Q2 was an interesting quarter for G10 FX, with the Fed’s dovish turn and trade angst driving mixed US dollar performance against the basket.
Monex Europe topped Bloomberg’s FXF rankings for USDCHF, and came second in AUDUSD after ranking first for the previous three consecutive quarters.
Forecasts are as follows:
USDCHF fell rapidly in the second quarter as trade risk and a weakening dollar allowed CHF to claw its way back from the two year highs seen in April, while AUDUSD ended Q2 just above 0.70, extending its losses from the first quarter.
Monex Europe’s winning CHF call was driven by a conviction that trade risk would remain prevalent, but that the worst of Trump’s threats against China were a bluff – leaving haven demand for CHF intact, but not ascendant.
We stuck with our longstanding call for further AUD weakness, and turned out to be right once again after the RBA delivered one cut, but did not turn quite as dovish as some forecasters were expecting.
The Eurozone economy is showing signs of faltering, with recent data out of the euro area showing that current momentum in the manufacturing sector is distinctively negative.
We were wrong-footed by the euro’s resilience in the face of dismal data – our call of 1.10 for EURUSD was well off.
Falling inflation levels in the Eurozone, along with record low inflation expectations has prompted the ECB to open the door to further monetary easing in 2019.
We’re likely to remain bearish on EURUSD relative to the crowd as the case for easing from the ECB is getting stronger by the week, while there is at least some risk of an upside surprise from the Fed.
Berich believes the major tail risks to this view are erratic policymaking from Trump, and a sudden deterioration in the US economy.
Along with US-China trade talks, the big question for Q3 will be if the US economy slows down sufficiently to justify the extreme levels of bearishness prices in to fixed income markets.
-Ranko Berich, Head of market analysis at Monex Europe.