President Trump’s latest trip to the Far East provided reasons for markets to adopt a more ‘risk-on’ posture - an appetite for higher risk. Factors including the delay of highly-anticipated punitive trade tariffs on China and potential drops in interest rates by some central banks has helped emerging market currencies recover from recent declines.
What’s in play
UK PM change: Boris Johnson, ex-Foreign Secretary and Mayor of London, won the vote among conservatives to be appointed next Prime Minister. A firm Brexit supporter, Johnson is anticipated to continue working towards the original Brexit mandate. Although the pound fell for a second quarter losing about 6 cents, it has not been affected by PM changes.
Trade tariffs with China: After President Trump’s visit to the G20 and his meeting with Xi Jinping in Japan, the delay of further retributive tariff actions by the US somewhat allayed currency market fears. Markets turned to a more risk-on posture, with safe haven assets including gold, the yen and the Swiss franc being sold off.
Fed expected to cut rates: The Federal Reserve is expected to announce a quarter percent interest rate cut during a meeting at the end of this month, with further cuts anticipated before year-end. The dollar is expected to weaken.
The ECB and BoE will meet: The European Central Bank will meet on July 25 and the Bank of England will meet on August 1. Christine Lagarde will take over from Mario Draghi as head of the European Central Bank. If the ECB matches the Fed’s rate cuts, there will be minimal impact on the euro.
The Dollar Index fell: The Dollar Index (a measure of the value of the US dollar relative to the value of a basket of currencies of key US trading partners) lost 1.7% last month—the largest monthly loss since January 2018. The decline was attributed to concerns regarding potential trade dispute outcomes with China and the prospect of Fed interest rate cuts.
Trump visited North Korea: The historic visit to North Korea following the G20 Summit left critics wondering if any concessions were made with leader Kim Jun Un. World currencies including emerging market currencies were unaffected by the visit.
Punitive tariffs with Mexico were not realized: Tariffs threatened by the US against Mexico for failures by the country to adequately assist in slowing illegal immigration were not implemented. After a dip in value, the peso recovered.
Oil prices jumped: Rumors of a potential change in supply from OPEC caused the price of the West Texas Intermediate benchmark for US oil (WTI) to increase about $5. Following the downing of a US military drone and attack on two tankers in the Persian Gulf, oil prices fluctuated, with the net value increase bolstering Canadian, Australian and New Zealand dollars.
India cut interest rates: The Reserve Bank of India lowered interest rates by a quarter percent. The Rupee remained unchanged as the decrease was expected.
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