Weekly view – Dovish murmurs

The CIO office’s view of the week ahead.

ECB president Mario Draghi has gone as dovish as possible without cutting rates, saying for the first time that he is prepared to cut interest rates and redeploy quantitative easing before he leaves the bank this autumn. Any interest rate rise in Europe will not happen until the second half of 2020 at the earliest, he suggested. As global uncertainty around trade remains elevated, the outlook for large exporting economies like Germany looks every more precarious. This has prompted policy makers around the world to prepare to support their economies however they can, with Draghi pledging to “use all the instruments that are in the toolbox” to support euro area growth.

In the US, dovish noises have come from Federal Reserve chair Jay Powell, who said earlier this week that he is also prepared to cut rates should the expanding trade tensions begin to impair the US economy. This means that in Friday afternoon’s US employment report, bad news was good news, assuming the Fed gratifies markets by cutting rates. The report showed US hiring slowed in May, although the unemployment rate held steady at 3.6%. We will wait and see how the Fed interprets this news. Meanwhile, strong downward pressure on US yields caused the US dollar to underperform major currencies in spite of the risk-off mood. We remain negative on the dollar and positive on gold and EM currencies.

EM currencies benefitted from the weakened US dollar, barring the Mexican peso, which was hit as markets await Trump’s next move following his threat of tariffs on Mexican imports unless Mexico satisfactorily beefs up its efforts to stem illegal migration across its border. So far, the Mexican government has offered to deploy 6,000 Nation Guard police to its southern border in an attempt to halt the flow of migrants from Central America trying to reach the US. So far, the US is making moves in preparation of proceeding with a 5% tariff on Mexican goods from Monday 10 June, when Trump is back from his European trip.

César Pérez Ruiz, Head of Investments & CIO

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