FX Watch
Group Economics Macro & Financial Markets Research
29 November 2016
Commo FX recovery delayed
Roy Teo
Mexican peso worst performer; Russian ruble and Canadian dollar
Senior FX Strategist
resilient post Trump victory
Tel: +65 6597 8616 roy.teo@sg.abnamro.com Georgette Boele Co-ordinator FX & Precious Metals
Commodity-related currencies likely to underperform in 2017…
…but to recover in 2018
We expect the Mexican peso to recover in 2017 and 2018
Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
MXN worst performer; RUB and CAD most resilient post US elections Since the US elections on 8 November, the Mexican peso (MXN) was sold off aggressively due to concerns that US President-elect Trump will repeal the North American Free Trade Agreement (NAFTA). The Mexican economy would be particularly vulnerable because it relies greatly on exports to the US (see chart below). The Canadian dollar (CAD), on the other hand, has been surprisingly resilient. For a start, speculators are already net short the CAD. Moreover, US President-elect Trump is a supporter of Keystone XL pipeline which will increase Canada’s oil exports to the US by up to 830k barrels per day. The Russian ruble (RUB) has also been very resilient given lower sensitivity to higher US Treasury yields and some support from firmer crude oil prices.
MXN worst performer; CAD and RUB most resilient %
MXN most vulnerable to restrictive US trade policies Exports to US % GDP in 2015
0
50
-2
40
-4
30
-6
20
-8 10 -10 0
-12 MXN
BRL
ZAR
CLP
NZD
AUD
RUB
CAD
AUD
RUB
Performance % vs USD since 8 Nov 16 Source: Bloomberg
NZD
CLP
BRL
Exports to US as % of GDP Source: DOT, World Bank
Insights.abnamro.nl/en
CAD
MXN
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FX Watch – Commo FX recovery delayed 29 November 2016
Commodity currencies are likely to underperform in 2017… We expect currencies of commodity exporters to decline further against the US dollar as domestic central banks (with the exception of Banxico) are likely to keep monetary policy unchanged with some central banks still holding on to an easing bias. The Central Bank of Russia may have some room to ease monetary policy if the ruble does not weaken sharply. Both Russia and Brazil are still recovering from a deep recession. The Copom in Brazil is unlikely to cut interest rates aggressively due to recent weakness in the Brazilian real (BRL). Moreover the central bank would like to see if fiscal policy is on a sustainable path. The central bank will only intervene in the currency market during periods of large downward pressure on the BRL as it is reluctant to build up large positions in FX swaps. In addition, central banks in Australia (+50bp), New Zealand (+75bp) and Canada (+50bp) are only expected to tighten monetary policy in 2018. As a result, interest rate differentials and monetary policy divergence with the US (we expect the Fed to tighten monetary policy by 75bp in 2017 compared to 50bp priced in by financial markets) is expected to result in more US dollar strength next year, also versus these currencies.
NZD and AUD more vulnerable to firmer US yields
CAD and RUB most sensitive to commodity prices Average weekly correlation and beta in 20161
Average weekly correlation and beta in 2016
0.6
3.0
0.5
2.5
0.4
2.0
0.3
1.5
0.2
1.0
0.1
0.5 0.0
0 RUB MXN BRL CAD ZAR Beta 2y US yields (rhs)
CLP AUD NZD
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
3.0 2.5 2.0 1.5 1.0 0.5 0.0 NZD BRL ZAR
Corr 2y US yields (lhs)
Source: Bloomberg
CLP MXN AUD RUB CAD
Beta (rhs)
Corr (lhs)
Source: Bloomberg
…recovery in commodity prices a tailwind; dominant driver in 2018 Our sensitivity analysis shows that both the Australian dollar (AUD) and New Zealand dollar (NZD) are the most vulnerable to higher US Treasury yields (unwinding of carry trades). However, higher iron ore and dairy prices have supported investor sentiment and dampened the downside in both currencies. Australian and New Zealand export exposure to the US as a percentage of GDP is also relatively small. Similarly, higher crude oil prices have limited losses in both the Canadian dollar and the Russian ruble. We expect the Chilean peso (CLP) and South African rand (ZAR) to rise in 2018 because we expect copper prices to remain supportive and gold/platinum prices recover. We also expect commodity-linked currencies to strengthen in 2018 as domestic central banks shift to a tighter monetary policy bias and improved terms of trade filter through their economies. Sell off in MXN overdone On the other hand, we expect a recovery in the MXN to commence in 2017 because despite US President-elect Trump's rhetoric, we do not expect aggressive actions on trade and immigration policies. Moreover, a strong uplift in the US economy and higher oil 1
Iron ore: AUD, BRL; Crude oil: RUB, CAD, MXN; Copper: CLP; Platinum: ZAR; Dairy: NZD
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FX Watch – Commo FX recovery delayed 29 November 2016
prices are supportive for the MXN. We expect the Banxico to hike rates in line with the Fed and investor sentiment to remain constructive
ABN AMRO Commodity FX forecasts
EUR/USD AUD/USD EUR/AUD NZD/USD EUR/NZD USD/CAD EUR/CAD USD/RUB EUR/RUB USD/ZAR EUR/ZAR USD/BRL EUR/BRL USD/MXN USD/CLP EUR/CLP
25-Nov 1.0589 0.7436 1.4240 0.7045 1.5031 1.3481 1.4274 64.62 68 14.16 15.00 3.45 3.65 20.65 677 717
Q4 2016 1.07 0.74 1.45 0.70 1.53 1.35 1.44 64 68 14.30 15.30 3.40 3.64 20.25 675 722
Q1 2017 1.05 0.73 1.44 0.69 1.52 1.37 1.44 65 68 14.50 15.23 3.45 3.62 20.00 680 714
Q2 2017 0.95 0.72 1.32 0.68 1.40 1.39 1.32 66 63 14.75 14.01 3.50 3.33 19.50 690 656
Q3 2017 0.95 0.71 1.34 0.67 1.42 1.42 1.35 66 63 15.00 14.25 3.60 3.42 19.50 690 656
Q4 2017 0.95 0.71 1.34 0.66 1.40 1.44 1.37 67 64 15.25 14.49 3.70 3.52 19.00 700 665
Q1 2018 1.00 0.70 1.43 0.65 1.54 1.45 1.45 67 67 15.00 15.00 3.70 3.70 19.00 700 700
Q2 2018 1.03 0.70 1.47 0.65 1.58 1.45 1.49 66 68 14.75 15.19 3.60 3.71 18.75 680 700
Q3 2018 1.06 0.73 1.45 0.68 1.56 1.43 1.52 65 69 14.50 15.37 3.40 3.60 18.50 660 700
Q4 2018 1.10 0.77 1.43 0.72 1.53 1.40 1.54 65 72 14.00 15.40 3.20 3.52 18.00 650 715
Source: ABN AMRO Group Economics
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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FX Watch – Commo FX recovery delayed 29 November 2016