This week I sat down with FXDD Global’s chief currency consultant, Stephen Simonis Sr., to take gain on insights into the recent and future FX and geopolitical events.
LF: Mr. Simonis, recently, Moody’s downgraded China citing slowing economic growth and rising debt levels. Did you have any thoughts on how this might affect the FX markets?
SS: A country’s currency strength always carries importance in matters of trade surplus, and the yuan is no different; its role in the Chinese economy is no different than the level of the JPY to Japan’s economy or the pound to Great Britain’s economy. What I find interesting is that after Moody’s downgraded China, China’s finance ministry posted a statement on their website to dispute Moody’s decision. They said the ratings agency overestimated the economic difficulties facing the country and underestimated its capability of making reforms and the reforms already in place. It’s unusual that Chinese authorities would make such an aggressive response to agency ratings. I think that China will continue the path it’s on and will not make any drastic moves based on anyone else’s opinion of their situation.
After the announcement, as one would expect, the main market movers were the NZD and AUD. They both went lower initially; however, they recovered all their losses after the finance ministry’s statement. Both of those pairs are continued higher than when the Moody’s downgrade occurred.
One would think that if you downgrade China you almost have to downgrade Hong Kong as their economies are closely connected. The Hong Kong dollar rarely moves unless they decide to move the peg which is pretty unlikely. All in all I think that Moody’s downgrade of China is no surprise and will carry little impact.
LF: Are there any fundamental events you think will affect the Euro this week?
SS: On Thursday June 8th, there’s the Minimum Bid Rate and ECB Press Conference. Germany’s Angela Merkel said the Euro is weak because of the ECB’s monetary policy, which has caused its large trade surplus. President Trump is quoted as saying this is “very bad”. Germany’s Scaeuble said that the Euro exchange rate is too low for Germany. Verbal intervention seemingly meant to push the Euro higher hasn’t had much impact. With geopolitical issues weighing on the region and looming contentious Brexit negotiations, I can see the Euro pushing back lower, testing the 1.10 level
LF: Do you have an outlook on the recent French elections?
SS: Macron’s victory was pretty much expected. While it is good news for the Eurozone’s stability, I do not think it will have much effect on the EUR/USD rate; however, as always, traders must still be wary of the ‘buy rumor sell the fact’ scenario. This puts the potential of France leaving the Eurozone talk to rest, keeps the Eurozone intact and creates a feeling of solidarity. Some people are saying that Angela Merkel now heads two countries. This could cause a selloff in the GBP as Brexit negotiations get under way. I’m looking for EUR/GBP to appreciate.
LF: Before I let you go, is there anything else you think traders around the world would like to know?
SS: The markets haven’t reacted much to the recent terror attacks in Manchester and Egypt which indicates that the market is heavily long CHF and JPY — which makes me concerned that an unwinding of long CHF positions could be volatile and trigger stops, and we know from the past that can be a very messy situation. I’m looking to begin to trim CHF longs.
For more information or you would just like to chat about the market please contact me at lfayman@Tripeak.com – Lawrence Fayman