Emerging from
a safe place

CURRENCIES

5 POINT SUMMARY OF THIS ARTICLE

1

2

3

4

5

Safe-haven currencies suffer in a ‘risk on’ environment

The actions of the Fed and global recovery imply lower USD demand

Changes are needed to support significant euro appreciation

A trade deal with Europe will determine the value of sterling

Tensions with the US are likely to continue to weigh on the yuan

Currencies that are perceived to be safe havens have appreciated during the coronavirus pandemic and will probably fall back slightly as the appetite for risk returns to financial markets.

Throughout the turmoil that has plagued financial markets during the great virus crisis, demand for safe-haven currencies has soared. They include the US dollar, which is the world’s reserve currency, as well as other traditional harbours of safety, including the Swiss franc. But for how long will these currencies remain so strong?

We expect the global economy to begin a gradual healing process as the number of new infections recedes, social distancing measures are relaxed and stimulus measures begin to take effect. Upward pressure on safe-haven currencies should then begin to fade. We believe there is a good chance of this beginning to happen, albeit at a measured pace, relatively soon for two main reasons.

First, the gradual return of an appetite for risk in financial markets is unlikely to rely solely on the absolute strength of the recovery – which is likely to be moderate and uneven at first – but on whether there’s continued improvement in a relative sense from the lowest point in economic activity. Second, the coordinated monetary and fiscal stimulus measures are on such an unprecedented scale that we believe they will facilitate a return to growth.

Currencies in reserve

Safe-haven currencies suffer in a ‘risk on’ environment

1

The actions of the Fed and global recovery imply lower USD demand

2

The dollar has been strong for many years now and strengthened further during the coronavirus pandemic. As the global economy begins to recover, these short-term upward pressures should begin to fade. Over the longer term, a number of factors could combine to weaken demand for the US dollar, causing it to depreciate gradually against other major currencies.

One of these relates to crude oil, which is likely to rise in price as the pace of global economic growth picks up and demand returns. In turn, this will increase the supply of ‘petrodollars’ to oil-exporting countries. The impact is likely to be a reversal of the marginal increase in demand for US dollars caused by the recent fall in oil prices.

Meanwhile, the US Federal Reserve’s (Fed) stimulative monetary policies are putting downward pressures on the greenback. Notably, the huge asset purchase programme (a form of quantitative easing) will increase the Fed’s balance sheet and increase the supply of US dollars relative to other central bank efforts.

Changes are needed to support significant euro appreciation 

3

Concerns remain about the long-term prospects for the euro area owing to the lack of fiscal integration, as well as weaknesses in some aspects of the monetary union. Can the 19 countries that share the euro work through their differences and resolve the numerous economic challenges the region faces?

One of these is how to apply common monetary and fiscal policies without constraining individual nations, given the wide disparity of economic conditions across the region. If successful then the fundamentals would support a stronger euro. That includes a twin surplus in its primary budget balance and current account, along with low and stable inflation.

In the shorter term, we believe the euro could appreciate slightly against the US dollar over the rest of 2020 as the global economy recovers and investors rediscover their appetite for risk. Any signs of closer monetary and fiscal integration across the region should boost the euro further.

A trade deal with Europe will determine the value of sterling

4

After formally leaving the European Union (EU) on 31 January 2020, the UK is working through an 11-month transition period, which is meant to give both sides some breathing space while they negotiate a new free trade deal. We believe a partial agreement is possible but not yet a done deal and, as the 31 December deadline approaches, sterling will become volatile and probably depreciate.

Looking beyond the near term, although currencies are difficult to value, the equilibrium exchange rate is a popular measure, which incorporates various economic factors into the calculations, including inflation, trade flows and productivity. It tends to provide a guidance on the long-term trajectory for currencies, which suggests sterling is no longer undervalued against the euro.

The UK faces the same uncertainty as the rest of the world as the process of economic recovery begins, but the government’s policies should support sterling. The pound’s value will largely be a reflection of confidence in the country’s economic outlook, which will depend to a large extent on the UK’s future trading relationship with the EU.



Tensions with the US are likely to continue to weigh on the yuan

5

The relationship between America and China became more relaxed at the start of 2020 after they signed a phase one trade deal. Yet tensions have flared again between these two superpowers during the coronavirus pandemic. China’s financial markets are likely to remain vulnerable to any setback along the economic recovery, as well as ongoing trade tensions.

The renminbi will continue to be driven by trade policy developments, including how closely America and China stick to their phase one commitments. It’s possible that President Trump will not want to stoke tensions further during an election year, which could put further downward pressure on the US economy. But, equally, a more tangible escalation remains a risk and may well take place.

We believe that over the longer term, the relationship between the two countries will remain complex. They are unlikely to reach a definitive agreement on trade, and China may find it difficult to meet its agreement to buy an additional $200 billion in US goods and services. Whenever the dispute escalates, the renminbi could face downward pressure as the flow of capital and goods slows.

CURRENCIES

05

Invest in a richer life,
however you define it.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.

Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement


Real GDP

Source: IMF

Our forecasts suggest real global GDP will contract sharply this year 
and then recover gradually

Weighted unemployment rate

Source: Cambridge J Econ, Volume 44, Issue 3, May 2020, pages 647-669

Percentage points

* Austria, Belgium, Finland, Luxembourg, Germany, Netherlands.
** Greece, Ireland, Italy, Portugal, Spain

Economic conditions vary widely across the eurozone, as demonstrated by 
the wide range of unemployment rates 

Misalignment relative to 'fair value'

Source: Goldman Sachs

Undervalued

Overvalued

Looking at fair value estimates, sterling is undervalued against the dollar 
and overvalued against the euro. But a post-Brexit trade deal could change 
sterling’s long-term attractiveness 

What do
easier financial
conditions mean?

LOWER
RATES

TIGHTER
CREDIT
SPREADS

WEAKER
CURRENCY

HIGHER
EQUITY
PRICES

USD/CNY

Source: Reuters, Bloomberg

Developments in trade relations have significantly impacted the value of the yuan 

Click on a key date to see how trade tensions have escalated

Emerging from
a safe place


CURRENCIES


5 POINT SUMMARY OF THIS ARTICLE


1

Safe-haven currencies suffer in a ‘risk on’ environment

The actions of the Fed and global recovery imply lower USD demand

Changes are needed to support significant euro appreciation

A trade deal with Europe will determine the value of sterling

Tensions with the US are likely to continue to weigh on the yuan

2

3

4

5

Currencies that are perceived to be safe havens have appreciated during the coronavirus pandemic and will probably fall back slightly as the appetite for risk returns to financial markets.




CURRENCIES

05

Currencies in reserve


Safe-haven currencies suffer in a ‘risk on’ environment


1

Throughout the turmoil that has plagued financial markets during the great virus crisis, demand for safe-haven currencies has soared. They include the US dollar, which is the world’s reserve currency, as well as other traditional harbours of safety, including the Swiss franc. But for how long will these currencies remain so strong?

We expect the global economy to begin a gradual healing process as the number of new infections recedes, social distancing measures are relaxed and stimulus measures begin to take effect. Upward pressure on safe-haven currencies should then begin to fade. We believe there is a good chance of this beginning to happen, albeit at a measured pace, relatively soon for two main reasons.

First, the gradual return of an appetite for risk in financial markets is unlikely to rely solely on the absolute strength of the recovery – which is likely to be moderate and uneven at first – but on whether there’s continued improvement in a relative sense from the lowest point in economic activity. Second, the coordinated monetary and fiscal stimulus measures are on such an unprecedented scale that we believe they will facilitate a return to growth.

Meanwhile, the US Federal Reserve’s (Fed) stimulative monetary policies are putting downward pressures on the greenback. Notably, the huge asset purchase programme (a form of quantitative easing) will increase the Fed’s balance sheet and increase the supply of US dollars relative to other central bank efforts.

The dollar has been strong for many years now and strengthened further during the coronavirus pandemic. As the global economy begins to recover, these short-term upward pressures should begin to fade. Over the longer term, a number of factors could combine to weaken demand for the US dollar, causing it to depreciate gradually against other major currencies.

One of these relates to crude oil, which is likely to rise in price as the pace of global economic growth picks up and demand returns. In turn, this will increase the supply of ‘petrodollars’ to oil-exporting countries. The impact is likely to be a reversal of the marginal increase in demand for US dollars caused by the recent fall in oil prices.

The actions of the Fed and global recovery imply lower USD demand

2

Changes are needed to support significant euro appreciation 

3

Concerns remain about the long-term prospects for the euro area owing to the lack of fiscal integration, as well as weaknesses in some aspects of the monetary union. Can the 19 countries that share the euro work through their differences and resolve the numerous economic challenges the region faces?

One of these is how to apply common monetary and fiscal policies without constraining individual nations, given the wide disparity of economic conditions across the region. If successful then the fundamentals would support a stronger euro. That includes a twin surplus in its primary budget balance and current account, along with low and stable inflation.

In the shorter term, we believe the euro could appreciate slightly against the US dollar over the rest of 2020 as the global economy recovers and investors rediscover their appetite for risk. Any signs of closer monetary and fiscal integration across the region should boost the euro further.

After formally leaving the European Union (EU) on 31 January 2020, the UK is working through an 11-month transition period, which is meant to give both sides some breathing space while they negotiate a new free trade deal. We believe a partial agreement is possible but not yet a done deal and, as the 31 December deadline approaches, sterling will become volatile and probably depreciate.

Looking beyond the near term, although currencies are difficult to value, the equilibrium exchange rate is a popular measure, which incorporates various economic factors into the calculations, including inflation, trade flows and productivity. It tends to provide a guidance on the long-term trajectory for currencies, which suggests sterling is no longer undervalued against the euro.

The UK faces the same uncertainty as the rest of the world as the process of economic recovery begins, but the government’s policies should support sterling. The pound’s value will largely be a reflection of confidence in the country’s economic outlook, which will depend to a large extent on the UK’s future trading relationship with the EU.



A trade deal with Europe will determine the value of sterling

4

Tensions with the US are likely to continue to weigh on the yuan

5

The relationship between America and China became more relaxed at the start of 2020 after they signed a phase one trade deal. Yet tensions have flared again between these two superpowers during the coronavirus pandemic. China’s financial markets are likely to remain vulnerable to any setback along the economic recovery, as well as ongoing trade tensions.

The renminbi will continue to be driven by trade policy developments, including how closely America and China stick to their phase one commitments. It’s possible that President Trump will not want to stoke tensions further during an election year, which could put further downward pressure on the US economy. But, equally, a more tangible escalation remains a risk and may well take place.

We believe that over the longer term, the relationship between the two countries will remain complex. They are unlikely to reach a definitive agreement on trade, and China may find it difficult to meet its agreement to buy an additional $200 billion in US goods and services. Whenever the dispute escalates, the renminbi could face downward pressure as the flow of capital and goods slows.

Invest in a richer life,
however you define it.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.

Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement


Source: IMF

Our forecasts suggest real global GDP will contract sharply this year and then recover gradually

Source: Goldman Sachs

Interest rates and credit spreads do not fully explain currency or equity performance

Financial conditions are easing more in the US than elsewhere which typically indicates a weaker currency

Source: Cambridge J Econ, Volume 44, Issue 3, May 2020, pages 647-669

* Austria, Belgium, Finland, Luxembourg, Germany, Netherlands.
** Greece, Ireland, Italy, Portugal, Spain

Economic conditions vary widely across the eurozone, as demonstrated by the wide range of unemployment rates 

Source: Goldman Sachs

Looking at fair value estimates, sterling is undervalued against the dollar and overvalued against the euro. But a post-Brexit trade deal could change sterling’s long-term attractiveness 

Source: Reuters, Bloomberg

Developments in trade relations have significantly impacted the value of the yuan 

Contact us

For further information, please visit: www.quintet.com

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Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.
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Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.

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