THE OUTLOOK FOR 2019
Biyi Cheng, head of Greater China at CMC Markets, assesses the prospects for various major currencies in late 2019
Whether the repercussions are from Brexit or the trade war, CMC Markets looks at how the central banks’ reactions during the first three quarters of 2019 have affected currency rates, and what investors can expect as the year comes to a close. USD: GRADUALLY RETREATING
The US Dollar Index (DXY) has extended its bullish performance of 2018 into the first half of 2019, supported by relatively strong fundamentals in the US economy and the rising appetite for risk aversion driven by geopolitical conflict. The DXY peaked at 98.93 on July 31—its highest level in the past 26 months—after the US Federal Reserve announced the first rate cut since December 2018.
President Trump has blamed the Fed on multiple occasions for maintaining the benchmark rate at a high level, which has had a negative impact on domestic manufacturers. US decision makers are also gradually abandoning the strong dollar policy introduced by former US treasury secretary Robert Rubin decades ago, in order to reduce a large amount of deficit in their current account balance.
The change of policy direction means that the Fed will cut the rate again later this year. Meanwhile, there appears to be no prospect of an end to the trade tension between mainland China and the US in the short term, so tax tariffs will slow down economic growth and harm the revenue generation of US companies.
EUR: TENDING TO STABILISE
The statistics from the European Central Bank (ECB) suggest that the eurozone has experienced capital outflow in the past few years, due to negative yields on treasuries and the ECB’S prevailing quantitative easing policy. Nearly half of this capital flows to US dollar denominated assets.
However, factoring in the gradually increased fiscal expenditure, historically low interest rates and current low value of the currency, a slow economic recovery in the eurozone is expected. Also, the US dollar’s bullish performance could end, with the euro benefiting. GBP: STUMBLING AT THE BOTTOM
The Brexit effect, which has hampered economic growth in the UK for three years, could end in the coming months. All domestic investments that have come to a standstill or been delayed due to Brexit will be able to grow again if a resolution is reached.
This removal will bring a short-term rise in the UK’S domestic inflation rate, possibly making the Bank of England raise its rate by 25 basis points, supporting sterling’s recovery. However, this might only be a flash in the pan. The uncertainties that Brexit caused will continue to influence the UK’S economic growth in the long run.
AUD: REBOUND IN RECOVERY
Due to the sluggish growth of its domestic economy, the negative impacts of global trade conflicts and a slowdown in imports from mainland China, Australia’s largest trade partner, the Reserve Bank of Australia (RBA) has cut its benchmark rate twice, taking it to an all-time low of 1 per cent.
It will cautiously monitor the impact of these cuts in the following months, and so is not expected to make any further interventions before November.
SUMMARY
Major economies around the world are facing external trade barriers, geopolitical instabilities, internal crises, and competition in currency depreciation. All countries want to keep their domestic economies stable and growing, and enhance the global competitiveness and market shares of domestic products. In addition, central banks around the world are easing their monetary policy to reduce potential recession and geopolitical risk. Keeping the domestic currency weak has become a global trend, and we will not see any fundamental changes to this pattern by the end of the year.
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