Current short term Forecast - page 11
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USD: Data Catalysts for USD Strength. Bullish.
We believe the USD is moving back to its long-term bullish trend. The closing US output gap and its implications on monetary policy should move rate and yield differentials in favour of the USD. Compared to this time last year, the markets are pricing in fewer rate hikes for the following year (markets currently pricing 21bp for 2017), suggesting that the risk/reward is skewed to the upside where there is more potential for rate hikes to be priced in, supporting the USD. This week sees many important data releases and events. Our economists' forecasts are higher than consensus for many of the data points, providing catalysts for USD to strengthen. We expect USD strength to be most pronounced against low-yielding currencies (low-yielding AxJ, JPY and SEK) while high yield EM currencies with good fundamental stories may continue to perform well.
EUR: EUR Crosses Stay Supported. Neutral.
Recent commentary from ECB officials did not reveal any new information and continued to emphasise that any policy decision will be made in the December meeting. We continue to expect EURUSD to be driven by the USD leg, which would mean the pair is likely to stay pressured given our projection for USD strength. On the crosses, however, EUR is likely to remain supported, particularly against JPY, GBP and SEK. Should global and EMU inflation continue rising, ECB tapering talk could come back into focus and the EMU yield curve could steepen, providing support for EUR crosses.
JPY: Staying Bearish. Bearish.
We continue to expect USDJPY to strengthen and would view any pullback as a buying opportunity. With the BoJ's yield curve management and steepening of global yield curves, financial institutions' profitability may improve over time, increasing their willingness to lend domestically and abroad, which would weaken the JPY. Market consensus remains bullish JPY with long positioning still large. Should sentiment start to shift, an unwind of these positions could generate a significant reversal in USDJPY to the upside. Additionally, given the increasing hedging costs, Japanese investors may now invest abroad on an FX-unhedged basis, further weakening the JPY. This week, we watch CPI and BoJ rates decision.
CHF: Watching Interventions. Neutral.
We expect EURCHF to remain within its trading range of 1.08-1.10, while USDCHF has the potential to test 1.01 in the coming weeks on the back of USD strength. With the move higher in global yields and potential for increased pricing of Fed hikes, we think USD strength will be more pronounced against low-yielding currencies such as CHF. CHF could strengthen should risk appetite be hit from a rise in volatility arising from a steepening ofyield curves, but with the SNB standing ready to intervene, the upside for CHF may be limited. This week, we watch sight deposits data to look for any signs of SNB participation in the sharp move higher in EURCHF when it traded around 1.08 in the past week.
CAD: Staying Neutral. Neutral.
In the latest meeting, the BoC revised its inflation and growth forecasts down and changed their wording on inflation risks to be "roughly balanced", which was less dovish than the markets expected. However, in the press conference, Governor Poloz conveyed that the bank actively discussed the possibility of adding more stimulus, though it would require a shock or series of shocks for them to ease further. We think this means that the BoC is willing to ease if the economy takes another dip, but this would only be warranted if there are major shocks such as a significant drop in oil, severe slowdown in the US economy or a US presidential outcome that could change NAFTA. For now, these scenarios look unlikely in ourview, suggesting the BoC should stay on hold. With markets pricing in 6bp of rate cuts, we think this is fair and thus stay neutral on CAD.
AUD: Strategic Short. Bearish.
We entered a strategic short AUDUSD position* after the pair rallied following the stronger than expected CPI print. China's property sector is at risk of slowing in the coming quarters given the authorities are starting to show signs of clamping down on the housing market, which would reduce iron ore imports from Australia. Australia's labour market also deteriorated further in September, which was a concern for the RBA's new governor. This, coupled with mining investment staying weak and the housing market expected to slow next year, means the RBA may need to cut rates to stimulate the economy. This week, we watch the RBA rates decision and building approvals. Markets reduced the pricing of RBA rate cuts quite substantially after the strong CPI print, suggesting that any RBA guidance towards more easing or a miss in the housing data can cause AUD to sell off.
NZD: More Potential for Correction. Bearish.
Within G10, NZD has the largest potential for correction in an environment of USD strength and steepening yield curves, in ourview. With markets increasing pricing of a Fed hike, central bank policy divergence and steepening global yield curves could increase volatility, leading to risk aversion reflexes reducing cross-border flows. Being a currency requiring foreign funding, NZD could come under pressure. The RBNZ could also be more open to rate cuts given inflation remains low and the Bank pointed to slower house price appreciation in its latest statement, though markets have already priced in 21bp cut for November and they would need to signal more easing for NZD to weaken materially. We remain short NZD/USD in our portfolio.**
Forecast & Forex Outlook For Pound Sterling, EUR, NZD, AUD, ZAR Exchange Rates (Short-Term)
With lots of potentially market-moving news ahead, we look at the events most likely to cause volatility in Pound to Euro, US Dollar, New Zealand Dollar, Australian Dollar and South African Rand exchange rates.
The deciding factor for Pound movement today has been Bank of England (BoE) Governor Mark Carney and the unresolved issue of his future at the bank.
The Pound was destabilised throughout the day, owing to widespread concerns that Carney might leave the BoE when it needs him most, or because of pressure from ‘Brexiteers’.
The latest news has been that Carney has met with the Prime Minister, though as this was a pre-planned meeting, speculators are none the wiser about Carney’s future intentions.
There has been a lot of volatility for the Pound thanks to rumours surrounding the future of BoE Governor Mark Carney, with investors worried that he may not choose to extend his term at the central bank.
As a result GBP exchange rates have faltered, losing particular ground to the South African Rand after fraud charges against Finance Minister Pravin Gordhan were dropped.
This week’s session in the currency markets brings a full data schedule, with tier one releases from every corner of the world forecast to inform price action for GBP, EUR, USD, NZD, AUD and ZAR exchange rates. We take a look at the likely highlights below.
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EUR/USD: Neutral: Rebound has scope to extend to 1.1040.
The current movement is viewed as corrective rebound which has scope to extend further to 1.1040. At this stage, a sustained move above this level seems unlikely. That said, the undertone stays positive unless there is a move below the strong 1.0890 support.
GBP/USD: Neutral: In a 1.2080/1.2350 range.
The undertone for GBP has improved somewhat with the strong daily closing yesterday. However, the current outlook is still viewed as neutral and we continue to expect sideway trading between 1.2080 and 1.2350 (even though the nearterm bias is towards the upside.
AUD/USD: Neutral: Only Above 0.7660 Eases Pressure.
While the outlook for AUD is still deemed as neutral, the sharp pull-back from last week’s 0.7705/10 high appears to have scope to extend lower but at this stage, a clear break below 0.7540 seems unlikely (the October’s low of 0.7506 is another major level). On the upside, only a move back above 0.7660 would indicate that the immediate downward pressure has eased.
NZD/USD: Neutral: In 0.7080/0.7210 range.
The current neutral consolidation phase appears incomplete and further range trading seems is expected, likely within a 0.7080/0.7210 range.
USD/JPY*: Bullish: Bullish Against 104.
The failure to move clearly above the major 105.50 resistance coupled with the rapid drop from the high has diminished the odds for further USD strength. However, only a move below 104.00 would indicate that the current bullish USD phase has ended.
EUR/USD: Neutral: Bullish if daily closing above 1.1095.
The anticipated corrective rebound exceeded our expectation by easily moving above the strong 1.1040 resistance. Upward momentum continues to improve and the undertone for EUR is clearly positive. However, EUR has to break above the major 1.1095 resistance before a sustained rally in the coming weeks can be expected. Overall, the positive undertone would remain intact unless there is a move back below 1.0955 (1.1000 is already a strong short-term support).
GBP/USD: Neutral: In a 1.2080/1.2350 range. [No change in view]
The undertone for GBP has improved somewhat with the strong daily closing yesterday. However, the current outlook is still viewed as neutral and we continue to expect sideway trading between 1.2080 and 1.2350 (even though the nearterm bias is towards the upside).
AUD/USD: Neutral: In a 0.7540/0.7705 range.
The recent downward pressure has eased as AUD moved back above the strong 0.7660 resistance (overnight high of 0.7689). Despite the strong rebound, the current outlook for this pair is still viewed as neutral even though the recent downward bias has eased. At this stage, there is no clear signs that this pair is about to embark on a sustained directional move and it is more likely that we would see a period of consolidation, likely within a 0.7540/0.7705 range.
NZD/USD: Neutral: Rebound has room to extend to 0.7265.
The surprising strength in NZD moved above the strong 0.7205 resistance. While the undertone has improved considerably, we are not convinced that the current up-move can be sustained. That said, further extension to 0.7265 would not surprising and we would turn bullish only if there is a daily closing above this level. The positive undertone is expected to stay intact unless there is move back below 0.7160.
USD/JPY: Shift from bullish to neutral: Pull-back could extend lower to 103.50.
While we highlighted the diminished odds for further USD strength in recent updates, the ease of which the key 104.00 support was taken out was unexpected. The bullish phase that earlier last month has ended and the current price action is deemed as a corrective pull-back which could extend lower to 103.50 with room for further extension to 103.00. Overall, this pair is expected to stay on the defensive in the coming days unless it can reclaim 104.60.
EUR/USD: Shift from neutral to bullish: Target, 1.1145, 1.1200
As highlighted in recent updates, the undertone for EUR is clearly positive and the ease of which the major 1.1095 resistance was taken out yesterday suggests that the current EUR strength could extend further in the coming days. That said, shorterterm indicators are already overbought and this could lead to a couple of days of consolidation first. From here, as long as 1.1000 is intact, further up-move towards 1.1145, 1.1200 seems likely.
GBP/USD: Neutral: Short-term strength could extend to 1.2400.
GBP edged above the top-end of our expected sideway consolidation range of 1.2080/1.2350 yesterday with a high of 1.2355. The recent positive undertone improves further and while extension to 1.2400 would not be surprising; we are not convinced that we could see acceleration higher from here. That said, this pair is expected to be underpinned unless there is a move back below 1.2215.
AUD/USD: Neutral: In a 0.7540/0.7705 range.
AUD registered and ‘inside day’ yesterday and there is no change to the current neutral outlook. Indicators are showing mixed signals and it does not appear that this pair is about to embark on af sustained directional move. In other words, we continue to expect a 0.7540/0.7705 consolidation range for now.
NZD/USD: Shift from neutral to bullish: Rally over-extended but room for extension to 0.7375.*
The underlying NZD strength exceeded our expectation as the major 0.7265 was easily taken out (overnight high of 0.7309). The outlook for this pair has shifted to bullish but the up-move is over-extended. That said, further extension to 0.7375 is not ruled out as long as 0.7220 is intact.
USD/JPY: Neutral: Key support at 102.50.
We shifted from a bullish to neutral stance yesterday and expected the pull-back to extend lower. However, the pace of the down-move has been more rapid than expected and the current USD weakness could extend further towards the key 102.50 support. At this stage, a sustained move below this level seems unlikely. Overall, this pair is expected to stay under pressure unless it can reclaim 104.00.
EUR/USD: Bullish: Target, 1.1145, 1.1200.
We turned bullish EUR yesterday and there is no change to the view. The current movement is deemed as a short-term consolidation phase that may last for a couple of days. As long as 1.1000 is intact, the prospect of a move beyond 1.1145 still appears to be quite high.
GBP/USD*: Shift from neutral to bullish: Overbought but room to extend further to 1.2620/25.
GBP broke above successive strong resistances and registered the single largest daily gains in 3 months. While overbought, the up-move appears to have strength to extend further towards 1.2625, the high seen on the day of ‘flash crash’. In order to maintain the current momentum, any short-term pull-back should not move below 1.2350.
AUD/USD: Neutral: In a 0.7540/0.7705 range.
There is no change to the current neutral outlook for AUD. However, the near-term bias is tilted to the upside even though strong resistances are stacked closely together (at 0.7735, 0.7760). AUD has to break clearly above these levels to indicate a ‘break-out’. In the meanwhile, further sideway trading is expected between 0.7540 and 0.7705.
NZD/USD*: Bullish: Rally over-extended but room for extension to 0.7375.
As highlighted yesterday, the outlook for NZD has turned bullish. While the recent rally is over-extended, there appears to be room for extension to 0.7375. Stop-loss remains unchanged at 0.7220 for now even though 0.7250 is likely strong enough to hold any short-term pull-back.
USD/JPY: Neutral: Key support at 102.50.
USD touched a low of 102.54 yesterday, holding just above the key support indicated at 102.50. Despite the overall negative undertone for this pair, a sustained move below 102.50 seems unlikely (the next support is closer to 102.00). That said, only a move back above 104.00 would indicate that the immediate downward pressure has eased.
EUR/USD: Bullish: Target, 1.1145, 1.1200.
EUR touched a high of 1.1143 last Friday, just a couple of pips below our immediate target of 1.1145. Upward momentum has deteriorated with the weak opening early this morning but as long as 1.1010 is intact, another attempt to break clearly above 1.1145 cannot be ruled out just yet.
GBP/USD: Bullish: Overbought but room to extend further to 1.2620/25.
We turned bullish GBP last Friday and highlighted that despite overbought conditions, further extension to 1.2620/25 would not be surprising. GBP touched a high of 1.2558 on Friday before easing off. From here, as long as 1.2400 is intact, another leg higher towards the 1.2625 target still seems likely. This is a major level and those who are long should consider booking some profit.
AUD/USD: Neutral: In a 0.7540/0.7705 range. [No change in view]
There is no change to the current neutral outlook for AUD. However, the near-term bias is tilted to the upside even though strong resistances are stacked closely together (at 0.7735, 0.7760). AUD has to break clearly above these levels to indicate a ‘break-out’. In the meanwhile, further sideway trading is expected between 0.7540 and 0.7705.
NZD/USD: Bullish: Rally over-extended but room for extension to 0.7375.
There is no change to the current bullish outlook. As highlighted previously, while the current NZD strength is over-extended, there is room for extension to 0.7375. NZD touched a high of 0.7362 earlier and as long as 0.7250 is not taken out, another attempt towards 0.7375 seems likely. That said, in view of the overbought conditions, those who are long from last week may like to take partial profit.
USD/JPY: Neutral: In a 103.00/105.20 range.
We indicated last Friday that despite the overall negative undertone for USD, a sustained move below the key 102.50 support is unlikely. The strong surge early this morning indicates that the recent pull-back has stabilized. However, it is too early to expect a bullish reversal and USD is more likely to trade sideways, likely within a broad 103.00/105.20 range.
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EUR/USD: Bullish: Diminished odds for further EUR strength.
The weak daily closing yesterday has clearly diminished the odds for further EUR strength (last Friday’s peak of 1.1143 fell just short of the immediate target of 1.1145). From here a move below 1.1010 would indicate that a short-term top is in place and the start of a consolidation phase. The downside risk would continue to increase unless EUR can reclaim 1.1110 within these 1 to 2 days.
GBP/USD: Shift from bullish to neutral: In a 1.2250/1.2550 range.
The expectation for the recent GBP strength to extend further to 1.2620/25 was proven wrong with the breach of the key 1.2400 level yesterday. The 1.2558 high seen last Friday is viewed as a short-term top. The current movement is deemed as the start of a consolidation phase, likely within a broad 1.2250/1.2550 range.
AUD/USD: Neutral: Room for extension but 0.7760 is a major resistance.
While the move above 0.7705/10 (high of 0.7728 at time of writing) indicates that the underlying strength for AUD has improved, strong resistances are stacked closely together at 0.7735 and 0.7760 (high in September and August respectively). These levels have offered strong resistances previously and are expected to continue to frustrate AUD bulls. That said, in the next few days, this pair is expected to stay underpinned unless there is a move back below 0.7640.
NZD/USD*: Bullish: Rally over-extended but room for extension to 0.7375. [No change in view]
There is no change to the current bullish outlook. As highlighted previously, while the current NZD strength is over-extended, there is room for extension to 0.7375. NZD touched a high of 0.7362 earlier and as long as 0.7250 is not taken out, another attempt towards 0.7375 seems likely. That said, in view of the overbought conditions, those who are long from last week may like to take partial profit.
USD/JPY: Neutral: In a 103.00/105.20 range.
While the undertone for USD is clearly positive, it is too early to expect the start of a fresh bullish phase. Any further upmove is expected to face stiff resistance at 105.20 ahead of the recent high of 105.50/55 which is a very strong level. All that said, the immediate upward pressure stays intact as long as the pull-back were to hold above 103.00 (103.50 is already a strong short-term support).
EUR/USD, USD/JPY: Scenarios & Targets For 1-Week After The US Elections
We summarize our key FX market views under three election scenarios: Clinton win; narrow Trump win; and strong Trump win (FX market implications for narrow and strong Clinton wins are similar, in our view, given the potential for Congressional gridlock in either scenario).
A Clinton win would likely further reduce risk premium on assets most sensitive to a Trump win, most notably the MXN, but also those linked to the likelihood of near-term Fed rate hikes (ie, implying a lower EURUSD, higher USDJPY and USDCNH). Medium-term prospects are closer to our base case of modest USD strength, centered more on EM than DM and arguing for selective carry trades (such as RUB, BRL, INR and IDR) funded with low-carry EM or the EUR.
We think a narrow Trump victory would be a modest risk-off for FX markets, with the currencies of countries with large trade surpluses with the US likely to be viewed as vulnerable to protectionist moves under a Trump administration. We see USDMXN rising to 21.50 and USDCNH to 6.95 in such an event. Increased market volatility implies a slower pace of Fed policy normalization and would likely weigh on the USD versus reserve currencies (notably EUR and JPY). Medium-term anti-trade policies point to a narrower EM vs DM growth gap, weaker capital flows and a higher USD vs EM. The political spillover of a Trump win would in our view be felt most keenly in Europe ahead of busy 2017 election calendar, weighing on the EUR on a relative basis. Thus, USD and JPY both strike us as better safe havens.
The strong Trump win scenario would likely be more disruptive than the narrow win given the broader implications for US policy. Currency implications look similar to those in the narrow Trump win scenario, except we see more persistent moves.
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EUR/USD: Neutral: Downward bias but expect strong support at 1.0820/1.0845.
While there is no change to the current neutral outlook for EUR, the weak daily closing has resulted in a negative undertone. The immediate bias is tilted to the downside but 1.0820/1.0845 is a major support zone and is expected to offer solid support. Overall, only a move back above 1.1090 would indicate that the immediate downward pressure has eased
GBP/USD: Neutral: In a 1.2250/1.2550 range.
GBP traded in a choppy manner yesterday but stayed well within the expected sideway consolidation range of 1.2250/1.2550. The outlook remains mixed and we continue to stay neutral for now.
AUD/USD: Neutral: In a 0.7555/0.7750 range.
As highlighted yesterday, despite the recent AUD strength, we prefer to wait for a daily closing above 0.7760/65 before turning bullish. The surprising sharp drop to a low of 0.7580 has clearly dented the upward momentum. We continue to stay neutral for now and expect this pair to trade in a broad 0.7555/0.7750 range for now.
NZD/USD: Shift from bullish to neutral: Corrective pull-back could extend lower to 0.7230.
The recent bullish phase has ended as NZD broke below the key 0.7295 support yesterday. The high of 0.7403 seen on Tuesday (8/11/16) is a temporary top. The current movement is viewed as a corrective pull-back which could extend lower to test the strong 0.7230 support (next support at 0.7180). At this stage, a sustained move below this level is not expected. On the upside, resistance is at 0.7360 and only a clear break above 0.7400/05 would indicate the start of a fresh bullish phase.
USD/JPY: Shift from neutral to bullish: Over-extended but room for further gains to 106.50.
The wild swing yesterday finally ended with USD closing near the high. The rally is clearly over-extended but based on the current momentum, there appears to be room for further extension to 106.50 (next significant resistance is at the July’s high of 107.45/50). Strong support is at 104.70 but only a move back below 103.50 would indicate that a shortterm top is in place.
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