· The dollar and euro were little changed on Monday as traders wait for decisions from the U.S. Federal Reserve and the European Central Bank on how much and how fast they may reduce interest rates, beginning with the ECB on Thursday.
Traders see about a 46% probability European policy-makers will lower a key deposit rate by 10 basis points to -0.50 basis points to combat risk from global trade tensions and anemic regional inflation, based on local interest rates market.
Rising chances of European interest rates sliding deeper into negative territory had pressured the euro lower against the dollar, and propelled the Swiss franc to a two-year peak against the single currency.
Meanwhile, the greenback has been bogged down by bets the Federal Reserve will likely cut U.S. interest rates for the first time in a decade to deal with the same issues as the ECB.
Data published late on Friday showed speculators dialed back their net bullish positions in the dollar against other G10 currencies to their lowest level in a year.
The euro was marginally lower at $1.1215, rebounding from a session low of $1.1207.
The dollar moved lower in step with U.S. yields. The two-year Treasury yield slipped to 1.801% early on Monday, which was below the Fed’s current target range of 2.25%-2.50% on short-term rates.
An index that tracks the greenback against a basket of currencies was fractionally higher at 97.2.
· U.S. rates futures implied traders positioned for a 72% chance the U.S. central bank may lower its rate range by a quarter point at its July 30-31 policy meeting, down from 76% late on Friday, according to CME Group’s FedWatch tool.
Rates futures signaled traders priced in nearly a 28% chance for a 50 basis-point cut next week, up from 24% on Friday. Rates futures rallied last Thursday with perceived chances for a half-point rate cut soaring to 71% after a dovish speech a Fed spokesman clarified that the remarks did not refer to “potential policy actions.”
· President Donald Trump, who has been critical of the Fed’s decision to hike four times last year, suggested on Monday the Fed should cut “deeper” at its upcoming meeting July 30-31.
· The U.S. will likely emerge the winner in a “cold currency war” that’s heating up, according to Joachim Fels, global economic advisor at Pimco.
“If there is a winner in this ‘cold currency war,’ it’s going to be the U.S. in the sense that the dollar is more likely to weaken than strengthen from here,” said Fels told CNBC’s “Squawk Box ” on Monday.
He said a cold war on the currency front refers to a conflict not fought with outright central bank intervention in the foreign exchange markets, but with interest rate cuts, negative interest rates (like those in Europe and Japan), quantitative easing and yield curve control.
The “cold currency war is heating up,” Fels said, noting that the U.S. Federal Reserve and the Bank of Japan are likely to cut interest rates soon. Analysts are also predicting that the ECB, which holds its next policy meeting on Thursday, will reduce rates later this year.
“Clearly, we are getting back into the situation where everybody would like to see a weaker currency. Nobody, no central bank, really wants a stronger currency and that’s why it’s a cold currency war,” he said.
· Morgan Stanley economists see a 20% chance of a recession in the year ahead, but that could move up quickly depending on circumstances.
Trade tensions that could lead to layoffs and a pullback from consumers are at the center of the recession case laid out by Ellen Zentner, Morgan Stanley’s chief U.S. economist.
A Fed rate cut may not be enough to stave off a slowdown that would start as a demand shock, according to the forecast.
· The effects would be a “large demand shock” that would take growth from a projected 2.2% in 2019 to a negative 0.1% in 2020 — a shallow recession but nonetheless a substantial retreat for an economy that grew 2.9% in 2018.
From an investing standpoint, that could mean a significant hit to stocks, with the best bets being defensive sectors like health care and consumer staples, with autos and tech hardware the areas most likely to underperform, according to the analysis.
Morgan Stanley isn’t alone in its recession warning. The New York Fed, which gauges a recession chance by measuring the spread between government bond yields, estimates a 33% chance of a downturn coming in the next 12 months, the highest level since the Great Recession that ended in mid-2009.
· The U.K. will find out who its next prime minister will be this week as voting within the U.K.’s ruling Conservative Party comes to a close.
Monday is the last day that members of the party can submit their preferred candidate to lead the party, and the country, with former Foreign Minister Boris Johnson facing the current holder of that post Jeremy Hunt.
· Britain called on Monday for a European-led naval mission to ensure safe shipping through the Strait of Hormuz, days after Iran seized a British-flagged tanker in what London described as an act of “state piracy” in the strategic waterway.
Foreign Secretary Jeremy Hunt outlined the plans to parliament after a meeting of COBR, the government’s emergency committee, which discussed London’s response to Friday’s capture of the Stena Impero tanker by Iranian commandos at sea.
“We will now seek to put together a European-led maritime protection mission to support safe passage of both crew and cargo in this vital region,” Hunt said.
· Oil prices rose more than 1% on Monday, as investors worried about possible supply disruptions in the energy-rich Middle East after Iran’s seizure of a British tanker last week.
Brent crude futures climbed 66 cents a barrel, or 1.02% to $63.11 a barrel. West Texas Intermediate (WTI) crude futures settled up 1.1%, or 59 cents, at $56.22 per barrel.
Speculative money is flowing back into oil in response to the escalating dispute between Iran, the United States and other Western nations, along with signs of falling supply. In early May, new, tighter U.S. sanctions on Iran took effect.
Hedge funds and other money managers raised their combined futures and options positions on U.S. crude for a second week and increased their positions in Brent crude as well, according to data from the U.S. Commodity Futures Trading Commission and the Intercontinental Exchange.
Goldman Sachs on Sunday lowered its forecast of growth in oil demand for 2019 to 1.275 million bpd, citing disappointing global economic activity.
· Iran is ratcheting up tensions in the Gulf, with its seizure of a British-flagged tanker, yet oil prices have been relatively unaffected.
With the surge in U.S. production and worries about weak global demand, oil is not the indicator for Middle East conflict it once was. A different pricing dynamic has been evolving with new supply calculations based on the U.S. as the world’s largest producer, and the partnership between No. 2 Russia and No. 3 Saudi Arabia trying to keep control on production levels.
“What I find amazing is oil has become a broken barometer for Mideast conflict,” said Helima Croft, head of global commodities strategy at RBC. “A few years ago, you could almost gauge how serious a security crisis was because of the oil price.”
Reference: CNBC, Reuters
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