Monex: Dollar wint terrein door opnieuw oplopende spanningen China – VS

May 27, 2020

Hieronder volgt een commentaar in het Engels van Ranko Berich, Head of Research bij Monex Europe op de Amerikaanse dollar, euro en het Britse pond.

USD

The dollar was put under pressure yesterday and fell against all major currencies as improved risk sentiment remained the main driver in FX markets, largely driven by further scaling back of lockdown measures globally. The market mood shifted overnight when the US published a report describing a range of sanctions they are considering to punish China for its crackdown on Hong Kong. The US Treasury may impose controls on transactions and freeze assets for implementing the new national security law, which in its current form would cut back the rights of Hong Kong citizens. The US faces a challenge in penalising China, however, as any harsh penalties aimed at Beijing may potentially also harm Hong Kong and in turn the US. The increased uncertainty around the US-China situation boded well for the greenback, while better-than-expected US house prices may have helped in pushing the dollar towards a rally as well. Home sales were expected to decline by 23.4% month-on-month but instead increased by 0.6%. Today at 19:00 BST, the Federal Reserve will publish the Beige Book in which they provide commentary on current economic conditions.

EUR

The euro ripped just under a percentage point higher during yesterday’s trading session as the dollar came under broad selling pressure and weakened against sterling. European Central Bank Chief Economist Philip Lane stated yesterday during his speech at the IIF Virtual Conference that the eurozone economy hit an absolute bottom in April but this did little to startle the single currency. Lane also added that the capital key is the benchmark of the ECB’s Pandemic Emergency Purchase Program, and that the central bank can depart from it if needed. The capital key as it is, bases bond purchases off on countries’ GDP level - each nation’s share in the ECB’s capital key reflects the country’s share in the total population and GDP of the eurozone. This would mean that countries like Italy that are in higher need of monetary support may not get what they fully need. In the short-run, the ECB has space to be flexible around this benchmark and may purchase more Italian BTPs, as long as in the medium-term horizon the total holdings will converge back to the capital key. Lane stated that “having the flexibility to move away from the capital key is a very important principle of the PEPP program” because it improves the efficiency of monetary policy. This morning, the euro lost some ground in the buildup to the economic recovery plan that European Commission President Ursula von der Leyen is set to present to the European Parliament today. Worsening US-China tensions following a report that the US is considering imposing sanctions on China has hampered risk sentiment and supported the dollar.

GBP

Sterling rallied along with the rest of the G10 yesterday on improved risk sentiment and ultimately, the pound closed 1.2% higher on the day. The main point of note yesterday was comments from Bank of England Chief Economist Andy Haldane who spoke at a CBI webinar yesterday. Haldane stated that the data coming in was slightly better than the bank’s base case scenario, with surveys showing some stabilisation and a very modest recovery in spending and business sentiment. Haldane reiterated that no one was expecting a sharp recovery, similar to the v-shaped recovery posited at the beginning of the outbreak, with the labour market potentially not recovering until 2023 if the BoE’s latest projections are correct. The mixture of stark realism with a glimmer of hope stemming from the survey data didn’t get in the way of the pound’s rally. Haldane deflected questioning on the pound punishing question of negative rates, stating that the Bank was still in its review phase. All in all, the event drifted by without inciting too much instability in currency markets. Today, the pound is trading lower along with most of the G10 as global risk sentiment deteriorates somewhat as the market anticipates the US response to China’s Hong Kong security law. There is nothing scheduled on the UK data calendar today.