Major Currencies Forecasts - page 12
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AUD, NZD: Opposing Risks In 2017; AUD/NZD En-Route To Parity
USD strength in 2017 should take the AUD towards the 70c mark, but if the RBA cuts rates this would make a move sub 70 much more likely.
Risks to our AUD outlook are tilted to the downside. If commodity prices give back all of their H2-16 gains and the Fed undertakes more than 2 hikes in 2017, then AUD risks ending next year closer to 65c than 70 cents.
The balance of risk favours NZD/USD moderating next year, but the NZD is seen either holding its ground or rising in cross-rate terms. NZ domestic factors remain positive and although core inflation is seen on a mild upward trajectory, the market is likely to price in a rising chance of an H2-2017 tightening as the year progresses.
Our base case is for AUD/NZD to trade through parity in 2018, but given that we are more positive on NZ’s economic prospects relative to Australia, the risk is that this may happen sooner, rather than later.
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Euro and Yen to Be the Big Losers Against the Dollar in 2017
The Dollar is likely to rise more against the Euro and the Yen than other currencies in 2017, say advisory service Capital Economics.
This is because the Euro and the Yen are particularly vulnerable to devaluation compared to other currencies due to their central bank’s monetary policies, writes Capital’s John Higgins.
Both the European Central Bank (ECB) and the Bank of Japan (BOJ) have a policy of printing money to help ease boost growth in their economies, however, this also has the effect of weakening their currencies.
The US Federal Reserve (Fed), on the other hand, has now stopped money printing and has started to raise interest rates instead, which has the effect of strengthening its currency.
Higher interest rates tend to attract more capital from foreign investors because they offer them higher rates of return.
At the moment, the members of the Fed’s monetary policy committee expect that they will have to raise interest rates by 0.25% three times in 2017, however, capital think they will eventually have to increase rates at an even faster pace than they or financial markets currently expect.
“Where we stand out from the crowd is in our view of monetary policy in the US. We expect the Fed to hike interest rates by far more than appears to be priced into the markets.
“We are less out on a limb when it comes to our view of monetary policy in the euro-zone and Japan.
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EUR/USD Weekly Forecast December 26-30
EUR/USD has shown resilience in the past week by staying below important support turned resistance from 2015 lows despite several attempts at the level. Nevertheless, technical developments in the week point to an exhaustion of the current downtrend, putting the pair at risk of a further correction in the upcoming week.
The upcoming week marks the last week of the year and volatility will be unpredictable. In some years, the year-end has accompanied strong trends with drastic fluctuations while in other cases the more volatile moves are seen in the first week of the new year. The past week was not volatile and the recovery in EUR/USD appears to be weak in trend at this point as compared to prior end of year trends.
Most high impact economic releases pertaining to the pair were released on Thursday and a brief spike following data above a horizontal level at 1.0462, marking 2015 lows, is likely to have eliminated some weak positioning. Out of the United States, durable goods orders were reported to decline 4.6% in November. The final reading of third quarter GDP pointed to a rise of 3.5% and the core PCE price index edged down to 1.6% on an annual basis.
High impacting scheduled economic data for release in the final week of the year remains relatively light. Out of the United States, consumer confidence will be released on Tuesday and the weekly unemployment claims on Wednesday. There is a bank holiday on Monday in both Europe and the United States.
The 2015 low at 1.0462 was a critical level for the pair in the past week and remains a critical pivotal point. An early week hold of the level resulted in a continuation lower, but following a marginal weekly low, the pair turned higher in a recovery. The horizontal level held the pair lower in the second half of the week aside from Thursday’s brief spike above the level. What has started to be a concern for bears, however, is that the level has failed to trigger a broader decline in the late week with support at 1.0430 holding the pair higher.
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Market Forecast - 1Q 2017: Fireworks Ahead on Trump, Brexit
A Not So Surprising Charge
After nearly two years of consolidation, the Dollar (ICE Index) was finally driven to a critical bullish breakout in the final months of 2016. To many, the catalyst for the resurgence came as a surprise: the US Presidential election. The unexpected win by Republican nominee Donald Trump defied popular opinion polls and helped the Greenback overcome its perceived limitations. The new President is seen as the candidate committed to significant change, and his extraordinary campaign promises hold unexpected benefits for the currency. Talk of a massive fiscal stimulus program bolsters expectations of meaningful growth while vows to crack down on perceived, unfair trade advantages for major peers charges inflation expectations. That translates into superior growth forecasts and a Federal Reserve motivated to accelerate its rate hike regime. Heading into the new year and presidency, the maintenance of and extension to the Dollar’s impressive bull trend now rests on these unique connections coming to pass – or a much more dramatic fate befalling the financial system.
Big Promises and Big Expectations
While the US economy is not on a runaway pace, it has nevertheless proven robust over the years while other major economies have wavered. In this environment where appetite for return is so prominent, a competitive economic pace can draw capital as readily as a central bank rate hike – and critically, more consistently. The promise of fiscal stimulus targeting infrastructure could significantly augment the pace of expansion and further draw contrast to those countries that have stagnated. The approval and details of the program remain to be seen, but a degree of speculative anticipation is already priced in.
Just as substantial in its promise – but carrying far greater risk – is the incoming President’s vow to confront what many see as unfair trade advantage. Tariffs on certain imports and tax breaks on certain exports are two options that have been floated in order to accomplish a rebalancing. This anti-trade shift is also the means for funding the aforementioned fiscal stimulus as well as planned tax breaks. In an ideal world, this could prove a balanced effort. However, there are many ways that this effort can prove a risk for the US and global economies. The United States is the world’s largest consumer economy, and a move to cut its consumption of trade partners’ exports represents a serious threat to their economies. It is not unreasonable to expect retaliation for such a move. If the world’s largest and second largest economies (US and China) were to engage in outright trade wars, the damage would not be limited to these two countries. In such a situation, US growth would likely suffer and the Dollar’s appeal would be significantly diminished.
Rate Forecasts Have Firmed but Still Present Opportunity Short of Fed’s Projections
While the promise of a more robust economy is a draw for investment and thereby lever for the currency, it is speculation of interest rate hikes that provides the practical expectation for return. The Federal Open Market Committee (FOMC) hikes rates for the second time in its very nascent hawkish regime on December 14th. That represented a 12-month gap between moves, but the second increase was full expected. Heading into the two-day meeting, the market had fully priced in the hike. The hawkish winds were further lifted by the forecasts for interest rates over the coming three years. In particular, the group increased its expectation for hikes in 2017 from two to three 25 basis point moves. That was the first time in 18 months that the central bank had increased its forecasts.
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Bank of Japan Governor Haruhiko Kuroda said on Monday the global economy seems to be entering a new phase and finally putting behind the negative legacy of the global financial crisis.
The BOJ's new policy framework aimed at keeping long-term interest rates around zero percent will help maximize the benefits of global tailwinds for Japan's economy, Kuroda said.
"By implementing this policy framework in an appropriate manner, the BOJ can take advantage of the recovery momentum of the global economy to produce an even greater driving force for Japan's economy," he said in a speech at Keidanren, Japan's biggest business lobby.
USD Loses Momentum
The bulls have finally loosened their reins on the U.S. dollar but a move below 117 in USD/JPY is needed to pave the way for a deeper reversal. The surprise decline in pending home sales combined with a sharp drop in U.S. yields sent the dollar tumbling against the yen. However even with this decline, the greenback managed to end Wednesday in positive territory versus euro, sterling and Swiss franc. The commodity currencies have found a near-term button and chances are that in the next 24 to 48 hours we should see a further pullback in the dollar. There are no U.S. economic reports scheduled for release on Thursday, so all the dollar needs is another day of lower yields. Short-term price action aside, with the Federal Reserve looking to raise interest rates three times next year, 2017 should still be a good year for the U.S. dollar. Between Donald’s Trump Presidential victory, the surge in U.S. rates and record highs in U.S. stocks, global investors have found plenty of reasons to own U.S. assets and, in turn, the U.S. dollar. The moves that we have seen so far are in line with the market’s reaction to Ronald Regan’s election in 1980 and if Trump follows through, we could see an even stronger rally for the dollar in 2017. Fiscal stimulus and rate hikes are a powerful combination, but our positive dollar view is predicated on Mr. Trump delivering. In other words, 2017 should be a good year for the U.S. dollar -- unless Donald Trump fails to deliver and the Fed resorts to raising interest rates twice instead of 3 times next year.
Wednesday's worst-performing currency was the euro, but thanks to a late-day U.S. dollar selloff, the currency managed to hold above 1.0350 and end the day above 1.04. After losing close to 1000 pips over the past 2 months, euro parity is in sight. However as weak as the euro may be, the slide in the currency is changing the outlook for inflation and growth. In the recent ECB economic bulletin, the central bank said it sees inflation picking up strongly at the turn of the year, a view the Bank of England shares. As a result, these 2 major central banks may need to start thinking about unwinding their stimulus programs in the coming year. The big question for Europe is whether a weak euro can save the Eurozone economy. We have no doubt that the lower currency will boost both economic activity and inflation, as the data already shows. However Europe’s problems extend beyond day-to-day business activity. The greatest risk for the Eurozone and the euro next year are politics, terrorism, elections and Italy's banking crisis. Many of these events are difficult to handicap but each scenario could have a dramatic impact on the currency, overshadowing positive improvements in the economy. Looking ahead, we hope to sell rallies in the EUR/USD between 1.05 and 1.06 -- targeting a move to 1.01 or lower.
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Italy's economy minister Pier Carlo Padoan, speaking with financial newspaper Il Sole 24 Ore
- Padoan says the ECB's new capital target was the result of a "very rigid stance" by the ECB
- "It
would have been useful, if not kind, to have a bit more information
from the ECB about the criteria that led to this assessment"
Reuters have moreUS Dollar Forecast 10-15% Higher from Trump Border Tax Proposal
One of Donald Trump's protectionist trade policies - Border Adjust - appears to have been given the green light by Republican's in Congress.
The new policy, if implemented, is forecast to have such a powerful effect on the value of the US Dollar exchange rate complex with significant gains being forecast by analysts at Morgan Stanley.
Border Adjust taxes imports and gives tax relief on exports and will raise a 20% tariff on imports and discount 20% from tax on exports, essentially amounting to a tax credit for exporters.
The policy has been put forward as a Republican House 'Blueprint', and since Republicans hold a majority in both Congress and the Senate, it is likely to see a relatively easy path to implementation.
Whilst some economists argue the Dollar will adjust significantly to offset the benefits of the policy, rising by an estimated 25%, Morgan Stanley do not agree.
“We don't expect a full exchange rate offset of the effects of border adjustment; the empirical breakdown of Purchasing Power Parity (both absolute and relative) in the short run, global supply chains and concerns about a World Trade Organization (WTO)-led response will limit full USD offset,” said Morgan Stanley.
Instead, the investment bank forecast an adjustment of a lesser but still substantial 10-15% degree instead.
“However, we still believe USD can rally 10-15% on a trade-weighted basis if border adjustment is implemented at the proposed 20% corporate tax rate,” said Morgan Stanley in their note.
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USD/JPY, EUR/USD, AUD/USD: What S/T Valuation Models Say?
We always find it useful to update our short-term valuation models to assess if any G10 FX spot rates have diverged materially from traditional short-term fundamental drivers.
One of the largest divergences which has opened up is between the current spot rate for USD/JPY and our short-term valuation model estimate which comes in between the 110.00 and 115.00 levels. The spot rate is currently trading at around two standard deviations above our model estimate. The current spot rate is very stretched signalling significant downside risk for USD/JPY in the near-term. Yen weakness appears to have overshot short-term fundamentals during December. A fresh fundamental catalyst will likely be required to justify an extension of USD/JPY’s recent upward momentum towards the 120.00-level. All eyes will be on President elect Trump’s inauguration on the 20th January.
In contrast, the scale of the euro’s recent decline appears more in line with short-term fundamental drivers. Our model estimate signals that risks for the euro are still skewed to the downside in the near-term. A potential test of parity for EUR/USD may even occur sooner than we are currently anticipating during Q2 of this year.
The other main divergences which have opened up between the current G10 spot rates and our short-term valuation model estimates is for the Australian dollar and Norwegian krone which both appear significantly weaker than implied by fundamental drivers. The supportive impact of higher commodity prices does not yet appear to be fully reflected in current spot rates. Our short-term valuation models estimate that AUD/USD should be trading just above the 0.7400-level and EUR/NOK just above the 8.8500-level based on short-term fundamental drivers signalling upside risks for the Aussie and krone in the near-term.
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EUR/USD: Won't Go Short Without Support From The Bond Market
That sound hammering away at the inside of my thick skull this morning is coming from the chart I’ve show a few times this year already,of real yield differentials and the dollar. Until the current downtrend in US real yields stops, and preferably reverses, in both absolute and relative terms, the dollar is likely to struggle. If anything, the dollar is falling more slowly than relative real yields are. The US labour market report did nothing to really propel real yields higher, painting a picture of ’more of the same’ about the state of the labour market, and doubts about the impact of Donald Trump’s polices are gnawing away at the confidence of dollar bulls and bond bears.
The second chart is one I did mention yesterday – it shows a 5-year history of speculative futures positioning in 10yr Notes and the dollar. This is just a partial glimpse at market positioning but on this measure, the market is more short of bonds than at any point in the last decade. Price action bears that out so far this year. The net dollar long isn’t nearly as exciting but the FX market is the tail and the bond-dog is doing the wagging.
All of this leaves us nervous...And we won’t go short EUR/USD without some support from the bond market.
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