What Happened

• The buck mounted a comeback, rising by 2.2% through June, best move since March 2020
• As foreseen, the European Central Bank established that they would keep aiding the economy, causing lowest Euro since April
• The MSCI Emerging Market Currency Index fell 1.0% as global momentum cooled off with COVID flare-ups in large countries
• Delays in re-opening the U.K., to be safe, caused Sterling to drop in value by 2.25%
• Mexican peso survived the risk in elections results and was one of few gainers through June

GreenShootsFX’s View

• A period of high volatility is expected to come as central banks are scrutinized over policy
• European Central Bank officials are more likely to be in consensus than Fed members
• Potential oil output reductions as a result of no deal in Iran could increase pump prices
• Canadian dollar likely to see an upward swing if Bank of Canada stays hawkish after first month of losses since September
• July starts with a focus on the ongoing medical crisis as vaccination efforts in many countries are not holding back the death toll

In Focus

• Greenback’s strength is based on the U.S.’s ability to combat Covid-19.
• Recent news headlines refer to a variety of coronavirus variants that could prevent the world from fully gaining control of the pandemic
• Although the U.S. and others have pledged to help with vaccines, a plethora of problems is causing delays and desperation
• Regardless of the risk-appetite, economists are warning that the recovery is at risk
• Our view remains that more needs to be done in coordination, otherwise this is here long-term

In Depth

U.S dollar fortunes can be short lived if progress accelerates…and it’s a big “if” as we enter a period typically of recess with ongoing woes.

American efforts since the beginning of the year to vaccinate as many people as possible have worked mostly domestically. Nevertheless, we are not seeing this level of return to regular activity elsewhere as even China has admitted to having a patchy recovery with regions still using safety measures.

India and Brazil have both kept a worrisome death toll going, and even Pacific Rim powerhouses like Taiwan and South Korea are concerned that some variants are more dangerous than what we have been dealing with. Traveling to many countries remains a major risk, and there is now a feeling growing that the virus will stay a threat for the fall, perhaps winter, and beyond.

Amid of all this chaos, the dollar dominates, for now. We have experienced a lot of movement just the first half of the year, and we will likely not see any consistency in this roller-coaster economic cycle.

There has been plenty of talk about inflation, but ultimately, it seems like it is simply the temporary cost of the uncertainty surrounding Covid. The virus caused unprecedented havoc and an immediate call to cease most activity, which exacerbated already existing trade matters for suppliers.

As we started seeing the light, demand surged rapidly, too quick for producers to adjust and what we have now is the challenge behind supply-side shocks. However, central bankers around the globe feel these shocks only come with transitory price growth, thus why most argue measures to shore up the economy from the adverse effects from Covid need to stay mostly in place and for a while longer.

This is where the buck is also gaining merit as a safe-haven asset. The belief is that interest rates will stay very low for months if not years and that stimulus in various forms and even new programs will only start tapering in the countries where Covid is less of a factor. Currently, we are the one nation looking to lead in that tightening line of thinking, almost matching the optimism seen before from the Bank of Canada, which refuses to think loose policy needs to be intact beyond this year.

Indeed, central banks are stretched, and traders worry that the bigger role they play now is affecting private trading. One example is Japan, where officials have exercised control over the yield curve, which has significantly reduced the free-market activity of those bonds. When the BOJ fixed the price for a 10-year bond at basically 0.0%, it essentially killed the incentive to trade. As a result, the Japanese Yen has been the worst performer among the majors, with a decline of over 7.0% this year.

Thus, this is why we may see a lot of scrutiny and questioning of officials down the line, which only makes future monetary policy decision press conferences more interesting to follow. Not all banks can swiftly make things happen, like the People’s Bank of China (PBOC).

In the outlook for June, we predicted interference with the Chinese Yuan, and this proved true. A rare decision necessitated an increase in the ratio of foreign reserves held at financial institutions, basically forcing them to retain more of their foreign funds to avoid causing circulation and movements that support the CNY.

While the PBOC has allowed the CNY value to be more free-flowing, it can set daily fixes for the price, and it can move maybe 2.0% from that level. China understands that an expensive CNY causes global inflation as most countries trade with the world’s second-largest economy. This was way to combat it and brought CNY down from three-year highs for its worst monthly performance since August 2019.

China’s slowdown caused other trading partners to see their currencies sink to the buck, as was the case with the Australian dollar dipping to its weakest point since December 2020. This trend may continue for various commodity-based currencies as we see less optimism in world growth levels for the remainder of the year. But, of course, that is unless there is a major turnaround primarily pushed by higher rates of vaccinations.

For a while now, we had said that the U.K. was going to face an uphill battle when trading on their terms with a newly divorced European Union. Although the talk of U.K. members segregating has faded, Northern Ireland’s trade issues continue to make post-Brexit trade a dent on the pace of recovery for the larger continent. Moreover, Bank of England Governor Andrew Bailey certainly seemed unconvinced with the economy in his last announcement.

Additionally, we wonder what will happen now that U.K officials decided to give up on a deal for financial equivalence with the EU. According to U.K. sentiment, the EU looks to want to compete as it seeks ways to boost its financial sector for global recognition without counting on London. There could be room for further deprecation of Pound Sterling.