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FX Insights: Five LOWS that matter

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In early September, investors and traders from all over the world return to their desks from summer vacation. After much deep thinking and several cups of coffee, they begin to make big trading decisions they hope will carry them to a successful year-end.

More often than not, a herd-mentality among investors comes into play, leading to big directional moves in markets. Here are five recent important economic and market LOWS indicating what those next big moves might be, and what impact they may have on the foreign exchange (FX) markets.

  1. US TREASURY YIELDS PLUMMET. On September 3, yields for US 10-year Treasuries (UST) dropped to 1.44%, matching the August 26th low, and well within reach of the July 2016 all-time low of 1.34%.1
    • The rush into US Treasuries can be attributed to a combination of 1) safe haven buying; 2) a rotation out of risky equities into bonds; 3) a very attractive yield compared to negative-yielding notes and bonds in other G10 countries (totaling $17 trillion); 4) a dovish Fed with several more rates cuts expected; and 5) several signals that the US economy may be heading for a downturn (see #2 below).
    • FX impact: the global demand for UST’s has led to demand for the US dollar. We expect that to continue until yields bottom out and move back higher, which will then become a head-wind for further dollar strength.
  2. US ECONOMY SUFFERS A ONE-TWO PUNCH. Two surprisingly weak U.S. economic data releases were a one-two punch in the economic gut of our country.
    • On September 3, the Institute for Supply Management (ISM) released their monthly PMIs for Manufacturing, Employment and New Orders. All came in below the 50 breakeven mark, implying an outright contraction in activity.
    • On September 4, the widely-followed University of Michigan’s Consumer Sentiment Index saw its biggest drop in six years. Consumers account for two-thirds of U.S. economic activity.
    • FX impact: a slowing economy is seldom good for a country’s currency. Our economy has been performing well, but this data should be considered as early indication of a slowing economy.
  3. THE GERMAN ECONOMY TEETERS ON RECESSION. German GDP growth in Q2 QoQ fell by 0.1%.2 Exports dropped faster than imports, while investment in construction declined significantly.
    • Forecasters expect a further contraction in the third quarter, putting the German economy into a technical recession (defined as two consecutive declines in GDP).
    • FX impact: once again, a slowing economy is seldom good for a country’s currency. And, here is one more reason for global investors to shy away from the EU and the euro.
  4. FALLING COPPER PRICES PRESAGE A GLOBAL SLOWDOWN. Since April, copper has dropped 16%, to its lowest level since mid-2017.3
    • Copper prices are viewed by analysts as a reliable leading indicator of global economic health, since it has widespread use in most sectors of an economy. Declining copper prices reflect reduced demand and suggest an impending economic slowdown.
    • FX impact: the correlation between copper prices and the US dollar is slightly negative, so declining copper prices may provide a modest tailwind for the dollar.
  5. ITALIAN GOVERNMENT BOND YIELDS DROP TO ALL-TIME LOWS. Yesterday, 10-year Italian bond yields hit an all-time low of 0.805%, plummeting nearly 50% from their early-August level of 1.55%.4
    • The political storm triggered by a collapse in the governing coalition of Italy is effectively over. The 5-Star Movement party approved a coalition with the center-left Democratic Party yesterday, removing the final hurdle to the formation of a new, more business-friendly government.
    • After Greece (10-year bonds at 1.54%), global bond investors are looking to Italy for the highest and most attractive yields in Europe.5
    • FX impact: replacing an ineffective coalition government with one that has the potential to be effective makes global investors feel better about Italy and the eurozone, so this is good news for the euro.

1,2,3,4,5 Bloomberg, September 2019

©2019 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.

This content is intended for US audiences only.

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.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.

Opinions expressed are our opinions as of the date of this content only. The material is based upon information which we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources. Opinions expressed are our opinions as of the date of this content only. The material is based upon information which we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

About the Author

Scott Petruska is Chief Currency Strategist and senior advisor for Silicon Valley Bank’s global financial services group, and is based in Boston, MA. He advises clients on currency and interest rate hedging strategies, and helps them with other aspects of global banking. He regularly writes blogs on topics covering the global financial markets, conducts client seminars and webinars, and speaks at regional financial conferences.

Petruska has more than 30 years experience in the currency and interest rate markets, and has lived and worked in Boston, Chicago, New York City, Singapore and Tokyo. Prior to joining SVB in 2009, he worked at several large international financial institutions, including National Westminster Bank, Irving Trust, Bank of New York, State Street Bank and Commerce Bank. He has been an institutional trader, product developer, analyst, salesperson and advisor.

Petruska has been awarded several professional designations, including the CFA (Chartered Financial Analyst), FRM (Financial Risk Manager) and CMT (Certified Market Technician). He earned his undergraduate degree in Finance & Banking from the University of Wisconsin.

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