Macro and Currency Outlook for Q2 2020

Claire Dissaux, Elisa Baku | April 7, 2020

Millennium Global has recorded a webcast of its Macro and Currency Outlook for Q2 2020, prepared and presented by our Head of Global Economic Research and Strategy, Claire Dissaux.

This quarter the outlook addresses the circumstances and challenges faced by economies around the world as they respond to impact of COVID 19. Key themes include:

  • The prospect of a deep global recession with risk of permanent damage to incomes and balance sheets: uneven resilience across regions/economies
  • The policy response – fiscal action coordinated with from monetary policy – in major economies is likely to be met with differentiated FX impact
  • Emerging markets faced with the need for massive fiscal spending and large capital outflows speed up monetary easing at the cost of currency depreciation

Claire assesses how this will impact global FX markets in the coming months, highlighting:

  • The fast expansion of the Fed’s balance sheet and lower US real rates, which is likely to put pressure on the USD versus other major currencies
  • The undervaluation of JPY vs. USD and the inability of the BoJ to lift inflation expectations should provide fundamental support for JPY vs. USD
  • Proactive fiscal policy in EU states, the ECB backstop for weaker sovereigns and real rate differentials should support EUR unless concerns about debt sustainability set in.
  • Coordinated monetary and fiscal response amid external imbalances will put pressure on GBP before a possible reduction in Brexit uncertainties and a bounce back in growth take place, likely not before Q3
  • Emerging market currencies with high external financing needs, such are TRY and ZAR, are at risk
  • The sharp deterioration in fiscal positions is negative for BRL, MXN and INR