- A cross rate we don’t normally talk about, but one which is increasingly crucial to global markets, is the US dollar/Chinese renminbi with the Chinese currency falling below the line-in-the-sand of 7 to the US dollar, prompting Trump to brand China a ‘currency manipulator’ and raising fears of a currency war. This would be just as bad for the global economy as tariffs with ‘neutral’ countries potentially getting caught in the crossfire leading them to devalue their currencies/introduce tariffs themselves. All very 1930s.
- As we always say , the FX markets speaks first and loudest and is the best and most liquid way in which financial markets can make their feelings known. ‘Sterling tanks’ has been the headline on my newswires seemingly just about every day this quarter as the poor old pound fell at one point to a 35 year low against the dollar. No explanation needed. Year to date though sterling has lost just 3% against the dollar, 5% against the yen and actually gained 1% against the sagging euro. Ignore the headlines, look at the facts is always pretty good advice.
- There will though no doubt be a pretty rocky ride for sterling in the coming weeks. Consensus seems to be a fall to 1.10 against the dollar and 1.02 against the euro if the UK leaves with a no-deal, no-transition outcome with all current EU trading deals instantly ceasing. Conversely, if UK does leave with a deal then sterling could rally to 1.35 against the dollar and 1.20 versus the euro, and trade higher still if Article 50 is revoked and the UK remains in the EU.
- The mighty greenback remains the mighty greenback as stories of its imminent demise have proven unfounded with the trade weighted dollar index close to a record high. This is not such a problem for the rather insular US economy as it is for Asia and EM businesses as they often borrow in US dollars but earn revenue in the local currency. The dollar is likely to remain firm being seen as a safe haven during times of global uncertainty and we are certainly not short of that at the moment.
Summary: Forecasting currencies is a mugs game, more so than ever given the increasingly unpredictable economic and political environment. For all the huff and puff this year the major currencies have traded in relatively tight ranges against each other, though sterling remains the loosest of cannons.