Near-term respite for FX markets
President Trump's verbal currency interventions have reversed the trend in the dollar. But for how long?
USD: Trump reversing his own (trade war) generated USD strength
President Trump's comments have shaken the FX ground once again. His criticism of (a) China and the EU for manipulating exchange rates; and (b) the Fed for hiking interest rates has reversed some of the US dollar strength (which had largely been generated by President Trump's trade policies). The near-term implications are that this should put a floor under EUR/USD and in the absence of an escalation in the trade rhetoric, should also be supportive for emerging markets FX. However, as the Fed policy path is set to remain intact for now (ie further gradual tightening, as per comments from St. Louis Fed President James Bullard late on Friday) and with the trade war overhang firmly in place, the broad-based USD weakness/ EM FX rally may not last for too long and could be easily derailed. As for today, we look for a continuation of the tentative rebound in EM FX and USD softness, with stable/lower USD/CNY overnight helping the near-term trend.
EUR: Modest upside to come in the first part of the week
The euro should stay supported during the early part of the week, in part benefiting from eurozone July PMI (Tuesday) and German Ifo (Wednesday), with both suggesting a limited impact of trade tensions on eurozone sentiment. We expect the July ECB meeting (Thursday) to be a non-event for the euro as the European Central Bank has already provided guidance on quantitative easing and deposit rates in June.
JPY: The big short-term beneficiary
The Japanese yen has led the G10 FX rebound since President Trump’s verbal interventions against US dollar strength on Thursday and Friday. The yen also benefited from speculation about a potential shift in the Bank of Japan's policy stance (to less loose). While we suspect it is still too early to start pre-positioning for the latter, the former should remain the main driver of USD/JPY during the early part of the week and bring USD/JPY towards the 110.00 level.
CEE: Short-term respite, but still too early to position for a turnaround
Central and eastern European currencies got some respite from President Trump’s comments as they translated into higher EUR/USD and general emerging market FX strength. Yet, as per above, we see these comments as putting a floor under EUR/USD rather than generating a meaningful cross strength (as the Fed is to continue tightening for now while the ECB maintains a dovish forward-rate guidance) suggesting that it's too early to position for a meaningful turnaround in the CEE FX segment, particularly in light of the existing threat of escalating trade wars. We continue to see the Hungarian forint as the most vulnerable CEE currency given the ultra-loose central bank stance (we look for EUR/HUF to re-test 330). With EUR/Czech koruna trading below the 26.00 level and the latest Trump comments providing some tentative support to EM FX (thus helping CZK), we expect the Czech National Bank to stay on hold in August.
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