Morning Commentary: Hope Springs Eternal

Foreign Exchange - Morning Commentary
Hope Springs Eternal
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
One of the constant themes in the marketplace over the past four months has been the optimism, confidence and momentum exhibited in U.S. and global equities.  Three Fed rate cuts combined with a reduction in U.S.-China trade friction and the likelihood of an orderly Brexit have spurred investors onto a more positive outlook going forward. The reduction of tensions regarding trade is helping to improve the outlook for global growth as we head toward 2020.

Up until recently, the currency market did not generally reflect this renewed positive outlook as many key currencies remained sidelined by the strong and steady performance of the U.S. economy relative to its peer group. But markets are always looking forward and with the reduction of trade and geopolitical tensions, markets are beginning to anticipate more green shoots springing up. As we approach year end, it appears there is a bit of front running in anticipation of better growth in the Eurozone, Asia, and in emerging markets.

While markets remain thin as many investors and traders remain on holiday, the U.S. dollar has weakened sharply overnight against many of the key major and emerging market currencies. European currencies are particularly sensitive to global growth changes and the optimism that has helped propel global equities seems to be aiding these currencies in particular as they have been slowly advancing since September and in particular today.

The euro is the second most important currency to the U.S. dollar and is highly sensitive to trade volumes as many key countries have much larger shares of GDP concentrated in exporting. In 2017, as U.S. and world growth accelerated, the euro advanced by nearly 15%. In 2018, as the trade war with China took hold and global trade volumes were negatively impacted, the euro fell by 4.5%. 2019 brought more downgrades to European growth and the euro fell by 3% this year.

Heading into 2020, many economists have upgraded their GDP forecasts for Europe and the euro forecasts have reflected this optimism with predictions of gains near 4% in 2020. Assuming all goes according to plan (no new White House surprises on trade), we tend to agree with those forecasts and look for a slight weakening in the U.S. dollar in 2020.
  • The Japanese yen (JPY) has not been participating in the mild U.S. dollar weakness over the past few months nor in today’s sharp fall. Part of the explanation is an unwinding of the JPY’s safe haven status against many key currencies and continued weak Japanese economic data. Industrial production fell again in November by 0.9% after collapsing in October by 4.5% and are fast approaching levels not seen since 2013. Japanese exports fell by 8.2% in early December after falling by nearly 18.5% in the same period in November.
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