Major Currencies Forecasts - page 14
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EUR/USD: Monthly Close Key; GBP/USD: Reverse H&S Target
In the short run, we continue to expect EURUSD and GBPUSD to test major resistance levels, which is consistent with our roadmap from 1999, before turning again later.
Looking back to 1999, as the DXY started turning higher in October of 1999, it did not rally against JPY. The rally was against European currencies and it is these crosses - largely EURUSD and GBPUSD - that we believe will trend in favor of the USD over the months ahead.
A month after the June 1999 Fed hike, EURUSD posted a bullish monthly reversal (July 1999) and the DXY Index posted a bearish one. We may well see the same again this month. The monthly close levels to watch this month are
– EURUSD: 1.0875 – A monthly close above would result in a bullish monthly reversal targeting a decent gap to the 200 day which currently stands at 1.1017.
– USD-Index: 99.43 – A monthly close below would result in a bearish monthly reversal
If seen, we it would add to the short term bias of USD weakness. Beyond this short term bounce the overall picture still looks bearish for EURUSD just as we saw in the last cycle.
EUR Is The 'Mini' JPY: Heading Towards An 'Ideal' Environment For EUR Weakness
The case for rising USD real rates. Falling DM productivity rates in conjunction with demographics boosting savings relative to consumption and globalisation has allowed DM real rates to decline over the past three decades. Lower real US rates were an important factor driving US financial and real sector investment abroad providing the fuel for the EM economic growth engine.
This trend may terminate now with globalisation slowing and the demographically related increase of savings relative to investment peaking. US productivity is the next factor to look at. Productivity has a structural and a cyclical component. Higher investment will boost cyclical productivity suggesting US capital demand and US real rates going up, both working in favour of the USD.
Anticipated EUR weakness. The EUR will not withstand these pressures either and we reiterate our view calling the EUR the ‘mini JPY'.
Inner EMU sovereign bond spreads have widened with Italy, Portugal and Greece taking the lead, pouring cold water on the idea the ECB may head towards an early reduction of its monetary accommodation. Greece and its EU creditors continued to struggle on Thursday to reach agreement on a key review needed for Athens to unlock new loans and avoid a descent into renewed financial turbulence. Italy’s economy struggles with its real rates which are too high relative to its ailing investment outlook, leaving the ECB with little other choice but to create conditions under which Italian real rates can fall. Tightening its policy too early may come with too high costs putting Italy under even more stress.
Hawkish comments from ECB members representing core countries (Mersch, Weidmannn, Lautenschlaeger) may be dismissed as the ECB directorate runs the show and here dovishness has prevailed. The EMU’s core may develop inflation while Italy may prevent the ECB from acting ahead of the curve, creating an ideal environment for EUR weakness.
MS maintains a short EUR/USD position from 1.0650 targeting 0.99.*
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EUR/USD: To Rally Towards 1.10 Short-Term; Sell Into This Rally Long-Term
EURO NOT READY FOR A SUSTAINABLE RALLY. The outlook for the euro remains negative, consensus projects EUR/USD to trade lower near parity during H1 2017. We agree, but the market is also clearly positioned for a weak euro -> we expect EUR/USD to rally short-term up towards 1.10 as USDpositioning looks stretched. EUR/USD remains a sell on rallies.
SHORT-TERM: Economic growth is recovering, and the euro area is expanding just above trend. Unemployment is falling, and inflation is slowly rising. We think it likely ECB will continue its QE-program throughout 2017 but that Mr. Draghi may well taper the current pace of purchases further (currently EUR 60bn/month from April). The policy divergence vs. a hiking Federal Reserve remains a relevant (negative) driver for the euro in the coming year. QE policy has likely contributed to making global reserve managers cut the fixed income holding of the euro-zone (large net bond outflows 2015/16), in turn boosting already significant imbalances in the Target 2 system. Furthermore, the current account development (increasing surpluses) is driven almost exclusively by German exports (hence not that strong a supportive euro factor). These factors show that large internal euro-zone imbalances and problems still exist. Political elections in 2017 risks boosting already elevated risk premia in the euro-zone furthermore.
LONG-TERM: The institutional crisis and imbalances that the euro-zone finds itself in, motivates a weak euro for long. Appetite for European assets will be low and foreign capital likely to seek to hedge their euro exposures. We expect the euro trade-weighted currency to be a funding currency of choice in 2017.
USD: USD To Recouple With US Yields. Bullish.
We expect USD to recouple with rising yields and strengthen against low-yielding currencies. The reflation trade remains in tact. We don't expect President Trump's comments about USD strength to sustainably impact USD and think sustainable USD weakness would only come from disappointment on the policy front. If Trump moves towards protectionist policies, we still expect USD strength (particularly from border adjustment). However, these USD gains would be disproportionately against EM currencies.
EUR: Driven by the USD. Bearish.
We continue to be sellers of EURUSD* as we expect broad USD strength to drive this pair. The Eurozone economic data and European Union commentary are not major drivers of the EUR side. An underlying dovish tone from the ECB does help. Last week Draghi suggested that policy should be tightened only when inflation is sustained and euro-area wide, implying that the ECB may remain accommodative for some time, given the wide divergence between the core and periphery economies. A faster rise of the US treasury yield relative to the bund helps the trade.
JPY: USDJPY to Rise With US Yields. Bearish.
USDJPY once again failed to break through 112.50 and we continue to expect it to rise in line with our mediumterm view. JPY short remains our preferred reflation trade: with US fiscal and monetary policy leading to higher interest rates in the US, the BoJ's yield curve management ensures that Japan's yields remain relatively low. JPY positioning is more clean now with the recent fall in USDJPY, supporting ourview.
GBP: BoE's Inflation Report in Focus. Bullish.
We think there is potential for GBP/USD to rally back to at least 1.27/1.28 before moving lower again towards our quarter-end target of 1.17. Recent commentary from the Spanish foreign minister has been encouraging for the Brexit negotiations. The parliament will likely pass the bill on Feb 8 to be able to trigger article 50. The market is still short GBP, suggesting that there is room for positioning adjustment to lift the currency. This week the market focus will be on the BoE's inflation report.
CHF: SNB to Limit Upside. Neutral.
The CHF should continue to weaken vs the USD and stay stable vs the EUR. We continue to expect the SNB to intervene in EURCHF if it appears to be falling too quickly. A level we are watching is around 1.0650. The SNB should continue to keep rates at current levels as inflation has surprised to the downside in Switzerland as the rest of world's rates rise with reflation.
CAD: Fade CAD Strength. Bearish.
We like fading recent CAD strength for a few reasons. First, the market hasn't priced in the very dovish BoC from last week and needs to price a flatter curve. Second, the CAD is not priced for any meaningful chance of trade protectionism but will be heavily impacted if border adjustability is enacted. Third, Canada's economy has not rebounded in line with the US and Canada's output gap is widening. We don't expect CAD to benefit much from the Keystone pipeline or small changes in oil prices.
NZD: Outperformance vs AUD. Neutral.
We still see the NZD outperforming the AUD over the medium term, with this week's positive CPI print supporting ourview. We don't see RBNZ pricing as exterme right now and despite NZD TWI strength, expect the RBNZ could remove its easing bias in the upcoming meetings. Ultimately, NZD will be vulnerable to any fall in risk appetite or a downturn from China but still less so than Australia (whose domestic picture is also weaker).
EUR/USD: Poor Performance Of Shorts To Stay For Some More Weeks
US policy uncertainty and Fed-ECB monetary policy divergence are likely to continue alternating as drivers of the EURUSD in the short term.
This week, the FOMC meeting could remind markets that risks are titled in the long-run towards a stronger dollar, through the possibility of more rate hikes, but the White House unpredictability has led investors to pare back short EURUSD positions since the beginning of the year.
The most important event will likely be the FOMC meeting on Wednesday in which we do not expect any change in policy. In this regard, our economic team recognizes that there was a notably hawkish shift in tone from the Fed at its December meeting. In addition to believing that cumulative progress toward the dual mandate justified a rate increase, the FOMC views signaled that monetary policy will not be passive in the face of expansionary fiscal policy. We expect no change in the target range for the federal funds rate this month. Instead, we believe that the statement will reflect the view that the labor market is at or near full employment. Regarding inflation, we look for a modest upgrade to reflect recent trends, but believe the committee sees this as mainly a mechanical passing of base effects from energy prices and currency movements. At the moment, markets (fed fund futures), price in a 70%+ probability of two hikes, roughly in line with Barclays expectations in 2017.
Our previous analysis of consensus trades (short EURUSD is one such trade this year) suggests that the poor performance is likely to stay for some more weeks. The political risk in Europe is likely to reassert itself more firmly on this pair as we approach the Dutch general election (15 March), where risks have been underestimated by markets, in our view
In addition, the January employment report will be published as usual on Friday. We forecast non-farm payroll to have increased 175k in January, a pick up from the December slowdown. We forecast for the unemployment rate to decline one tenth to 4.6%. We expect average hourly earnings to increase 0.3% m/m and for the average weekly hours to be unchanged at 34.3.
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Euro Near-Term Risk Event: Eurozone CPI In The Spotlight
As investors watching the euro exchange rates attempt to gauge the legitimacy of last month’s big jump in Eurozone inflation, all eyes will be on Tuesday’s headline year-on-year CPI figure, upon which the future scale of the ECB’s bond buying program partially lies.
Eurozone ‘flash’ CPI will be watched closely on Tuesday morning in London (10:00 GMT) as the market gauges how legitimate was last month’s surprising inflation jump to +1.1% year-on-year.
Ordinarily Not a big EUR USD Exchange Rate Mover, Although...
December’s flash figure (released on by Eurostat on January 4th) was considerably higher than the +0.6%, +0.5% and +0.4% recorded for September, October and November, and was also above the market consensus of +1.0%.
Another big jump in the reading is expected this month, with the market predicting +1.5%.
Traders should be wary, however, since eurozone inflation data is not ordinarily a big market mover – although it has had its moments.
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