Going Higher

The macro point

It's unequivocal. According to the weekly report from the American regulator, the CFTC, fund managers have never been more bearish on the dollar in history. It's a record. Everyone expects the American currency to continue weakening in the coming months. The reasons are governance issues in the United States, concerns about the trade war, and uncertainties regarding the budget.

The dollar's decline poses a serious problem for investors. Historically, a European investing in the United States did not need to hedge against currency risk. The volatility of the EUR/USD was limited. This is no longer the case. The pair has dropped by -12% since the beginning of the year, further impacting the performance of US equity funds. Unfortunately, this is certainly not over. Futures contracts on the EUR/USD forecast a decline to 1.23 or even beyond by the end of the year – an additional depreciation of at least +5%. This is obviously also a problem for companies which, through exports and imports, can face exchange rate issues related to the US dollar.

It is well known that exchange rate forecasts are always volatile and unreliable, even over three months. However, it is rare to see such distrust for the dollar, the most traded currency globally and the international reserve currency. It is too early to know if the dollar's decline is cyclical or structural. Some analysts mention a secular bear market for the dollar (structurally bearish market). This is somewhat exaggerated given the current knowledge.

Our opinion: the dollar will likely continue to decline, particularly against the euro, the pound sterling, or even against some Asian currencies. An EUR/USD pair close to 1.23 by the end of the year is not an unreasonable target. However, we do not see what could push the pair beyond that. Caution.

At a macroeconomic level, the news in recent sessions was calm. Last Tuesday, during a press conference, the Governor of the Bank of France, Villeroy de Galhau, hinted that the European Central Bank (ECB) could proceed with further rate cuts: "inflation expectations remain moderate," while "the significant appreciation of the euro" partly offsets the rise in oil prices. "This could lead to further easing in the next six months." We expect a terminal rate around 1.50% next year, compared to 2% currently. If this happens, it will be good news for the eurozone economy, which is still somewhat sluggish.

Finally, geopolitics takes a backseat for now. Finished are the Middle Eastern crisis, the consequences of the Strait of Hormuz blockage (a completely improbable scenario), and the 3rd world war (we're barely exaggerating). What can be retained from this episode is that spikes in military tensions generally have little effect on the foreign exchange market, including safe-haven assets. It's much talked about. But the real impact is often limited. Something to ponder.

Technical point

The euro continues its surge against almost all currencies, including the Israeli shekel. It's the phenomenon of this year. One might have thought that the Israeli currency would benefit from the Middle East ceasefire. Not even. The most noticeable rise is obviously against the American dollar with the crossing of the threshold at 1.17 (+1.90% over the past five sessions). Unless there is a drastic change in FX paradigms in the coming weeks, we think the euro should sustain its performance throughout the summer.

Announcements to follow

The week is slightly shortened due to the American national holiday, which will lead to an early closing of stock markets and therefore less liquidity, including in currencies. The American Labor Department's employment report for June will be the most important statistic. We expect the unemployment rate to remain stable at 4.2%. It's low. It would need to rise to 4.5% for it to prompt the American Federal Reserve (Fed) to act hastily. In this context, there is no chance that the Fed will move its rates at the end of the month. It should be in autopilot mode until September, at least. At that time, we anticipate a rate cut of 25 basis points.

Below you will find the publications and events that should have a major impact on the evolution of currency rates.

The information presented in this publication is provided to you for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as a basis or deemed as an inducement to engage in any investment whatsoever.