With the dollar on the wane and oil on the gain commodity Dutch lender ABN Amro have had to scratch out recent foreign exchange forecasts and make some notable changes.
The bank has revised its outlook on the US Dollar based on predictions that interest rates in America will stay low for the rest of 2016.
Lower interest rates tend to weaken a currency because they dissuade foreign investors from putting their capital in the country, due to poorer expected returns, this in turn reduces demand for the country’s currency.
“The dollar multi-year uptrend is over in our view. The uptrend rested on three crucial drivers: Monetary policy divergence, rising EM risks and the collapse in commodity prices. Recently these three drivers have become less positive for the dollar.” According to Abn Amro's Co-ordinator FX and Precious Metals Strategy, Georgette Boele.
Their view that the dollar will not continue rising has led them to revise many of the forecasts they had made for individual currency pairs.
How has their outlook changed for other currencies?
They expect EM currencies to rise as they are likely to benefit from the rise in global commodities, as much as Australia and New Zealand.
Russia, Brazil, Chile, South Africa and Mexico are all major commodity producers and exporters themselves so their currencies should piggy-back the general commodity rally higher.
Strategists argue will help to dampen inflation in many of these countries, allowing their central banks to reduce high interest rates, which will lower business borrowing costs, supporting wider economic growth:
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“The recovery in emerging market commodity currencies will reduce inflation pressures in countries such as Brazil, Chile, Mexico, South Africa and Russia. As a result, central banks in these countries could focus more on supporting growth.”
They further add, however, that the rally in the Russian ruble and the Brazilian real could be less marked.
This is due to the central banks in Russia and Brazil may opt to buy more foreign exchange to build up their reserves. As their currencies naturally appreciate they will not be required to use intervention as a supportive crutch, the removal of which may dampen their uptrends.
As far as their actual forecasts go, by the end of 2016, they see dollar/ruble falling to 60, dollar/real down to 3.50, dollar/rand lower at 14.50 and the dollar/peso weakening to 16.75.
Oil on the Rise
ABN Amro's forecast for oil, which they see rising to 55 dollars to the barrel by the end of 2016 and 60 by the end of 2017, means those currencies such as the Canadian Dollar and the ruble, which are highly correlated with oil (meaning they almost always track the price of oil), will also have an equally bright outlook.
For the USD/CAD pair they expect the exchange rate to come down to 1.26 by the end of 2016.
Yen Under Pressure
Abn Amro expect the yen to come under pressure in 2016 as, “risk sentiment improves” and the US dollar is supported by rising US interest rates.
The reason why the yen is likely to weaken if global sentiment improves is because it is a popular safe-haven currency in times of crisis, since investors view it as a safe-place where they can leave their money. Obviously when the opposite happens and sentiment improves the yen weakens because of the fall in safety demand.
Although they have revised up their USD/JPY year-end forecasts from 120 to 150, this remains above the current exchange rate level in the mod 112s – therefore they still see the yen as weakening to the dollar, only not as much as previously.
Further pressure on the yen is likely to come from continued policy easing from the Bank of Japan, who they expect to increase printing money and cutting interest rates (most likely in April).
The also see, “Domestic investor’s portfolio rebalancing towards overseas assets in search of higher returns is likely to continue.”
And: “Last but not least, speculative long yen futures positions are also overcrowded.”
Sterling still likely to weaken
Abn Amro continue to be bearish sterling due to referendum risk.
“We expect GBP/USD to move towards 1.35 ahead of the referendum. However, GBP/USD should recover sharply afterwards as our base case is that the British public will vote to remain in the EU.”
They have kept their end-of-year forecast the same at 1.48.
No Change to yuan forecasts and Asian’s to strengthen mildy
The yuan is still likely to decline modestly versus the dollar, “in line with longer term fundamentals,” however, instead of having to devalue the yuan to keep pace with a rapidly rising dollar, a tamer dollar will mean the Chinese authorities will be able to devalue against a wider basket of currencies instead, leading to a softer currency landing.
“Local firms are likely to take advantage of current yuan recovery to reduce their foreign currency liabilities. The PBoC is also expected to replenish their foreign currency reserves which have fallen by around 20% since mid-2014. Hence we stick our year-end yuan forecast of 6.70.”
As far as other Asian currencies go, Boele and Teo, see less downside for them, however they do not expect sharp rises either as
Asian central banks are likely to intolerant of stronger currencies amidst subdued inflation and weak export growth.
As such central bank intervention is expected if any appreciation in Asian currencies goes too far.
Central banks in Thailand and Indonesia are expected to replenish their foreign exchange reserves which have fallen by 20% in the past year.
The slow-down in China is also expected to impact negatively on other Asian economies and their currencies.
The Indonesian Rupiah is forecast to decline versus the dollar, falling to 13,500 per dollar from 13.183 now.
This is because the central bank of Indonesia is unlikely to toerate more gains in the rupiah after the 10% outperformance in 2015, and may intervene to keep rates low.
The rupiah is also vulnerable to the high volume of foreign investors holding Indonesian local government debt, which could be sold off rapidly, weakening the rupiah in the process.
Further both the rupiah and the Indian rupee are vulnerable to rises in oil which will raise their inflation levels making foreign investors less keen to put money into their economies, as it will depreciate more rapidly despite high interest rates providing strong returns; as such they forecast the rupee to fall slightly to 67.0 during 2016 from its current 66.6 level.