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We continue to believe that eventual ECB policy normalization will lead to a much larger appreciation of the Euro than most observers expect. However, specific developments will certainly delay this process, so we think it is a good time to dig deeper into our position.

Oil Price Recovery likely to Continue. WTI crude oil is now trading at around $60/barrel after having been as low as $42.50 in December 2018. We have expected crude oil to eventually bounce back to the range of $80-$85, but the speed of the rebound is still impressive.

Continuing Brexit and Trade Uncertainty May Boost Gold. Two major sources of uncertainty, Brexit and heightened trade tensions, look increasingly likely to persist at least into late 2019. The latest Brexit delay until October 31 is mostly good news for the British pound (GBP) because it reduces the risk of a no-deal Brexit. It does mean, however, that heightened volatility will continue until at least this fall. President Trump’s latest threat to impose tariffs on Europe is another sign that trade tensions, despite continued optimism on U.S.-China negotiations, are likely to persist through 2020.

Global Growth Outlook Bodes Well for Chinese Assets. China has coped with slowing economic growth and trade tensions by allowing its currency to depreciate by the minimum amount that allows its foreign reserves to remain stable around $3 trillion. This policy has helped preserve China’s large trade surplus with the United States, frustrating President Trump’s efforts to reduce this imbalance. All signs continue to suggest, however, that the Chinese would prefer the CHN/USD exchange rate to be closer to 6.30 than its current 6.72 valuation. If the Chinese economic outlook improves or if there is a deal that ends trade tensions, we expect the Chinese to push for a stronger yuan.

Because supply disruptions may be related to geopolitical risk, we decided to see how political and economic uncertainty affect a forecasting model for crude oil. We consider both U.S. economic policy uncertainty, and Caldara and Iacoviellos’ (2017) measures of geopolitical uncertainty for the world, Saudi Arabia, and China.