Major Currencies Forecasts - page 10
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Dollar Correction Ahead, But Likely To Be Brief And Shallow
After a three-week rally, the dollar bulls finally showed signs of tiring ahead of the weekend. Technical indicators have begun rolling over from over-extended conditions. Nevertheless, the dollar's pullback is limited in time to the first part of the week ahead, and in scope to only modest retracement targets ahead of the US employment data, the Italian referendum, and the Austrian presidential election on December 4.
We have suggested that the dollar's advance was fueled by the divergence that had little to do with the US election. It is clear from Fed comments and the minutes from the November FOMC meeting that officials were prepared to hike rates regardless of the election outcome. Moreover, subsequent data has been mostly better than expected.
Trump's promise of significant fiscal stimulus with the world's largest economy already grown near or above trend, the inflationary implications are clear. Nominal rate differentials have widened significantly in the US's favor. We are cautious about extrapolating too much from the inflation-linked securities as the liquidity premium tends to exaggerate the movement. Also, Fed funds futures strip has not fully priced in two hikes next year, suggesting potential room for further adjustment.
Since November 4, a few days before the US election, the Dollar Index rose about 5.35% at last week's peak, just above 102.00. The RSI has rolled over, as has the Slow Stochastics. The MACDs may turn next week. Initial support is seen in the 101.00-101.20 and then 100.65.
The euro put in a low a little below $1.0520 while Americans were celebrating Thanksgiving. Like the Dollar Index, the RSI and Slow Stochastics have turned, but MACDs, as is often the case, are lagging. Nearby resistance is seen in the $1.0650-$1.0660 area. Above there, and the euro can test the $1.0725 area.
To the extent the widening of the U.S. premium is a critical driver for the dollar, we note that both the 2-year and 10-year premiums continued to widen ahead of the weekend, despite the greenback's pullback. The US two-year advantage reached 1.90% bp at the end of last wee the most in 16 years. It finished at 1.86%, a 13 bp gain on the week. The US 10-year advantage widened eight basis points to 3.10% before the weekend. It has been as much as 3.20%, which is the largest since 1992.
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EUR: Support on the Crosses. Neutral.
EURUSD is largely driven by the USD leg, which means the pair could slowly grind lower towards 1.04 by year end. However, we think EUR should remain strong on the crosses as eurozone banks are not increasing foreign lending enough to compensate for the current account surplus, and the higher global inflation environment reduces the need for the ECB to add to QE purchases indefinitely. Should the French election political risks subside, EUR could have further upside, particularly against JPY.
GBP: Tactical Rebound. Neutral.
We see the GBP maintaining its near-term outperformance in the broad USD rally, with the potential for GBPUSD to rebound to 1.30 in the near term. PM May's speech on Monday was focused on UK businesses. The market is still short GBP so positioning adjustment and no new negative news from the Brexit negotiations should continue to allow GBP to rebound. However, going into 2017, GBP may weaken again as we expect business investment to fall. We remain long GBPJPY* and look for a rebound to sell into 1Q17.
CHF: Buying Against JPY. Neutral.
We expect EURCHF to remain range-bound for now, with the range widened towards the 1.06 low. The latest sight deposits data indicate that the SNB intervened in the FX markets last week in similarvolumes to the week after Brexit, but it failed to weaken the CHF as EURCHF still declined slightly on the week, suggesting large CHF buying pressure. To capitalise on this large buying interest and hedge against Eurozone political risks, we promote buying CHFJPY* in our portfolio this week.
CAD: Vulnerable to Trade But Supported by US Growth. Neutral.
We expect CAD to weaken against USD but outperform other commodity currencies. CAD is not as vulnerable as MXN to trade protectionism given a prior free trade agreement which would take effect if the US backs out of NAFTA, though this still remains a risk. However, a better US economic outlook (from other policies like fiscal stimulus) should benefit Canada. We expect growth to remain weak but the bar for easing from the BoC is high given its downgraded forecasts and moderate worries around the housing market. We would need to see BoC easing for CAD to underperform the rest of the commodity complex.
AUD: Structurally Bearish. Bearish.
We are structurally bearish AUD and expect it to underperform NZD. The market has priced too hawkish a path for the RBA given weak employment data and our expectation for a negative 3Q GDP print. Australia will also be hurt as China's mini-cycle recovery slows (as we already see in the housing data). While the RBA may not cut rates for the foreseeable future, in ourview it will make sure the market reflects its easing bias, weakening AUD. AUD is also particularly vulnerable to rising US interest rates given its high yield (relatively speaking) status and current account deficit.
NZD: Outperformance vs AUD. Neutral.
We expect NZD to range trade for now but outperform AUD. New Zealand's economic outlook has remained relatively strong with high migration and booming housing supporting growth. This is likely to be enough to offset the RBNZ worries over the inflation outlook and, in particular, the exchange rate. However, we don't rule out another rate cut or even FX intervention, though the latter would occur only after substantially more FX appreciation. We expect NZDUSD to continue to depreciate due to the USD rally but unless we get substantially higher bond yields or a hit to risk appetite, we expect NZD outperformance of AUD in the near term.
GBP/USD Forecast - Heavy Losses In British Pound To Dollar Rate As Legal Grounds For EEA Memberships Are Disputed
The GBP to USD exchange rate was trading down almost 0.50% on Monday after the doubt over the legal grounds for the case of the UK remaining part of the European single market after Brexit hit the news.
GBP/USD traded down 0.40% at around 1.2400 level in the afternoon in London on Monday with the daily technical indicators pointing further to the downside, according to Scotiabank.
“After the narrow trading session seen last week, relatively heavy losses on the day for the GBP leave Cable looking soft and vulnerable to renewed declines on a trend basis. Intraday price action is bearish and a low close today should see Cable test support at 1.2355 (channel support off the October low) shortly. Trend strength signals are starting to align albeit weakly at the moment) bearishly again. Look to sell GBP rallies,” Shaun Osborn, chief FX strategist at Scotiabank wrote in a note on Monday.
Current Pound Sterling US Dollar (GBP USD) Exchange Rates
At time of writing the us dollar to pound exchange rate is quoted at 0.806.
The us dollar conversion rate (against euro) is quoted at 0.943 EUR/USD.
The live inter-bank USD-AUD spot rate is quoted as 1.338 today.
NB: the forex rates mentioned above, revised as of 28th Nov 2016, are inter-bank prices that will require a margin from your bank. Foreign exchange brokers can save up to 5% on international payments in comparison to the banks.
GBP/USD at Risk of Bearish Breakout
The GBP/USD was trading at around $1.2400 level after noon in London after it jumped as high as 1.2530 earlier on Monday during the Asian trading session.
The fall of sterling against the US Dollar materialized after the news of the UK government facing legal battle over whether the UK stays inside the single market after it has left the European Union (EU) as reported by BBC.
The details of the Brexit negotiations are driving the foreign exchange rate of sterling in recent weeks as the distribution of power in the UK government is being interfered by ruling of courts in the UK.
Based on the High Court’s ruling, the parliament is set to trigger the article 50 that starts legal procedure of the UK exiting the European Union.
Although disputed by the UK government, the ruling fueled the uncertainty over the timing of Brexit negotiations that weighed on sterling.
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Parallels With The Reagan Era: EUR/USD En-Route To 0.95
Since the US presidential elections the US dollar has firmed against most currencies. While it has risen by more than 5% against the yen and 3.5% against the euro, the sharpest moves have been against a number of vulnerable emerging market currencies.
For instance, the US dollar is up by 10% against the Mexican peso and around 7% versus the Brazilian Real and South African Rand. This reflects the combination of higher US growth expectations, higher US equities and higher US Treasury yields, as well as capital outflows from EM due to the unwinding of carry trades.
President-elect Trump’s program has similarities with that of Ronald Reagan in the 1980s. President Reagan was able to boost America’s self-esteem; his policies gave a strong boost to US growth during his first term and restrictive monetary policy kept inflation in check. This resulted in a substantial rally of US dollar (+43%) in his first term. However, a key difference is we expect the period of strong US economic growth to be more shortlived compared to the Reagan era so the dollar rally would likely be of shorter duration.
Another up leg in the dollar… We have upgraded our forecasts for the US dollar based on early views about the impact of Mr Trump’s economic agenda. We now expect a substantial pick-up in US growth and inflation to above-trend rates. In addition, we expect the Fed to hike rates more aggressively than anticipated by financial markets in order to dampen inflation expectations and actual inflation over the medium term.
We expect six rate hikes over the next two years, compared to the just over four currently priced in by futures markets. This combination of strong US growth – which will also be above inflation in 2017 - , wider yield spreads and a rise (less negative) in US real yields (official rates minus inflation) is bullish for the US dollar. Therefore, we now expect that the US dollar rally has another leg upwards. It is likely that this move will run out of steam once financial markets have anticipated the strong pickup in growth and more monetary policy tightening. In addition, the move could start to unwind in 2018 when yield spreads start to narrow, US growth starts to slow and expectations start to surface that the Fed will pause its rate hike cycle.
lWe expect the EUR/USD to break through parity also fueled by rising European political risk and an extension of ECB QE.However, a soon as expectations of ECB taper (which we expect from March 2018) start to build in the market at the turn of 2017-2018, this will likely lead to a recovery in EUR/USD.
ABN-AMRO targets EUR/USD at 1.05 by the end of Q1 '17 and at 0.95 by the end of Q2 '17.
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Danske's 2017 view: 4 themes, 9 trades, 1 wildcard
We present our year-end FX Top Trades for the coming year. We base the 2017 publication on four themes we think will drive FX performance in 2017: (i) cyclical outlook, (ii) monetary policy and reflation, (iii) currency vulnerability and (iv) the Trump factor.In addition, we have a 'wild card', which is our tail-risk scenario.
The global recovery engine is set to turn towards developed markets from emerging markets. This is likely to make carry trades vulnerable, while long FX volatility strategies become right skewed. The Scandi outlook suggests a bullish NOK stance but a more cautious SEK stance.
Inflation is likely to increase in 2017 and monetary policy conditions are set to tighten. Market pricing leaves scope for hawkish CZK surprise. Higher global inflation is likely to support CEE and commodity currencies, while an increase in 10Y UST yields would be JPY negative.
We score currencies according to current account misalignments, valuation mismatches and net international investment positions. Based on the scorecard, there is upside potential for HUF, CZK, EUR and PLN, while USD and AUD have downside correction potential.
The Trump presidency is likely to have a large impact on FX markets in 2017 via the potential of the Homeland Investment Act 2, positive supply-side policies, higher infrastructure spending and more protectionist policies. The 'Trump factor' is set to be negative for JPY and CNY and positive for NOK, RUB and CAD.
In our wild card scenario, we consider political instability in Europe. In our view, a sharp increase in political uncertainty in Europe would be EUR negative and create demand for traditional 'safe havens' such as CHF, JPY and DKK.
As in previous versions of FX Top Trades, entry prices are based on ECB fixings (as at 14:15 CET on 30 November 2016). In line with 2015, we include both forward outright and option ideas. Our forward outright recommendation will be included in the Danske Bank FX Trading Portfolio, in which we consider only spot and outright FX trading recommendations. For option trades, we provide updates to our P&L.
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What To Expect From The EUR This 'Busy' December?
December will be busy for the eurozone, with a heavy economic and political agenda, though we ultimately expect events in the eurozone to matter less for the EUR than developments in the US.
The two main events for the markets are the Italian constitutional referendum on 4 December and the European Central Bank meeting on 8 December.
We think that in both cases, the EUR reaction should be limited and short lived, with US dynamics the primary driver of EURUSD direction.
Italian constitution referendum:
polls show ‘no’ vote is likely Published opinion polls show that the ‘no’ vote is holding on to the lead ahead of Italy’s referendum on constitutional reform. Confirmation of this result would likely see the EUR open broadly weaker in Asia on Monday (5 December), but we think the impact would be relatively limited for several reasons.
More generally, we do not think FX is the most exposed asset class to potential European risk. A telling example is the Greek debt crisis in the summer of 2015. Unlike during the 2010-2012 European debt crisis, the EUR did not experience a large sell off; in fact it even showed a positive relationship with peripheral spreads (Chart 1). The EUR has been used as a funding currency for FX carry trades and the risk-off environment has forced the unwind of these trades, leading investors to buy back the EUR. The EUR remains supported by a large current account surplus and grounded in strong FX fundamentals.
ECB December meeting is moderately bullish for the EUR.
Our economists expect the December ECB to announce that it will prolong quantitative easing by six to nine months and scale back its asset purchases from EUR 80bn to EUR 60bn per month. We think this announcement will be moderately bullish for the EUR and do not expect a very large market reaction, as our rates team does not expect a significant rise in rates. Despite scaling back its asset purchases, the ECB should keep a dovish tone.
Firstly, the accompanying statement will be key; ECB President Mario Draghi will be likely to present this reduction as a marginal change and highlight that the policy continues to be exceptionally accommodative, while playing up the economic rationale for such action.
Secondly, he will likely emphasize that special circumstances forced the ECB to increase the run-rate to EUR 80bn a month at the beginning of 2016 are no longer present. Lastly, the ECB is facing a trade off between the eventual length of its programme and the pace of purchases; a scale down will allow the programme to run for longer and end in a more gradual way. With the reduction of asset purchases, we remain cautious on extending EUR shorts too aggressively into December.
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USD/JPY, GBP/USD: Trading USD Trend & GBP Correction
We think FX investors should differentiate between the trend and the correction. The USD is within a secular uptrend driven by relative return differentials which themselves find their foundation in a global output gap differential.
Hence any USD setback should be regarded as welcome to add to USD longs. This applies especially for our main call suggesting a medium term USDJPY target of 130 or higher. Mondays 111.35 USDJPY low should now limit the downside
Japan equityin flows= Weaker JPY. When plotting the performance of DM and EM local equity markets in the last 6 weeks vs the performance of their currencies vs the USD, we find a nice inverse relationship. This makes sense as a strong equity market is often a sign of local economic growth potential and equity market inflows from foreigners. However, there is one outlier, the JPY, which has weakened at the same time as receiving equity inflows. Analysis from our QDS team taking data from the Tokyo Stock Exchange shows that cumulative Foreigner equity positioning was only 56% of previous peak exposure, suggesting further upside here. The BoJ's Sakurai said yesterday the BoJ will continue to provide a stubborn effort across a wide front to escape deflation, which includes buying lots of JGBs and continuing fiscal spending. The Nikkei is reporting that Japan is considering issuing more deficit bonds to cover the tax shortfall. Even if issuance increases,yields are expected to be capped by the BoJ, keeping the yield differential wide and supporting USDJPY. Japan's life insurers also continue to exhibit strong demand for USD assets despite a widening USDJPY basis. The chart below shows that their hedge ratios are too high and the adjustment process will limit and JPY upside
Our more constructive GBP outlook is paying early dividends as the UK government appears to takes a more realistic position in respect of maintaining access to the common market. Yesterday, Brexit Minister Davis suggested the UK would consider paying for EMU market access. Even if his comments were not a new line from the conservative party (May's speech at the party conference said an end to contributions was not a red line), the FX markets were more optimistic after a similar line came from EU side. Dutch Finance Minister Dijsselbloem, who is also president of the Eurogroup, suggested that the EU could design a way for the UK to enter the internal market but it would not be as easy or cheap as it is now. GBP longs towards 1.30 offer a good opportunity to weather any short term USD setback.
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GBP EUR, GBP USD Exchange Rates: Two Days Of FX Volatility Ahead
The Supreme Court appeal and the Italian referendum to decide the direction of the sterling.
The British pound has taken a breather in the past few weeks and the comments by the Brexit secretary David Davis on the possibility of a soft Brexit gave a boost to the currency.
On a trade-weighted basis, the pound has rallied 4.8% against the dollar in November, the best month since 2009.
David Davis raises hopes of access to the single market
Britain wants to ”get the best possible access for goods and services to the European market,” and the government would consider contributing to the EU budget to gain such an access, said David Davis. This was the first hint from the government to show that it is considering a soft Brexit approach as well.
However, analysts’ believe that more clarity is needed on Brexit for the pound to sustain its rally. “I don’t see much more clarity in the direction of travel from the government. Single market access is one message but the clear policy to have control over UK borders is a red line in the sane,” said Alan Wilde, head of multi-sector fixed income at Barings, as quoted by the Financial Times.
Court case to garner attention next week
The Supreme court will hear an appeal by the government seeking to overturn the ruling by the lower court, which put forth the requirement of a parliamentary approval to trigger Article 50 of the Lisbon Treaty.
Though the court’s decision is expected only after the New Year, “the market appears to be leaning towards the government's appeal not being upheld, and therefore (triggering) Article 50 means (seeking) parliamentary approval," said HSBC strategist Dominic Bunning. "That means a softer Brexit," reports Reuters.
The last leg of the fall in the sterling from $1.5 to $1.3 was fuelled by the concerns of a “hard Brexit”, hence, a possibility of a “soft Brexit” few experts can lead to short covering.
"Sterling itself is undervalued," said James Kwok, head of currencies for asset manager Amundi. "It should be trading about $1.30. It is trading lower because of all the uncertainty. But for us the best way is not to bet on cable (dollar rates), but to bet against the euro," as quoted by Reuters.
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Foreign Exchange Rate Forecasts: How Will Brexit, ECB & Fed Impact Pound, Euro And The US Dollar?
After spiking to multi-week best conversions, what's next for GBP EUR and GBP USD exchange rate forecasts?
GBP/EUR trended over half a cent lower on Monday afternoon as Sterling was weakened by Brexit jitters while the Euro recovered solidly from its lows.
The Euro was also able to recover against the US Dollar. The US Dollar’s strength was limited against the Pound and Euro despite the day’s composite PMI from ISM coming in well above expectations.
Italy’s No vote on constitutional reforms triggered some marked volatility for the Euro exchange rates, although the bearish mood was somewhat muted by the reassuring news of the far-right’s defeat in the re-run Austrian presidential election.
Confidence in the US Dollar has remained heightened, nevertheless, with expectations for the afternoon’s services data positive.
Last week the GBP/EUR failed to hold a high of 1.1941 but ended the week above opening levels of 1.1779.
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Roundup Of Today's Euro To Dollar Exchange Rate Forecasts - BNP Paribas, Lloyds, Scotiabank
Foreign exchange experts give their take on thesharp highs and lows seen in the euro to dollar rate over the last 48 hours. We examine the latest euro-related fx forecasts targeting the sterling and the US dollar in the short, medium and long-term GBP/EUR forex outlooks
The Italian Referendum and Austrian election on Sunday saw some extreme volatility in the euro crosses.
We bring you a range of views from leading FX institution:
Scotiabank: EUR Rally has Come to an Abrupt Stop
Analysts studying the euro to dollar rate at the Bank of Scotia, suggest the overall trend strength remains strong:
"After yesterday’s surge, the EUR rally has come to an abrupt halt."
"Two tests of the 1.0785/95 area have not made any real impression on the figure area and that leaves a potential, short –term double top on the hourly chart."
"The 6-hour chart shows a collection of small doji candles forming over the past 24 hours or so, which is sometimes indicative of indecision and a turn in the trend."
"Trend strength remains strong on the short-term studies though and we need more evidence to confirm that a minor top at least is in."
"Weakness below 1.0735 today would suggest a move back under 1.07."
BNP Pairbas: EUR/USD upside unlikely to extend much beyond 1.08
BNP Paribas, in a brief to clients today, note a potential topside of 1.08 to the recent uptrend:
"The benign market reaction to the referendum result was in line with our expectations, but probably resulted in short-covering on positions taken on in anticipation of a more negative market impact."
"Markets may also be anticipating that the calm response to the weekend’s political events will encourage the ECB to emphasize the limits to its QE intentions or cut back the pace of anticipated purchases when it reveals plans for the asset purchase program beyond March at this Thursday’s meeting."
"EURUSD has stabilised Tuesday following Monday’s gains and we would expect the pair to struggle to extend upside much beyond 1.08."
Euro to Dollar Exchange Rate Forecast to Test Long-Term Support
Some key EUR/USD exchange rate levels are noted by Lloyds in their daily report on Tuesday 6th December:
"As you can see in the chart, we witnessed a very sharp reversal of the post Italian referendum spike low."
"Range support down to 1.0450 continues to hold, with the current rally testing important resistance that runs from 1.08-1.0910."
"A move up through this resistance region would suggest we are still in range mode and couldn’t rule out a move back towards the 1.1100 region before testing and breaking 1.0450."
"Intra-day support in this regard lies at 1.07-1.0660."
"Medium term we still view the range between 1.0450 and 1.1700 as corrective and should eventual breakdown to test major long-term support in the 1.01-0.99 region."
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