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Brace for FX correction in July, warns DBS

Ng Qi Siang
Ng Qi Siang6/26/2020 02:31 PM GMT+08  • 4 min read
Brace for FX correction in July, warns DBS
With economic fundamentals weak and fears of a second Covid-19 wave, markets are sinking back into the doldrums.
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SINGAPORE (June 26): Despite a rise in US equities on Thursday, DBS Research Group analysts Phillip Wee and Chang Wei Liang are warning that this Wall Street bullishness is nothing but a head fake. With the US economy remaining fundamentally weak and Covid-19 showing no sign of dissipating, they predict that July will see a downward correction for currencies next month.

“The rally that came in the final hour of trading was narrow, driven mainly by financials from recommendations to ease restrictions on US banks from the Volcker Rule. These gains were reversed in after-hours trading after the Fed told big banks to limit dividend payments and suspend share buybacks in 3Q,” say the analysts. They warn that the Fed is encouraging US banks to maintain capital stocks to absorb the economic fallout should a prolonged pandemic result in loan defaults from corporates and households.

After falling from April to May, unemployment levels seem to have plateaued in June. Millions of Americans are at risk once the US government’s US$600 unemployment benefit expires at the end of July, with small firms under pressure to retrench once government relief dries up. “In the end, a jobless recovery (not U, V or W) is what Americans worry most about,” note the analysts sombrely.

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