US Dollar (USD)
The USD didn’t manage to strengthen against the Euro, despite the Fed’s announcement of a tightening in monetary policy over the next few months.
The dollar struggled to maintain the strong rally it saw in the immediate aftermath of the US presidential election last year. Trump’s slower than expected implementation of policies, such as tax cuts and fiscal stimulus, accounted for the dollar’s weaker performance in May. Furthermore, the French presidential election, which regained the market confidence in the eurozone with Macron’s win, also had an impact on underwhelming US dollar performance.
However, as long as the Dollar Index remains above 96, we remain bullish on the Dollar, as weak performance of other major economies, together with Fed’s tightening and policy reforms, will eventually drive demand to the global reserve currency.
The US non-farm payrolls will be the number to watch this Friday, with a forecast of 186K new jobs – lower than May’s released number of 211K.
The European currency started the month in sideways trading at around 1.09, in anticipation of the French presidential election results. With Macron’s win, fears about a possible “Frexit” disappeared and the currency moved crossed the 1.10 mark.
The recent positive sentiment on the Euro is supported by the latest Euro Commitment of Traders (COT) report as well. We saw the net position for the Euro futures went into the positive territory for the first time in the past 3 years.
However, from a fundamental and macro point of view, we still expect the European currency to depreciate against the US dollar, or at least see some retracement in the next few weeks. The reason for this are subdued price trends and the continuation of the ECB’s asset purchase programme.
As long as ECB’s monetary policy remains accommodative versus a tightening policy of the Fed, this divergence in policies will potentially continue to provide some selling pressure on the Euro.
The GBP was heavily influenced by Theresa May’s announcement of a British snap election in June. The aim of the election is to strengthen May’s hand ahead of the “Brexit” negotiation, but the latest polls show that her party’s advantage over the Labour opposition is shrinking.
The market could be disappointed if there is no much change in UK’s position regarding a softer “Brexit” deal, which is likely to happen.
Despite longer term valuation models like the purchasing power parity (PPP) suggest that the British pound is currently undervalued by some 700 pips, Sterling could depreciate even further in the aftermath of the UK snap election.
We are expecting the Pound to move lower towards 1.25 area.
Japanese Yen (JPY)
With geopolitical tension rising in the Asia, the Japanese Yen benefitted from its safe haven status in the second half of May, gaining around 400 pips in one week.
The Japanese large positive external balance as well as huge international investments have driven yen’s demand even further, which mark the strength at 110 against the dollar – down from May’s high of above 114.
Although the country has defeated the long-year deflation, real price gains still remain weak at 0.2% year on year – far below the Bank of Japan’s target of 2%.
In the long term perspective, we still expect the Yen to weaken, and potentially driving the USDJPY towards the high around 120.