16 October 2020 | Currency update | Will there be a currency war?

covering USD Index, EUR/USD, GBP/USD, USD/JPY, GBP/EUR

USD Index	LT-M	MT-W	ST-D
93.72 (93.80)
Trend	↑ (↑)	↓ (↑)	↓ (↓)
% Risk Weight	12 (12)	34 (30)	55 (55)
Allocation	70% (70%)

16 October: Very little change during the past two weeks and with dollar looking primarily weak in medium term risk weight. We still target the 2018 low around 88.50. As mentioned in our Gold update, the IMF has come out with a statement for a Bretton Woods style action on monetary reform. That leads to the question why this statement now and is it already based on wide consensus between the financial gatekeepers of advanced economies? Or is there no consensus and can we look forward to an unprecedented protection lead fiat currency war between West and East for instance.
This sounds like a very high risk situation, but must follow existing economic transaction risk rules for the time being. Hence no change.

02 October: The dollar index represents the price trend of the USDollar versus a basket of major currencies with Euro weight at 57.6%, Yen at 13.6%, Sterling at 11.9%, CAN$ at 9.1%, Swedish Kroner at 4.2% and Swiss Franc at 3.6%. Official Data goes back to the introduction of the $index in 1973. The present correction upward after the 11% drop since March may be pushed a little further although the medium term looks very vulnerable having made a single bottom in the technical tools we follow (stochastic Slow, MACD and RSI). No change in risk approach with 70% covered on long forward dollar exposures.

18 September: The dollar index has dropped over 10% since March and only shows signs of a possible short term pause. Weekly risk turned up and Daily consolidating. As the downtrend is considered a secondary bear market we would look for Medium term Weekly and Long term Monthly to develop bullish divergence before a more serious correction can be expected. Under normal circumstances of course an todays circumstances are far from normal. Dollar receivable transaction risk should be largely covered (now 70%). No Change.

EUR/USD	LT-M	MT-W	ST-D
1.1712 (1.1713)
Trend	↓ (↓)	↑ (↓)	↓ (↑)
% Risk Weight	86 (86)	65 (70)	50 (39)
Allocation	70% (70%)

16 October: The EUR uptrend ag USDollar that started in March doesn’t seem finished by a long shot. Yes, we will likely see more volatility as the US elections get nearer. The only real feedback is from our technical indicators and they show consolidation before another round of dollar weakness. lowest management risk on trade flows therefore calls for a no change on the 70% perpetual hedge on forward dollar receivables.

02 October: The Euro continues to nibble at the down sloping trendline that started in 2008 from the 1.60 handle and connecting lower consecutive peaks in 2011 2013 and 2017. A clean break will probably setup for a fresh long term rally towards the 1.40 level. The uptrend of the Euro medium and long term term looks very far from finished supporting our 70% perpetual hedge on long dollar transaction exposures. Economic and Translation exchange risk should also be a major consideration in the current environment.

GBP/USD (Cable)	LT-M	MT-W	ST-D
1.2905 (1.2920)
Trend	↑ (↑)	↑ (↓)	↓ (↑)
% Risk Weight	78 (78)	50 (50)	60 (66)
Allocation	50% (50%)

16 October: GBP still looks the weaker USD related currency, hence no change in maintaining a 50% perpetual hedge on longer dollar transaction exposures.

02 October: Cable looks to be one of the most vulnerable exchange rates in the $index basket supporting our much weaker outlook for GBP versus Euro. Yet, this needs to be confirmed by subsequent price action. As a result we maintain the lower 50% hedge on Long dollar transaction risk.

USD/JPY	LT-M	MT-W	ST-D
105.33 (105.22)
Trend	↓ (↓)	↑ (↓)	↓ (↓)
% Risk Weight	41 (41)	33 (25)	30 (67)
Allocation	50% (50%)

16 October: The Yen looks more in search of direction and technically behaves on a par with the dollar index. Broad risk calls for no more than 50% currency hedge.

02 October: If Dollar Yen continues to show similar risk action as during the 2007-2010 period the rate should be lower in 12 months time. The picture however is not clear yet and we like to see a break of the 2016 low in order to generate a trigger for a larger than 50% dollar cover.

18 September: Dollar Yen has weakened further and even though making new daily and weekly lows doesn’t look particularly weak. Support is at 100 Yen per dollar. No Change.

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GBP/EUR	LT-M	MT-W	ST-D
1.0995 (1.1025)
Trend	↓ (↓)	↑ (↑)	↓ (↑)
% Risk Weight	36 (37)	45 (35)	67 (73)
Allocation	80% (80%)

16 October: Brexit causes GBP traders to be very irrational it seems. The UK show doesn’t good at all, but Sterling currency is behaving technically undecided the past few weeks. Not a great deal of price change in a directionless market. If a monetary reform is indeed on the cards GBP should fall in the same category as all other inflation countries during the 70’s and 80’s with one big difference. The UK has sold 50% of its gold reserves at rock bottom prices during consecutive labour governments whilst Public debt has now topped 100% to GDP. Under more stable genwral world economic conditions and a similar country risk scenario the GBP hedge would be 100%. Expected economic contraction as a result of Covid and a no deal Brexit puts it at 80%.

02 October: GBP rallied 1.5% since our 18 Sep update. This rally looks to be a short term event a bearish divergence appears to be developing between Daily and Weekly time frames. Our best consideration is for higher risk of a lower GBP exchange rate across the board and with a sub par price level against Euro which would be a historic low and very much in line with the historic trend of higher inflation in the UK than the major economies in Europe mainland. No Change.

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