There has become conventional wisdom among many market participants that the 27 February G20 meeting resulted in a deal among the major economies to curb USD strength, or at least to no longer seek to weaken their own currencies.
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After all, the ECB did deliver new rate cuts in March and the ECB president’s indication that further rate cuts might not be needed was hardly definitive. At this week’s press conference he again emphasised that all policy tools remain at the ECB’s disposal if needed. Moreover, Japanese officials have insisted that further rate cuts are possible and that even FX intervention is on the table if FX moves become disorderly, while the shift in USDCNY behaviour is completely consistent with the People’s Bank of China targeting a basket of currencies as the USD retreats broadly.
Nonetheless, whatever actually transpired at the G20, the USD clearly did weaken very broadly afterwards. Moreover, this weakening has supported a recovery in a number of markets. The USD pullback has helped commodity prices to rebound and, as noted, has greatly reduced fears of a renewed CNY devaluation, both of which have contributed to a recovery in equity and credit markets. As a result, while EURUSD has strengthened since the G20 meeting and the March ECB meeting, the EUR’s trade-weighted index has been more stable, EUR financial conditions have eased overall and eurozone inflation expectations have actually recovered.
In FX, we think the best risk-reward for positioning against this possibility is via short positions in commodity exporter currencies, and we added a long USDCAD recommendation* this week accordingly.
Implications for USD-funding currency pairs (JPY and EUR) are more mixed, with initial USD gains likely to be quickly short-circuited by a renewed rise in risk aversion. We continue to target EURUSD at 1.16 and USDJPY at 108 by mid-year.