FX Talking: Currencies move to frontline of trade war
Currencies are front and centre in the global trade war. Now that USD/CNY has breached the 7 level, it seems that China is happy to let the Renminbi take the strain as US-China relations deteriorate further. This has undermined the EMFX complex and, combined with weakness in Europe, has propelled the dollar back to the highs
Executive summary
Given that unilateral FX intervention rarely works, the best hope for a weaker dollar probably comes either through: a) agreeing to a trade deal that secures positive re-rating stories in Europe and Emerging Markets or b) the Fed delivering a much deeper easing cycle than that priced by the markets. Neither of the above looks imminent and warns of another tricky 1-3 months for risk assets.
We expect European FX (ex CHF) to stay soft on the back of i) ECB easing, ii) No Deal Brexit fears culminating in October and iii) uncertain Italian politics. EUR/USD should continue to threaten a break under 1.10 and Cable under 1.20. Within the CEE space, the PLN should continue underperforming as the market gauges the potential threats to the banks from legacy FX mortgage challenges.
Asian FX will very much be dominated by the new-found flexibility in the CNY and the scope for local policymakers to provide stimulus. And in Latam, Brazilian corporates are using surprisingly low local interest rates to pay down external debt – a long-term positive, but short-term negative for the BRL.
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