FX Weekly
Group Economics Macro & Financial Markets Research
19 May 2016
USD in favour as Fed rate hike expectations rise Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
USD in favour as Fed rate hike expectations rise EUR outlook deteriorates; GBP resilient as Brexit fears recede JPY weakness persists as overcrowded long positions are unwound AUD forecasts downgraded Emerging market currencies under pressure USD in favour as Fed rate hike expectations rise The US dollar (USD) gained across the board as the April FOMC minutes were more hawkish than expected. In the minutes, most participants judged that if economic growth in the second quarter picks up, labour market conditions continue to strengthen further and inflation making progress towards 2%, then it would be appropriate to increase the target range for the federal funds rate in June. According to Fed funds futures, the probability of a 25bp rate hike next month rose from 4% to above 30% since the beginning of this week. We continue to think that the Fed will remain on hold, but the risk for a rate hike later this year has increased.
Fed funds rate implied by futures contract %
1.00 0.75 0.50 0.25 Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Futures implied Fed funds rate in Dec 16 Futures implied Fed funds rate in Sep 16 Futures implied Fed funds rate in June 16 Source: Bloomberg
EUR outlook deteriorates; GBP resilient as Brexit fears recede The euro declined by one cent to around 1.12 as the interest rate spread between the eurozone and the US declined. The market sentiment has become more negative on the
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FX Weekly y - USD in fa avour as Fed d rate hike e expectations s rise - 19 May M 2016
euro which w is reflecte ed in higher demand for down nside protectionn. In the near-tterm this move could c continue e. However, we e expect the euro to find somee support around 1.1140 ahead of the ECB mo onetary policy meeting on 2 June. J On the ot other hand, the Sterling at the Brexit cam (GBP) has been resi lient as recent polls show tha mp is losing grround, though h the vote coun nt remains clos se. Nevertheles ss, strong demaand to hedge downside d risk in the GBP rema ains evident in the t options ma arket.
EUR/U USD; 2 year E EU-US interes st rate differe entials Level
%
1.4 4
0.0 -0.3 3
1.3 3
-0.6 6 2 1.2 -0.9 9 1.1 1.0 0 Ja an-13
-1.2 2 -1.5 5 Oct-1 13
Jul-14
EUR/USD (lhs)
Apr-15
J Jan-16
2y EUR-US E yield spreead % (rhs)
Source: Bloomberg
JPY weakness w ma ay continue as s overcrowde ed long posittions are unw wound Higherr oil prices and firmer US Treasury yields we eighed on the JJapanese yen and pushed USD/J JPY above 110 0. We do not rule out that the yen weaknesss momentum may m extend furtherr towards 112 a as overcrowded long yen pos sitions are unwo wound. In our view, the BoJ is still likely to enhan ce its qualitativ ve and quantita ative easing proogram later this year as the better than expeccted economic performance in the first quarrter of this yearr was flattere ed by a downw ward revision in GDP in the las st quarter of 20015. In addition n, economic activity y in April remaiins weak and surveys s show th hat consumerss have become e more pessim mistic on the ecconomy. Japan hosts the G7 ffinance ministe ers and central bank governorrs on 20 to 21 May. An agreem ment between the US Treasu ury and Japan Finance F Ministtry on what con nditions warran nt an interventio on in the yen is s unlikely in our view. Neverthheless, the risk k of any interve ention by Japan n to weaken the currency has s declined signnificantly given the correction (weaker) in n the yen. Separa ately according g to a Nikkei su urvey, 52% of 360 3 companiess have assume ed a USD/J JPY rate of 110 0 in the current fiscal year. He ence we expecct companies to o increase their hedging of forei gn currency re eceipt exposure es if the yen is at much weake er levels. This is s likely to provid de some suppo ort to the yen. Our O year end U USD/JPY forec cast is 110
AUD forecasts f dow wngraded The Au ustralian dollarr (AUD) found some s support after a the Reserrve Bank of Au ustralia (RBA) minutes reinfo orced our view that it is unlike ely that the RBA A will lower the e OCR in June. However, weakkness in the AUD resumed after wage grow wth in the first quarter q slowed d from 0.5% to 0.4% qoq. Thiis reignites market expectatioon that the RBA A may need to furth her ease policyy rates as soon n as August giv ven that their foorecast in May assumed
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FX Weekly y - USD in fa avour as Fed d rate hike e expectations s rise - 19 May M 2016
that wa age growth wo ould stabilise arround 0.5%qoq q. Soft employm ment numbers in April also CR by 25bp to pushed d the AUD low wer to 0.72. We expect the RB BA to cut the OC o 1.5% later this ye ear in August. T This is not fully priced in by fin nancial markets ts. We have als so downg graded our AUD D forecasts as outlined in ourr FX Watch – A AUD weakness s to continu ue? which wass published on 16 May 2016.
Emerg ging market c currencies un nder pressure Despitte firmer comm modity prices, emerging marke et currencies caame under pre essure as the The South Afriican rand was the worst perfoormer due to do dollar strengthened. s omestic politica al uncertainty a and rising expe ectations that South S Africa’s ssovereign rating g will be downg graded to non-i nvestment grade later this ye ear. In Asia, thee South Korean n won decline ed by more tha an 2%, tracking g weakness in the t yen given JJapan and Sou uth Korea high ex xport similarityy.
ABN AMRO majorr currency forecasts
EUR/USDD USD/JPYY EUR/JPY GBP/USDD EUR/GBPP USD/CHFF EUR/CHFF AUD/USDD NZD/USDD USD/CADD EUR/SEKK EUR/NOKK
19-May 1.1209 110.23 123.56 1.4574 0.7691 0.9885 1.1079 0.7199 0.6727 1.3079 9.3654 9.3481
Q2 2016 Q3 2016 QQ4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 1.15 1.15 1.15 1.15 1.15 1.15 1.15 110 110 110 108 1005 105 108 127 124 1221 127 127 121 124 1.52 1.54 1.556 1.48 1.50 1.40 1.42 0.76 0.75 0.774 0.78 0.77 0.82 0.81 0.97 0.98 0.999 0.96 0.97 0.96 0.96 1.12 1.13 1.14 1.10 1.11 1.10 1.10 0.75 0.75 0.775 0.74 0.75 0.73 0.72 0.70 0.71 0.772 0.68 0.69 0.68 0.68 1.17 1.16 1.15 1.20 1.18 1.25 1.22 9.00 9.00 8.775 9.25 9.25 9.25 9.25 8.50 8.25 8.225 8.75 8.50 9.25 9.00
Source: ABN AMRO Grouup Economics
ABN AMRO A emerg ging market currency c forecasts
USD/CNYY (onshore) USD/CNHH (offshore) USD/INR W USD/KRW USD/SGDD USD/THBB USD/TWDD USD/IDR USD/RUBB USD/TRYY USD/ZARR EUR/PLNN EUR/CZKK EUR/HUFF USD/BRLL USD/MXNN USD/CLPP
19-May 6.54 6.57 67.2 1,191 1.38 35.78 32.40 13,525 66 2.99 15.91 4.40 27.02 317 3.57 18.49 690
Q2 2016 6.55 6.55 66.5 1,165 1.36 35.00 32.50 13,200 66 2.85 15.00 4.40 27.00 310 3.60 17.25 670
Q3 2016 6.60 6.60 67.0 1,165 1.38 35.00 32.80 13,400 64 2.80 14.75 4.40 27.00 310 3.55 17.00 660
Source: ABN AMRO Grouup Economics
Q 2016 Q4 6.70 6.70 67.0 1,165 1.40 35.00 33.00 13,500 60 2.75 14.50 4.35 27.00 305 3.50 16.75 650
Q1 2017 6.75 6.75 67.0 1,150 1.38 34.80 32.80 13,400 59 2.75 14.25 4.30 27.00 300 3.45 16.50 640
Q2 2017 6.80 6.80 66.0 1 1,140 1.36 3 34.60 3 32.50 133,300 58 2.75 1 14.00 4.25 2 26.50 300 3.40 1 15.75 630
Q3 2017 6.80 6.80 65.5 1,130 1.35 34.40 32.20 13,200 57 2.75 13.75 4.20 26.25 295 3.35 15.50 620
Q4 20117 6.880 6.880 655.0 1,1220 1.335 34.000 32.000 13,0000 5 55 2.775 13.550 4.220 26.000 2990 3.330 15.225 6000
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FX Weekly y - USD in fa avour as Fed d rate hike e expectations s rise - 19 May M 2016
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