Silicon Valley Bank FX Monthly Outlook provides insight into today's foreign exchange markets and the global events that impact your cross-border transaction strategies.
The U.S. dollar was the star performer in the currency markets last month, increasing in value slowly and steadily. By month-end several currencies had even broken out of long-standing trading ranges.
Most major currencies surrendered to the long-awaited rally in the dollar, as: 1) U.S. economic growth and inflation surprised on the upside; 2) the FOMC statement that deflation is less of a concern upped the odds that the Fed will begin tightening in Q2 2015 rather than H2 2015; and 3) a combination of major geopolitical events around the world drove global investment and speculative flows into the safety of the dollar.
Whether or not the upward trend in the dollar will continue is now the big question. There has been a tendency this year for the dollar to rally one month, only to sell off the next. My personal view is that the game has indeed changed. This time the fundamentals are aligned nicely with the technicals. In addition, important moves in the currency markets historically begin in the months of August and September.
The euro broke out of its familiar $1.35–$1.40 trading range after more punitive economic sanctions on Russia were agreed upon by Western governments. It was the downing of the Malaysian Airlines flight in the Ukraine by pro-Russian rebels that ultimately convinced German Chancellor Angela Merkel that harsher sanctions were in order. Unfortunately, euro zone countries have significant economic relationships with Russia. Germany imports 40 percent of its natural gas needs from Russia, and 20 percent from Italy and France. Russia imports about $350 billion of consumer goods from the EU. The U.S. does not have much of a trading relationship with Russia. This puts Europe’s economies and the euro at much greater risk with these economic sanctions than the United States and the dollar.
The euro zone area recovery continues to struggle and growth is uneven across the region. European banks in general are fraught with bad loans. Portugal’s Banco Espirito Santo is under severe financial stress, and we may see more banks with capital and funding problems before the year is out.
The British economy is having a good year—inflation, employment and GDP growth are in pretty good shape. The Bank of England is expected to lead the tightening cycle by the major economies, one reason for the strength in the U.K. pound. The uptrend that began in July 2013 at $1.49 may have at least temporarily peaked two weeks ago at $1.7160, an appreciation of 15.3 percent. It closed the month just below $1.69.
The Japanese yen, typically the go-to currency in times of geopolitical tensions, actually moved in the opposite direction last month. It weakened from a yen high (dollar low) of ¥101 mid-month to nearly ¥103 at month-end, a four-month high in the dollar. Most market participants expect the strong momentum of Abenomics and further stimulus by the Bank of Japan to weaken the yen going forward. Bloomberg’s month-end survey of 80 economists/contributors shows average forecasts of ¥105 for 2014 and ¥110 for 2015.
Early in the month, the Australian dollar hit a new high for the year at $0.9505, only to sell-off rather quickly after RBA Governor Glenn Stevens said their currency “is overvalued by most measures, and not just by a few cents.” The AUD has been one of the strongest currencies in the world this year, much to the detriment of their export-led economy. I expect the AUD to drop into a $0.91–$0.93 trading range shortly.
The Canadian dollar ended July on a very weak note—down 2.1 percent for the month. It began the month testing (USD) support several times at C$1.0620 only to race higher during the last week, closing at C$1.0950, where it had found strong resistance back in May and June. The odds suggest consolidation around these levels.
Emerging Market Currencies
Emerging market currencies finished the month with the biggest weekly declines in three months. The Mexican peso, Russian ruble, Brazilian real, and the Indian rupee all got hit hard, losing nearly 2 percent on the week.
Chinese Yuan (CNY) – It looks like the People’s Bank of China has finished punishing those currency speculators who thought that an appreciating Chinese yuan was a foregone conclusion. After spending most of the year nudging USDCNY higher (it peaked at 6.2675 in May) the PBOC has allowed it to fall again (the yuan to appreciate) over the last two months, dropping to 6.17 late last week. Expect the yuan to continue appreciating, albeit very slowly.
Indian Rupee (INR) – Since the election in May, Indian assets and the rupee have rallied on the potential for faster growth under Modi. However, more recently the market is realizing that the Modi effect may be more of a 2015 story. So, after enthusiastically dropping to 58.33 following the election, the USDINR has been trading mostly in a tight 59.50–60.50 range. Late last week, however, it did pop higher to end the month at 61.00.
Israeli Shekel (ILS) – Remarkably, the Israeli financial markets and the shekel seem largely unruffled by the geopolitical tension in the area. In fact, the shekel hit a three-year high at 3.4007 early in the month, which helped lead to an unexpected rate cut on July 28 by the Bank of Israel of 25bp to 0.50 percent, matching an all-time low. With the rate cut the Bank of Israel said they are taking advantage of low inflation to contain economic damage from the conflict in Gaza and the strong shekel.
| ||USD ||EUR ||JPY ||GBP ||CAD ||AUD ||CNY ||INR ||MXN ||ILS |
|GDP (Q2) ||4.00 ||2.70 (Q1) ||3.00 ||0.90 ||2.10 ||3.50 ||7.50 ||4.60 (Q1) ||1.80 ||2.90 |
|CPI (YoY) ||2.10 ||0.50 ||3.60 ||1.90 ||2.40 ||3.00 (Q2) ||2.30 ||7.30 ||0.17 ||0.30 |
|Unemployment Rate (July) ||6.10 ||12.30 ||3.70 ||6.50 (Apr) ||7.10 ||6.00 ||4.10 (Q1) ||8.80 ||4.80 ||6.30 |
|Central Bank Rate ||0.25 ||0.15 ||0.10 ||0.50 ||1.00 ||2.50 ||5.76 ||7.00 ||3.00 ||0.75 |
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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