Mar 18, 2019 – Monday

1) Less Dovish Fed May Boost USD/SGD as More Dovish BSP Lifts USD/PHP
2) Euro, Swiss Franc, European Bond Markets Eye Yellow Vest Protests
3) Buyers And Sellers Jostle Near 1.3300 Amid Brexit Reports

1) Less Dovish Fed May Boost USD/SGD as More Dovish BSP Lifts USD/PHP

The US Dollar had its worst week since August as DXY fell about 0.80%. Weakness was partially owed to a broadly stronger British Pound, which rallied the most when the UK Parliament voted to reject a ‘no-deal’ Brexit in any circumstances. Meanwhile, the S&P 500 trimmed its losses from the previous week, sapping demand for safe havens and the highly liquid Greenback.

As such, this allowed for some ASEAN currencies to gain ground against the US Dollar. Most notably was USD/SGD which tends to have a close positive correlation to the Greenback. The same could not be said for the Philippine Peso, which continues to selloff after the central bank’s new governor brought with him dovish rhetoric.

The week ahead contains multiple central bank interest rate announcements, both regionally and externally. Beginning with the former, the Philippine Peso may weaken on the Bangko Sentral ng Pilipinas (BSP) monetary policy decision. While rates are anticipated to be left unchanged, the central bank’s new governor, Benjamin Diokno, may allude to easing in the future and confirm hopes to cut banks’ reserve requirement ratios.

Philippine inflation has significantly slowed from a peak of 6.7% y/y towards the end of last year to now 3.8% in February. This is within the BSP’s target range and if it remains there, perhaps reaching the lower boundary, it may open the door to a cut down the road. Falling oil prices (towards the end of last year) have played an important part as the commodity is a key import.

Meanwhile, the USD/IDR looks to the Bank of Indonesia where rates are also seen to be left on hold. The Indonesian Rupiah has been weakening versus the US Dollar since February as the central bank remained on hold. Watch for what they have to say about the fundamental value of the Rupiah. The central bank has been intervening as they believe the currency to be undervalued. More of the same rhetoric may boost IDR.

All eyes will be on the Federal Reserve this week with Fed funds futures pricing in a 32.3% chance of a cut by the end of this year. This means markets are anticipating the central bank to downgrade their view on interest rate hikes this year. Having said that, leaving the door open to just one increase is still more hawkish than what markets anticipate.

As such, risks for the US Dollar are arguably tilted to the upside as it would take a surprisingly cautious announcement to fuel dovish bets. If the Greenback rallies, then USD/SGD is likely to follow higher. Meanwhile, technical warnings hint USD/MYR may rise in the medium-term.

2) Euro, Swiss Franc, European Bond Markets Eye Yellow Vest Protests

France’s “gilet jaunes” or Yellow Vests protests are re-erupting after a brief period of respite. President Emmanuel Macron is once again on the defensive and has vowed to crack down on the violent outbursts. This comes after he attempted to appease the protesters by repealing his proposed fuel tax and introducing new minimum wages laws to address the high cost of living.

His new policy measures may take France beyond the EU-wide fiscal regulation of a 3 percent deficit constraint and could rattle European markets and make Euro bulls jitter. Italy – which notoriously shook up the bond markets in 2018 – had to trim down its ambitious budget plans because it violated European laws. If France were allowed to bend them, it could make Brussels look hypocritical and biased in its application of the law.

If France were to use fiscal measures to provide an economic boost, the key question is whether that growth is sustainable. If it is, then the debt incurred could then be offset by the productive ends it achieves. However, if the funds are not allocated to address key structural reforms and only jolts the economy before shortly evaporating, it poses longer-term risks which could destabilize regional financial activity.

As in the case of Greece, when the perception of a government’s ability to service its debt is compromised, it often fuels capital flight and sends yields higher, making repayment more difficult. This increases the risk of the bond even more, and causes interest rates to rise, and so on and so forth. It is not outlandish to suggest that a Eurozone contagion effect could emerge if states undergo a radical fiscal program that undermines their economy in the long-run if it is executed poorly.

Macron’s proposals of new minimum wage laws and tax cuts for pensioners are estimated to cost between 8-10 billion Euros. The bigger question is, can France financially – and the Eurozone, politically – afford it? The ECB has limited tools to address such a crisis with rates already below zero and new liquidity provisions in the form of TLTRO’s introduced at the last policy meeting.

In such an outcome, the Euro would probably take a hit – as it did during the Greek debt crisis – with local, and possibly global equity markets hurting as well. However, the anti-risk Swiss France (CHF) may rise during this time as investors shift from chasing yields to preserving capital. CHF may outperform relative to the Japanese Yen and US Dollar because of its regional proximity to the European-based event risk.

3) Buyers And Sellers Jostle Near 1.3300 Amid Brexit Reports

The GBP/USD pair clings to 1.3300 ahead of London open on Monday. The quote struggled between optimism surrounding soft/delayed Brexit, doubts over the UK economic growth and expectations that the US Federal Reserve may end up revising its plan to fewer rate hikes in 2019. While developments concerning Brexit could dominate major moves, the US NAHB housing market index might offer intermediate trading opportunities.

With the British members of parliament (MPs) rejecting a no-deal Brexit, chances of the UK’s hard exit from the EU drifted lower and helped the British Pound (GBP) register gains across the board.

Though, there are challenges to the UK PM Theresa May’s position as some 40 lawmakers unite against her third Brexit proposal and show readiness to turn it down if PM May doesn’t resign by April. On the positive side, UK Finance Minister Philip Hammond was noted saying by the BBC that significant numbers of the MPs support May’s plan.

Additionally, the British Chambers of Commerce (BCC) cut its 2019 gross domestic product (GDP) forecast for the UK economy to 1.2% from 1.3% estimated earlier.

On the other hand, the US Dollar was weighed down after Bloomberg reported that the expectations the Fed will revise its plan for a median projection down to just one rate hike in 2019.

The UK PM May has only three days to get parliament support if she wishes to join the EU summit on Thursday, which in turn highlights Brexit developments prior to that. Also in the limelight will be current month NAHB housing market index from the US that’s expected to print 63.00 figure versus 62.00 prior.

While 1.3345/50 acts as an immediate upside barrier for the pair, 1.3410 becomes strong resistance that holds the gate for the quote’s rise to 1.3500.

Alternatively, 1.3220 and 1.3200 could provide immediate support to the pair, a break of which may recall 1.3130 support level on the chart.

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