Year In Review: What Shaped FX In 2019

h2 Daily FX Market Roundup 12.30.19/h2

2019 has been a busy year for the financial markets. The biggest driving forces were trade war, global easing, Brexit and record breaking moves in US stocks. Hong Kong dissolved into political chaos and President Trump became the third President in the history of the United States to be impeached by the House. One would expect that these political developments would have made investors nervous and drive stocks lower but all of the major indices across the globe enjoyed gains. In the US, the Dow Jones Industrial Average rose more than 20%, the S&P 500 is up nearly 30%, the DAX is up 25%, FTSE is up more than 12%, the Nikkei gained 19% and despite all of China’s troubles, the Shanghai Composite rose 20%.

However the consistency in equites was not seen in currencies.2019 was a good year for the Canadian dollar and sterling and a challenging one for the euro. All other major currencies changed little in value versus the greenback. The first 9 months of the year was actually kind to the dollar. There was a lot of choppiness in the greenback but the overall trajectory of the Dollar index was higher. However at the end of September into early October, DXY peaked and trended lower into year end. There were 2 primary drivers for the greenback this year – the trade war and the Fed.

The trade war has been good for the dollar for no reason other than the fact that tariffs are more painful for the rest of the world than for the US so the dollar benefited from safe haven flows. China ended the year with higher tariffs. In May 2019, the US increased tariffs from 10% to 25% on USD$200B worth of Chinese goods. China responded with their own increased tariffs on US$60 billion worth of goods. Then on September 1st, the US implemented higher tariffs on another USD$125B worth of Chinese imports. In October the US announced a Phase 1 deal that would delay tariff increases that were set to go into effect in October but the US and China oscillated between progress and setback before reaching a trade truce that delayed the December tariffs. A signing ceremony is expected in the New Year but when it comes to US-China trade relations, until the ink meets the paper, attitudes could change on a dime.

The Federal Reserve lowered interest rates 3 times in 2019 but easing did not begin until June so for the first 6 months of the year, trade tensions and steady US policy helped to boost the dollar. The Fed cut rates and the dollar fell but the losses were shortlived because the central bank described the moves as insurance against a deeper slowdown. However in October, US data started to take a turn for the worse and the greenback peaked. Then in December, the Fed dot plot changed and central bankers forecasted unchanged rates for 2020. Chairman Powell’s emphasis on low rates for long helped to drive stocks higher but took the air out of the dollar rally.

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The Fed was not the only central bank to ease monetary policy in 2019. The Reserve Bank of Australia and Reserve Bank of New Zealand cut interest rates by 75bp each while the European Central Bank cut rates on bank reserves for the first time since 2017 and restarted Quantitative Easing. The Bank of Canada, Bank of England, Bank of Japan and Swiss National Bank made no changes to monetary policy which explains why the Canadian dollar and British pound were this year’s best performing currencies.

As we draw 2019 to a close, the most influential events that shaped FX was policy uncertainty and the cycle of global easing. Unfortunately much of this uncertainty persists into 2020. Assuming that a Phase 1 trade deal is signed, what happens next? The Phase 1 deal is a modest one – China didn’t give up much and in exchange got Trump to delay tariffs. With the 2020 elections nearing, the US President could get tough on China once again. Boris Johnson won big in the UK but he’s still willing to leave the European Union without an agreement. FX volatility also compressed significantly with 3 month euro vols hitting record lows. This could be a structural shift but with the US election next year and the risk of stocks coming off their highs, leading to broad based profit taking, we expect volatility to rise in 2020.