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The EURUSD closed below 1.1000 on Friday for the first time since early March. Back then the single currency was recovering from a sudden retreat which coincided with a pick-up in global equities.

The year had kicked off with a substantial risk-off move thanks to a combination of the Fed’s December rate hike, crashing oil prices, concerns over the junk bond market and another sell-off in Chinese stocks on growth fears and yuan devaluation. But markets stabilised relatively quickly and the euro managed to push higher over the next couple of months. One of the reasons for this was talk that there had been an “off the record” agreement at the February G20 meeting in Shanghai to weaken the US dollar. This was seen as a way to reverse the sell-off in oil (as a weaker dollar helps to lift dollar-denominated commodities) while also helping to keep a lid on the Chinese yuan. The yuan is pegged to the US dollar and a cheaper yuan helps boost Chinese exports. There were fears that China would respond to any strengthening in the yuan by devaluing their currency again. That had happened in August 2015 and earlier in 2016 and in both cases we saw plunges in global equities on fears of spreading deflationary pressures thanks to cheaper Chinese exports.

We have just had another G20 meeting. Time will tell if there was any behind the scenes shenanigans, but the subsequent communique included a pledge to avoid competitive currency devaluations and agreement to consult on foreign exchange policy. However, Japan managed to underscore a warning in the communique concerning “excess” currency volatility. This may provide Japanese policymakers with the cover to intervene unilaterally should the yen strengthen and we see the USDJPY head back towards 100. This could be useful if the Bank of Japan fails to announce further monetary stimulus after this week’s meeting which would certainly wrong-foot investors.

As far as the EURUSD is concerned, the upside does appear to be capped at present. Much of this comes down to central bank chatter. The dollar is getting a lift from renewed speculation that the US Federal Reserve may be ready to hike rates again before the end of the year. This seems most unlikely (and nothing is expected at this week’s meeting) but it all helps to boost the greenback. At the same time, while the ECB declined to make any changes to its already-accommodative monetary policy at last week’s meeting, the governing council left the door open for further easing in September.

As the four-hour chart of the EURUSD shows, the euro is struggling to make gains:

PM Bulletin

David: As far as the EURUSD is concerned, the upside does appear to be capped at present.

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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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