Macroeconomic and currency research

Claire Dissaux | April 15th, 2019

Claire Dissaux | April 15th, 2019

Millennium Global Macro and Currency Outlook: Highlights Q2 2019

We are pleased to share our latest Macro and Currency Outlook Highlights document, which examines several themes including:

  • Global growth is slipping, leading to a potential re-pricing of interest rate markets as they look for elevated odds of a recession.

  • Despite the dovish shift from the Fed, we only see small downside risks to the US dollar, as higher inflation expectations are still seen as positive for growth.

  • The absence of a rebound in hard data will further impact rate hike expectations for 2020-21 in the Euro area.

  • Norwegian krone is likely to see benefit from another potential rate hike in Q2 2019.

  • In EM, country-specific opportunities are favoured and we look for outperformance of the Mexican peso, Russian ruble and South African rand and downward pressures on Asian currencies such as the Singapore dollar.


China Evolving from Capital Exporter to Capital Importer

As China evolves from exporter to importer, its role will change drastically within the global financial markets. Claire Dissaux, from Millennium’s Global Economics & Strategy team, explores the reasoning and ramifications of China’s evolving place in the world’s economy.

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Sovereign Chartbook

We are pleased to share our latest Sovereign Chartbook, which produces a sovereign scorecard based on proprietary research. The main themes highlighted are:

  • As global growth slows, fiscal concern is increasingly centred on a restricted number of countries with unorthodox administrations, populist tendencies and / or notable budget imbalances.

  • The fiscal stance is expected to remain neutral in EM, whereas a temporary fiscal boost in the US is set to boost fiscal thrust in developed markets (DM) throughout 2019.

  • Italy’s budgetary show with the EU Commission might lead to the initiation of an Excessive Deficit Procedure and further market pressure.

  • Fiscal space has been used rapidly in China, underscoring both the recent willingness to engineer a soft landing of the economy and lessened ammunition ahead.


EU Elections: Understanding the risks and their implications for the EUR

With the European Parliament elections taking place this week, Millennium Global’s Macro Economic and Research team are pleased to release a research note examining the risks and implications for the Euro.

In summary, we believe the short-term impact is likely to be benign although there may be a negative immediate effect on Euro sentiment, specifically, if a populist victory in Italy revives market concerns about unsustainable government debt dynamics. In addition, the outcome of the EP elections may affect the outlook for institutional reforms of the EU/EMU over the longer term and indirectly influence the choice of the next ECB governor this year. Both developments could potentially carry negative consequences for the Euro over the medium term especially if this were to weaken the ability of the ECB to react to the next global downturn.

We think the direct implication of the EU elections for the Euro are benign, given that mainstream parties are likely to be able to form a working majority in the EP. We doubt support for populist parties will be large enough to block legislation.

If polls have underestimated the share of seats that populist parties will win, predicted at around 30% of total seats, then the downside risk to sentiment on EUR will increase.

The indirect effects of the elections on national politics are likely to be of more immediate market concern. For example, the elections may prompt political instability in Italy/Spain and slow reform momentum in France.

We see most significant risk in Italy. Italy’s budget is already at risk of breaking EU rules and Deputy PM Salvini has made European fiscal constraints a central issue for his Lega Party campaign. A strong performance across the EU for Lega and the ‘Salvini Alliance’ may lead to more confrontation between Italy and the EU’s executive branch, the European Commission (EC), which will be negative for the Euro.

The outcome of the EU election will also indirectly affect the choice of the next ECB governor. If Manfred Weber does not become the EC president, it will be more likely that his fellow German Jens Weidmann will be the next President of the ECB in place of Mario Draghi. He has previously opposed QE, so this will create uncertainty on how the ECB may respond to an economic downturn in the future.

Helping mitigate these risks is widespread short positioning in EUR/USD, as indicated up by our proprietary Millennium Global FX Positioning index. Balance-of-payment dynamics for the Euro have also improved as financial outflows have declined. As such, our strategic base case for a broadly range-bound EUR vs. the USD remains unchanged.