weak.

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Australian Dollar πŸ‡¦πŸ‡Ί- Neutral

 

The Australian Dollar has recovered in recent weeks as global stock markets have staged a recovery and China’s started to relax their social distancing rules and many of the major cities reopen. 

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Australia’s open export-driven economy is extremely exposed to any global slowdown as domestic GDP growth is driven through national income from it’s main export’s, predominantly commodities such as Iron Ore and Coal. 

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The Australian dollar has actually been continuously weakening since The US-China trade war started in 2018. 

China buys 35% of all Australian exports and the Asian region purchases a total of 84% of all exports from Australia.

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The Asian region’s growth is driven by China, therefore, as The US-China trade war affected China’s economy over the past two years due to the U.S hitting China with high import taxes to discourage U.S consumers from buying Chinese goods. This has been the fundamental reason for a weaker Australian dollar over the past two years as the Reserve Bank of Australia has cut interest rates to purposefully devalue the Aussie Dollar in exchange rates to make exports cheaper as demand from Asia has fallen due to the weakness in China’s economy caused by U.S tariffs and the Coronavirus outbreak.

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The reserve bank of Australia has already cut interest rates to near 0.00% in response to the Coronavirus outbreak. 

Therefore, moving forward, the Australian Dollar will be driven by markets expectations of how long it will take for the global economy to recover from the impact of the coronavirus shutdown and when China’s demand for Australia’s exports will increase back to historical levels. 

 

Key Data. 

 

As Australia’s economy is reliant on growth in the rest of the world! 

Markets will focus on the economic outlook of China’s economy, the U.S economy and Europe for clues of the direction for global growth! 

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1. Manufacturing & Services PMI data in U.S, China and Europe. 

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2. Consumer Confidence data in the U.S, China and Europe. 

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3.  Housing Permits data in U.S and Europe! 

 

Sentiment shifts: 

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We could start to see a stronger Australian dollar if the economic outlook for the U.S, Europe and China improves. 

If that is the case, then Australia will automatically experience growth from exports increasing from regional demand in Asia.

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New Zealand Dollar πŸ‡³πŸ‡Ώ - Neutral

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The New Zealand Dollar has been weakening since the beginning of the Coronavirus outbreak hit China in early January.  

 

This is due to New Zealand’s dependence on direct trade with China and Australia to support domestic GDP growth. 

 

China buys 24% of all New Zealand’s exports with Australia buying a total of 15%. That total’s 39% of all New Zealand’s exports.

The Asian region in total buys 53% of All New Zealand exports and as we have seen the Asian Region completely relies on China for regional growth. 

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As Australia is New Zealand’s second-biggest trading partner and Australia’s growth is dependant on China. We can see the cross-relationship between China’s economy slowing having and this having a double-edged effect on New Zealand’s economy as trade with China and Australia slows. 

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This explains why the New Zealand Dollar has been getting significantly weaker since 2018 when the US-China trade war started to have a negative impact on Chinese growth. 

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The Coronavirus outbreak has now put even more pressure on China’s economy and this explains the weakness seen in the first two months of 2020 as China’s economy went into lockdown.

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Key Data. 

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As New Zealand’s economy is reliant on growth in China and China’s economy is reliant on growth in the U.S and Europe. 

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Markets will focus on the pace at which China, the U.S and Europe can recover from the Coronavirus lockdown for clues on the direction for global growth and the effect that will have on New Zealand economy through export sales.

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Key Data to focus on. 

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1. Manufacturing & Services PMI data in U.S, China and Europe. 

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2. Consumer Confidence data in the U.S, China and Europe. 

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3.  Housing Permits data in U.S and Europe! 

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Sentiment shifts: 

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We could start to see a stronger New Zealand dollar if the economic outlook for the U.S, Europe and China improves and the demand for New Zealand dollars increases from a pick up in trade and investment.

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Currency Sentiment Tracker

 

Euro πŸ‡ͺπŸ‡Ί - Neutral 

 

The Euro has strengthened in the currency markets since the coronavirus outbreak hit the global economy, as weakness in global stocks and commodity markets caused commodity currencies and emerging market currencies to weaken.

 

The strength in the Euro has been down to many of the major central banks such as Australia, New Zealand, Canada, Russia, Brazil and others cutting rates to make exports cheaper as they try to offset the falling demand for exports caused by the coronavirus outbreak. 

 

At the same time, the European central bank has limited room for rates cuts as interest rates are already at 0.00%.  

 

The narrowing of interest rate differentials between Europe and many other countries has meant the euro has been lifted in the currency markets.

 

However, if we look at the bigger picture, the Euro has continuously weakened since 2018 against currencies such as the Japanese Yen and Swiss Franc due to the Bank of Japan and the Swiss National Bank already having rates below 0.00%. 

 

The European economy has been hit by a sluggish global economy, mainly caused by the U.S-China trade war since 2018.

 

This has meant the Euro has only been able to make up ground against currencies that have weakened due to interest rate cuts or currencies that weaken when there is a drop in demand for a countries key commodity exports.

 

Moving Forward: 

 

Markets will focus on the economic outlook for the global economy based on the speed at which authorities can lift the social distance in rules and reopen international trade.

 

If countries re-open their borders and trade starts to pick back up, expect currencies like the AUD, NZD, RUB, NOK, MXN, BRL, ZAR & TRY to strengthen against the Euro.

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Japanese Yen & Swiss Franc - Based on Risk Sentiment πŸ‡―πŸ‡΅ πŸ‡¨πŸ‡­ 

 

The Japanese Yen and Swiss Franc remain safe-haven currencies that only appreciate in value if other currencies weaken or risk-off sentiment hits global stocks and commodity markets. 

 

Japan and Switzerland’s safe-haven status is down to Japan being a net creditor to the rest of world due to decades of international investment and Switzerland sounds financial system and current account surplus currently being 10% of GDP. 

 

This has meant in times of risk-off sentiment when stocks or commodity markets crash, investors sell stocks and   Commodities to liquidate positions and sell international currencies to purchase The Japanese yen and Swiss Franc in order to buy Japanese and Swiss Government bonds. This demand for bonds strengthens the Yen and Swiss Franc in exchange rates during risk off sentiment. 

 

The income coming into Japan and Switzerland from international trade and investment income has meant the Japanese and Swiss governments are seen as creditworthy borrows by investors in the international markets during risk off sentiment.

 

Negative Interest Rates: 

 

With Japan and Switzerland having interest rates in negative territory below 0.00%, due to extremely low levels of inflation being below both central banks 2% inflation target. 

 

Buying the Yen & Swiss Franc against currencies that have higher interest rates remains an unattractive trade as you lose money overnight due to the negative interest rate differentials. 

 

As we have seen recently due to the Coronavirus outbreak, when stock markets and commodity markets sell off due to uncertainty in the world, this is the only time the Yen and Swiss Franc strengthen as investors dump global stocks and push cash into Japanese & Swiss Government bonds. 

 

Another reason we have seen a stronger Yen and Swiss franc over the past few years is other currencies have weakened due to their own domestic fundamental factors causing interest rates cut’s in the U.S, Australia, New Zealand and other countries.

 

Possible Sentiment Shifts.

 

If stock markets and commodity prices start to see a sustained recovery, this will likely weaken the demand for the yen and Swiss franc and we could see some reversal opportunities in the currency markets as investors sell off Japanese and Swiss government bonds and push cash back into global stocks and commodities. 

 

Another key factor to pay attention to is if central banks in the US, Australia, New Zealand, Canada and other countries reverse their recent emergency rate cuts, we would likely see the Yen and Swiss Franc weaken against these currencies as the interest rate differential goes against the Yen and Swiss franc.

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British Pound πŸ‡¬πŸ‡§ - Neutral / Bullish

 

The pound continues to consolidate as markets await a clear outlook for negotiations between the UK and Europe before the UK is set to leave the European Union in December 2020. 

 

If the UK and Europe can agree on a comprehensive trade deal, analysts expect the UK to see a significant amount of investment to come back into the UK as investors will have confidence that UK companies will have tariff-free access into the European Union. 

 

The British pound’s demand will increase in exchange rates as international investors sell foreign currencies in exchange to buy pounds to directly invest in the UK. 

 

We can expect the pound to strengthen in this scenario unless the UK and EU cannot agree on a trade deal and the UK crashes out the EU without a deal and is hit with high taxes on exports to Europe!

 

The European Union is the UK’s biggest trading partner as the UK sells 56% of all exports to Europe. Therefore we can see the importance of a trade deal for the UK’s domestic growth!

 

The UK’s strong track record in securing overseas investment is being put at risk by Brexit with the number of jobs created and foreign capital deployed in Britain falling sharply since the EU referendum.

 

The UK has scooped up large amounts of inward investment during the past four decades, due to its business-friendly environment and the ability of foreign companies establishing operations in Britain to sell goods and services into the rest of the EU.

 

Moving Forward: 

 

Markets will focus on negotiations between the UK and E.U for a directional bias on whether to buy or sell the pound

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Emerging Market Currencies 

 

Russian Ruble πŸ‡·πŸ‡Ί 

 

The Russian ruble has seen significant weakness in the currency markets as Oil prices have tumbled in 2020. 

 

Oil accounts for more than 50% of Russia’s national income coming from exports. 

 

We see a strong correlation between Oil prices and the Russian Ruble. 

 

If Oil prices can recover when the coronavirus is brought under control and the global lockdown eases, we can expect to see the Russian Ruble strengthen. 

 

Lower Oil prices will put further selling pressure on the ruble in the meantime.

 

Mexican Peso πŸ‡²πŸ‡½ 

 

The Mexican Peso remains vulnerable to a recession in the U.S.

 

The U.S buys 73% of all Mexican exports and Canada buys 5.8%. As Canada is dependant on trade with the U.S for growth, we can see the damaging impact a recession in the U.S will have on Mexico as 80% of its export market (U.S & Canada) will reduce their demand for Mexican products. 

 

Moving Forward:

 

Once the outlook for the U.S turns positive and the U.S government opens its economy from the lockdown brought in to reduce the spread of the virus, we can expect the Mexican peso to strengthen.

 

However, in the meantime, the currency could remain at current levels or weaken further if the lockdown turns out to last longer then Markets expected. 

 

Brazilian Real πŸ‡§πŸ‡· 

 

We have seen the Brazilian Real weaken in the markets as the lockdowns seen in Asia, Europe and the United States have meant that the demand for Brazil’s exports has dramatically dropped.

 

The demand for Brazil’s commodity exports Iron Ore, Coal, Oil and Soya bean’s have dropped as China and other key trading partners have shut their borders to contain the spread of the Virus.

 

Once international trade picks back up to normal levels after the virus lockdowns are lifted, we can expect a stronger Brazilian Real.

 

In the meantime, expect the currency to remain weak.

21st May 2020
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