FX Monthly Outlook: Dollar, pound strengthen despite global slowdown concerns

The Brexit saga continues with no agreement between the PM and Parliament. Theresa May has suggested that the end of March deadline might be extended. Trade negotiations between the US and China have made some headway. The rather surprising outcome was that the pound strengthened during the month, outpacing the strengthening dollar.

What's in play

Brexit developments. The Brexit time frame appears to have become more flexible as we approach the March 29 deadline. The new uncertainty caused cabinet Minister for Farming, George Eustice to resign. These different factors added to the pound’s volatility. The pound’s direction from here is very difficult to forecast as there are too many variables.

US-China trade issues. US trade negotiations with China have made headway, and an agreement may be signed when Trump meets with Xi. China agreed to buy about $200 billion worth of farm equipment and other goods from the US. The Chinese yuan strengthened in February, but ended the month almost unchanged from the end of January.

Major and emerging market currencies declined across the board against the US dollar this month with the exception of the British pound.

US-North Korea peace talks fell apart abruptly when Trump left the table. The Japanese yen weakened on the breakdown in talks with North Korea, losing about 1 yen to the dollar.

What's next

Global Growth. ECB Head Mario Draghi and a number of central bankers are concerned that global growth is showing signs of contraction. This will hold back the euro despite any news that favors the euro.

The Federal Reserve. Chairman Jerome Powell repeated that he is taking a patient stance on any interest rate changes as he watches uncertainties in the economy. With no interest rate hikes likely, the dollar should hold steady as interest rate differentials remain unchanged.

The ECB. Mario Draghi said he has no change in the interest rate outlook and is sticking with his cautious approach. The prospect of more funding from the ECB is becoming more likely. This changes the bias in favor of and could weaken the euro, given the continuing push higher by the dollar.

What happened

More certainty prevailed during February. US bond yields rose due to increased caution from the Federal Reserve.

Stocks rallied through the month as chances of a trade war with China receded and as Trump extended his trade tariff deadline. Positive comments from both Trump and the Chinese top trade negotiator Lui He increased confidence and risk appetite.

The US Government funding bill extended funding to September 30, averting another government shutdown.

The Canadian dollar declined at the end of the month as Canadian GDP came in lower than expected. Falling oil price also drove the loonie lower in volatile trading at the end of February.

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Data sources: Bloomberg 2019

*Bloomberg Q3’ 2018 FX forecasters are ranked based on three criteria: margin of error, timing (for identical forecasts, earlier ones received more credit) and directional accuracy (movements with the currency’s overall direction). The rankings which were based on Bloomberg’s foreign exchange forecasts (FXFC), were for forecasters who provided forecasts for Q3’ 2018 in at least three of the four preceding quarters but no later than one month prior to September 30, 2018.

Scores were calculated each quarter for the three criteria, which were weighted 60 percent, 30 percent and 10 percent, respectively. The final score for each currency pair was the time-weighted average of the four quarterly scores.
The best overall forecasters were identified by averaging the individual scores for each firm on all 13 currency pairs and all four quarters. Forecasters had to be ranked in at least eight of the 13 pairs to qualify for the overall ranking (54 firms qualified). All ranking tables display the top 20 percent of the forecasters who were eligible, to a maximum of 10 names.

This article is intended for US audiences only.

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About the Author

Laurence Hayward is the Senior Advisor for International Markets and Risk for Silicon Valley Bank in its Central Region. He is responsible for helping clients mitigate foreign exchange risk, including trade finance and international cash management.

Hayward has over 40 years in the foreign exchange and interest rate markets, with experience as a banker, broker, trader and marketer / advisor. He has worked in London, Abu Dhabi, Dubai, Singapore, Hong Kong, New York, Houston, Dallas, Santa Clara and Denver for Barclays International, First National Bank of Boston, Tullett and Tokyo Forex International, Gulf International Bank, NationsBank, Bank One, Cambridge Mercantile Corp. and Silicon Valley Bank. He has made presentations to the national AFP, the New Orleans AFP, the Houston TMA. Fort Worth Chamber of Commerce, the University of Colorado at Boulder, the KPMG Global Enterprise Institute in Denver, and many bank presentations on the subjects of foreign exchange, international risk, FASB accounting rules and quant analysis. He has also been published in the Wall Street Journal, the New York Times, and many periodicals.