OANDA Updated Q2 FX Quarterly Outlook: A patient period is upon us

Is Safe-Haven Mania Over?

Global growth concerns were alleviated towards the end of the first quarter and safe-haven currencies, such as the Japanese yen and Swiss franc turned negative, while gold prices erased all their gains.  The crux of the argument for a more risk-on quarter is supported by central banks globally adopting a more accommodative stance, trade deal optimism that will allow China to unleash their next wave of stimulus, and the fact that credit markets have rebounded.

Japan’s current situation remains vulnerable as the BOJ remains committed to easing as they continue to fail to reach their inflation target.  Governor Kuroda has delivered six years of super-loose monetary policy which was accompanied by global deflationary pressures.  The BOJ is unlikely to flipflop policy now, so we will likely see them cheer on a global rally to help trigger global inflation.

A scheduled tax hike later in the year will likely keep the door open for further easing measures.  The BOJ will also need to unveil plans on how to unwind its massive asset purchases if they do begin easing again.

If the US economy is poised to have a strong second half of the year, we could see that be the main catalyst to support a USD/JPY rally towards the 115.00 .  If the economic data improves for America, we could see tightening expectations for the Fed return and that may be the trigger to invert the 10-year/2-year yield curve (in March the 3-month/10-year inverted for a week).  The Even if the curve inverts, that does not mean we immediately see a prolonged risk-off environment.  When we see the end of the current economic cycle and recession concerns hamper the data, that could support yen strength target the 105.00 level in the longer-term.

Gold prices were unable to breakout significantly when global growth concerns were running wild because China-US trade deal optimism continued to make progress.  A trade deal is getting very close and if we do see a Trump-Xi meeting in Mar-a-Lago by the end of quarter, the precious metal could see selling momentum accelerate.

The yellow metal for now appears immune to the accommodative stance that has been signaled by all the major central banks, so for prices to rise higher, we may need to see the key catalyst be a weaker dollar and that might not take place until we see eurozone economy strengthen.

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