FX Market Update

24 January 2020

We look ahead to what some of the big stories around the world could mean for FX rates. Marvin Barth, Head of FX & EM Macro Strategy discusses Brexit trade negotiations, the US presidential election, volatility in the Middle East as well as the potential strategy that the new head of the European Central Bank, Christine Lagarde, may take.

Aaron Foy:
Hello and welcome to this the latest instalment of Barclays FX Outlook. My name is Aaron Foy from Barclays Foreign Exchange Sales. Today as always I’m joined by Marvin Barth Head of FX and EM Macro Strategy. Thank you very much for joining us today Marvin.
Marvin Barth: Thank you
2019 was a year of great political upheaval, in the UK, the US and Asia. In the UK, Boris Johnson ascended to the leadership of the conservative party and Number 10 and in so doing ushering in a good avenue to an orderly exit from the EU. In the US, Donald trump finished the year with the signing of his US China trade deal phase one whist also beginning to prepare himself for an impending impeachment. In Asia, Hong Kong erupted with mass demonstrations over planned extradition bill which was eventually defeated. And for 2019 for the banks, for central banks, it was a year of monetary reversal with the Fed three times reducing interest rates and the ECB once, while also starting their bond buying programme again.
So Marvin what can we expect from the post Brexit trade negations with Europe?
Marvin: I think they are going to be tight and they are going to be tense. Remember that with the passage of the withdrawal agreement the UK only has an 11-month transition period within the single market before it’s out into the wild so to speak. That just not enough time to negotiate a comprehensive trade deal. Now they could ask for an extension, but they need to do so by 1 July and also the parliament has passed a law precluding the government from being able to ask for that extension so it seems they are likely to stick to that and that’s going to mean a lot more volatility, especially as given that you are not going to be able get a comprehensive agreement we are talking about a set of sector specific agreements that are going to leave some sectors in greater transition cost.
That’s going to be keep a lid on sterling in our forecast so while we do have a little bit further sterling appreciation based on some of the reduction and uncertainty here we’re still only seeing sterling going up to 1.34 dollars per pound or 1.25 euros per pound. Now if you want more information on this Fabrice Montagne, our chief UK Economist, and I have a wonderful debate about the likely Brexit outcomes in the latest episode of The Flip Side.
Aaron: Brilliant Marvin I look forward to listening to it soon. Moving back to US politics what do you see as the downside risk for US dollar for a Trump impeachment and more generally for loss for the republicans in the upcoming election?
Marvin: So we do have in our forecast persistent dollar appreciation across the board with a few notable exceptions, sterling being one of them, but clearly the election, the impeachment proceedings, the senate trial going on right now definitely are a threat to that. The reason for that is regardless of how you feel about President Trump, his policies clearly have been beneficial for small and medium enterprises in the US. The tax cuts, the deregulation have really boosted their confidence and they have really been the driver of recent growth so if you did see impeachment or President Trump falling behind in the polls significantly there is a real risk that could start to dampen business confidence in the United States which would likely put some downward pressure on the dollar.
Moving back to Europe and looking at European central bank’s decisions, Riksbank, the oldest central bank in the world, Sweden’s central bank recently took the decision to move their negative interest rates to zero, a move that shocked the markets. What in your opinion do you see at the disposal of new ECB President Christine Lagarde to combat decelerating growth within the Eurozone?
Marvin: Well we definitely did take note of the Riksbank decision there. The Riksbank was an early and perhaps one of the most aggressive adopters of negative interest rate policy so their decision to move back to zero certainly caught our attention especially given that members of the governing council at the ECB several of them have suggested that negative interest rates may actually be doing more harm than good as it impairs banks profitability and thus hurts their willingness to lend.
Now we don’t expect any change in ECB policy this year but definitely the door is open here. New ECB present Christine Lagarde has as her first action opened up a strategic review of the banks priorities and polices and lots of different things are on the agenda including potentially removing negative interest rates. Ultimately, if that happens that means we’re likely to see low interest rates for a longer period as you remove some of the potential stimulative effects of negative rates and so we don’t see a big effect on the Euro as a result.
Marvin: Sticking with Europe for the time being Marvin and seeing now that we have finally an NAFTA agreement wrapped up and looking at how damaging the trade war was between China and the US for both parties, what lessons can Europe really take into their negations with the US now?
Aaron: Well this is a great question Aaron, one of the lessons I take away at least in looking at the foreign exchange is that the real implication of all these trade tensions between the US and its other trading partners was that FX volatility. So we saw a lot of volatility in dollar Canada, in dollar Mexico, in dollar CNY but at the end of the day it didn’t have a huge effect on the level it looks like. And I think that’s the key implication we see for Europe. The one difference is, is that Europe is coming out of a period of weakness we’re just seeing it start to stabilise here, if it did see business confidence undermine significantly by trade tensions with the US that does introduce some down side risk to our Euro forecast I think.
Marvin: Moving onto something that’s very topical at the moment, the recent tension in Iran, you’ve seen a flight towards safe haven currencies but what impact will this actual escalating situation have on the US dollar and oil prices?
Marvin: Well Aaron that’s a really good question. What’s been really striking to me is how little markets have reacted to this escalation in US/ Iran tensions. We haven’t seen a big reaction in either oil prices or in currencies only very minor moves here and that seems to be that markets have taken a lesson from some of the events last year. Last year in September we had an attack on the world’s largest oil distribution facility in Abqaiq Saudi Arabia and you saw very quickly that the Saudis were able to restore production and distribution and that US tide oil producers were able to quickly respond with flexible output to offset any disruptions there.
So part of why we’re not seeing a significant reaction here is that markets now see that there are other mechanisms to offset this and so while they are nervous about this situation they don’t really know which was to jump as a result.
Aaron: Thank you very much for that Marvin, insightful as always.
Marvin: Thank you Aaron, I appreciated being here.
Aaron: If you have any questions on what you have heard today or on our research please contact your Relationship Director. I’m Aaron Foy and on behalf of Barclays thank you for tuning in.

Marvin Barth met with Aaron Foy from our UK Corporate FX Sales team. If you want to listen to more detail about Brexit negotiations, you can listen to Marvin discussing this in the Barclays Investment Bank podcast, The Flip Side.

This video was recorded on Friday 17 January 2020.

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