The greenback has been under heavy pressure since the start of the month, and is now threatening to extend the downtrend. Ongoing issues such as rising tensions between the US and China; the unrest that started in Minneapolis which quickly spread across major cities in the US with a “I can’t breathe” movement; Brexit negotiations continuing to head nowhere; and no noticeable improvement in the coronavirus containment in Brazil, Mexico, nor Russia have not been much reflected in the financial markets.

What seems to be the focus now is the investment climate that is being shaped by forces that emerged in May. Many countries began relaxing lockdowns, and these have also helped push crude oil prices to the best month on record. Optimism is growing over several different vaccines that have been initiated or will soon begin human tests. The hope is that a vaccine may be ready by year-end.

With the 2Q growth in general expected to contract sharply, what the data needs is to set the stage for a recovery in 3Q to validate expectations. This will be a good template on how the market should differentiate currencies. Such template, added with the expectation of the US dollar weakening in view of the growing appetite for risk-on, should see currencies like the euro, Aussie dollar and ringgit on an appreciation mode.

On the ringgit, it depreciated by 1% to 4.347 against the dollar which fell by 0.7%. However, the current appreciation of the ringgit is driven by the weakening US dollar, strengthening oil prices and growing expectations for a rate cut in July. Besides, the focus will be on the recovery plan which is expected to revive both investor and consumer confidence. Adding on, by having the economy restarting from the gradual shift of the MCO to CMCO, some early data is shedding positive signs, for instance the manufacturing PMI.

Hence, what is needed now is that the data needs to set the stage for a recovery in 3Q to meet expectations. Such validation will be a good framework on how the market should look at currencies. On the flip side, if we look into the month of June, the ringgit that has gained on the back of heavy US dollar selling can have its appreciation capped. This could come from the ongoing domestic political noise.

Hence for this pair in June, the most likely scenario is a price rise for the ringgit. On that note, the projected high for June is 4.22 and low at 4.31

A. What is in store the US dollar in June?

• The greenback has been under heavy pressure since the start of the month. It is now threatening to extend the downtrend. It has already dipped below the 98 mark, suggesting that the safe haven-linked currency has succumbed against the backdrop of firm risk-on sentiment.

• Issues such as rising tensions between the US and China over the latter’s proposed security law over Hong Kong; the unrest that started in Minneapolis which quickly spread across major cities in the US with a “I can’t breathe” movement; Brexit negotiations continuing to head nowhere; and no noticeable improvement in the coronavirus containment in Brazil, Mexico, nor Russia have not been much reflected in the financial markets.

• What seems to be the focus now is the investment climate that is being shaped by forces that emerged in May. Many countries began relaxing lockdowns and various activity-based alternative data, like traffic pattern and open table reservations showed improvement on the margins. Lockdown easing has helped push crude oil prices to the best month on record. Optimism is growing over several different vaccines that had been initiated or will soon begin human tests. The hope is that a vaccine may be ready by year-end.

• Besides, the early survey for May showed a definite improvement over April. For instance, it is already being recognized that the US economy will contract sharply in 2Q. Hence, what the data needs is to set the stage for a recovery in 3Q to validate expectations. The capital markets have continued to stabilize, and this has seen the Fed tapering its Treasury purchases to US$5bil a day, down from US$75bil a day at its peak in late March and early April. Fed officials have made it clear that there is little interest in adopting a negative target rate.

B. Euro has moved to centre stage

• This pair appreciated in May against the US dollar by 1.3% to 1.110 and with volatility having eased. Europe has moved to the centre stage in June. Trends in this currency pair will continue to be driven by the US dollar. The currency is now appearing to be in the process of moving from a long-term bearish trend into a bullish trend, more so due to improving risk sentiment than any particular expectations from the US Fed, which has indicated negative rates are not on the agenda.

• Besides, the euro has grown stronger recently. It coincided with the announcement of a new economic rescue package from the European Union valued at €750 billion, which appears to be coming not from printing new money. Thus, it has had an effect of boosting confidence in the euro.

• The focus in June will be on: (1) when the ECB meets on 4 June, and is widely expected to increase its Pandemic Emergency Purchase Plan by €250–500bil; (2) the ECB’s Targeted Long-Term Refinancing Operation, with a rate that could be as low as negative 100bps if specific lending targets are met, could see strong demand of €1bil or more; and (3) the EU heads of state are expected to decide on the joint effort to promote economic recovery among competing proposals.

• Hence for this pair in June, the most likely scenario is a price rise for the euro. On that note, the projected high for June is 1.14 and low at 1.09

C. Negative news on UK, but can benefit from weaker US dollar

• Nothing seems to go in the UK’s favour in May. The sterling was dragged lower by 2% to 1.23 against the US dollar. It is despite the sterling having recouped some of its earlier losses that carried it to six-week lows in the middle of May (~US$1.2075).

• The virus has hit the UK hard. And it appears to be much slower in reopening than many other countries. Several Bank of England officials have played up the possibility of adopting a negative target rate. It seems neither imminent nor inevitable. The focus will be on 18 June’s Monetary Policy meeting where expectations are for the central bank to more likely increase its bond-buying programme by £100–£200bil.

• Besides, the trade talks with the EU did not appear to be going particularly well. This is also expected to weigh on the sterling. And as we move into the month of June, the sterling has gained similarly on the back of heavy US dollar selling amidst a rebound attempt off last month’s lows put forth by the sterling.

• Hence for this pair in June, the most likely scenario is a price rise for the sterling. On that note, the projected high for June is 1.27 and low at 1.23.

D. Some optimism on Aussie dollar

• Riskier currencies rose against the US dollar as investors looked to the positive signs from China's post-coronavirus economic recovery and gambled on an easing in US-China tensions. With US President Trump not having imposed new tariffs on China during a news conference on Friday where he outlined his response to Beijing's tightening grip over Hong Kong, that has removed the near-term risk of any intensification of the US-China trade war.

• Meanwhile, the decision by the Reserve Bank of Australia (RBA) to hold the policy rate unchanged at 0.25% during the recent June policy meeting was expected. But the key point here is that there is some optimism that the economy, which is facing the biggest contraction since the 1930s Great Depression, could be less severe than expected. This will be a good template on how the market should differentiate currencies.

• Also, the currency rose 22% from March lows and gained slowly but steadily through May as the economy brought the impact of the coronavirus under control. In May, the currency appreciated by 2.4% to 0.667 against the US dollar. What will drive the price of the currency in general will be how the country navigates the exit from a lockdown and how it returns to normalcy.

• Hence for this pair in June, the most likely scenario is a price rise for this currency. On that note, the projected high for June is 0.70 and low at 0.66.

E. A stronger ringgit

• The ringgit was under pressure in May. Although the domestic economy in 1Q2020 grew 0.7%, added with investors looking positively on the US-China tension and post-coronavirus economic recovery, this was not reflected in the local currency movement. The ringgit depreciated by 1% to 4.347 against the dollar which fell by 0.7%. In part, this was due to the domestic noise in May.

• However, the current appreciation of the ringgit is driven by the weakening US dollar, strengthening oil prices and growing expectations for a rate cut in July. Besides, the focus will be on the recovery plan which is expected to revive both investor and consumer confidence. Adding on, by having the economy restarting from the gradual shift of the MCO to CMCO, some early data is shedding positive signs, for instance the manufacturing PMI.

• Hence, what is needed now is that the data needs to set the stage for a recovery in 3Q to meet expectations. Such validation will be a good framework on how the market should look at this currency. On the flip side, if we look into the month of June, the ringgit that has gained on the back of heavy US dollar selling can have its appreciation capped. This could come from the ongoing domestic political noise.

• Hence for this pair in June, the most likely scenario is a price rise for this currency. On that note, the projected high for June is 4.22 and low at 4.31.

Source: AmInvest Research - 4 Jun 2020