Fixed Income Outlook  |  Q2 2019

Currency views

Fixed Income Team

Currency views

The dollar poised to weaken

In March, the Federal Open Market Committee took a dovish turn on interest rates. The Fed scaled back its median interest-rate projection to zero hikes in 2019 and one increase in 2020. The Fed also moved up its balance sheet normalization plan and announced that in May it will begin tapering the amount of proceeds it allows to roll off its balance sheet each month, ending aggregate reductions in September. The pause in the Fed's rate-hike cycle should help alleviate some of the upward pressure on the U.S. dollar. Still, growth outside the United States will need to pick up to allow for a more broad-based dollar depreciation.

The euro looks steady

The outlook for the euro remains dominated by monetary policy, growth, and political risk premium. At its March meeting, the ECB said it will delay raising interest rates until at least 2020. The ECB plans to provide banks with fresh long-term loans known as TLTROs (targeted longer-term refinancing operations) to keep credit flowing in the eurozone. The stimulus measure — which will start in September — came after the ECB lowered its growth and inflation forecasts. The euro will likely retain its role as a funding currency as the central bank pushes back its guidance for future rate moves.

Brexit weighs on pound

In the United Kingdom, Brexit noise remains high. While considerable work on a deal remains ahead and may continue to cause market volatility, we think a soft Brexit is now the most likely outcome. The pound will continue to be affected by the uncertainty around Brexit as investors attach a risk premium to the currency instead of focusing on fundamental economic news.

Rates continued to fall during Q1 causing parts of the yield curve
to slightly invert chart

Japan's accommodative policies

The Bank of Japan (BoJ) changed its yield-curve control policy in August. It allows for an elongated policy horizon driven by focusing on the price (level) of rates over quantity. At subsequent meetings, the BoJ continued to endorse this policy. With global growth slowing and Japan's inflation moving lower, it's likely that policy will remain accommodative longer than previously expected. The BoJ kept monetary policy steady in March, and minutes suggest that a growing majority are discussing additional easing.


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The outlook for global growth has cooled in 2019.