What Are The Limits To USD Gains Now? Where To Target? - BNPP
For the remainder of 2016, we would focus on three sets of risks: internal, external, and market.
1) Internal: A stable risk environment post-election is probably contingent on a message from the incoming president (and his team) that continues to emphasize a pro-growth agenda. A different message or cabinet appointees who are not viewed as market friendly could challenge the internal risk environment.
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2) External: Reaction from foreign governments is assumed to be cautious in the aftermath of the vote, but the geopolitical environment is inherently unpredictable, and an international stress event during the transitional period between administrations might be challenging to manage. Markets might also grow more concerned about anti-establishment political movements in Europe following the US election result. Somewhat counterintuitively, these concerns might help EURUSD more than they hurt if they lead to broader risk aversion which limits the Fed’s capacity to move ahead with rate hikes and supports current account surplus currencies generally.
3) Market: if US yields adjust too quickly, particularly long-end yields, it could cause an adverse reaction in the risk environment which might ultimately derail Fed hikes. However, we would expect initial gains in the USD during the period of rising US rates and thus think of this more as a limiting factor for USD strength rather than an immediate risk.
Our current forecasts look for EURUSD to reach 1.08 by year-end 2016, and 1.05 by the end of 2017. Meanwhile, we expect USDJPY to reach 108 by the end of this year and recover to 120 next year.
