FX Weekly
Group Economics Macro & Financial Markets Research
26 May 2016
Moves overdone Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com Roy Teo
US dollar rally to be temporary… …as well as the strengthening of sterling Firmer oil prices support currencies of oil exporting countries Weaker iron ore prices weigh on AUD; RBNZ to pause in June? Resilient Japanese yen and Chinese yuan
Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
Dollar has recovered since the end of April … The US dollar weakened by around 8.5% from February 2016 up to the end of April 2016. It will not come as a surprise that commodity prices and emerging market currencies rallied strongly during this period. However, since the end of April, the dollar has been on a recovery path (+3%) and emerging market currencies and commodity prices (especially metals) have fallen considerably. Precious metal prices have retraced by 4 to 12%. However, oil prices have remained resilient. The upward adjustment in Fed interest rate expectations since 12 May and better-than-expected US data have played crucial roles in this market behaviour.
Long term dollar trend Calculated effective exchange rate US
175 150 125 100 75 50 80
84
88
92
96
00
04
08
12
16
Source: Bloomberg, Bank of England
… but this is expected to be a temporary recovery Is this a re-start of the US dollar rally? In short, no. We see this movement mainly as a short-term US dollar recovery. We continue to hold the view that the multi-year dollar uptrend is over and has turned negative. Short-term waves of strengthening do not
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FX Weekly y - Moves ov verdone - 26 6 May 2016
change e this overall o outlook as long as the US dollar does not breeak above the 200-days moving g average. In a addition, if the Fed F were to hik ke rates this yeear (not our base case), it will be gradual. A 25b bp rate hike by y the Fed this year y is now rouughly priced in by b financial s (taking into ac ccount inflationn expectations) will likely markets. In addition, US real yields decline e. This will weig gh on the dolla ar. So, the nearr-term upside inn the US dollar is limited in our vie ew. What would d change the overall o US dolla ar picture is agggressive Fed rate hikes respon nding to a stron ng economy. We W think this is unlikely. US daata to focus on n ahead of the 14-15 June FOM MC meeting are e: US GDP, corre PCE inflationn and the emplloyment report..
Rate hike expecta ations and the e dollar Fed funds expectations D Dec 2016, in %
USD index
1.00 0
100 98
0.80 0
96 0.60 0 94 0.40 0
92
0.20 0 J 16 Jan
90 Mar 16
May 16 1
Fed funds future Dec 2016 (lhs)
USD index i (rhs)
Source: Bloomberg
GBP continued c to rally Since 26 February, ssterling has bee en on an impre essive recoveryy path, rallying by 6% st a wide baske et of currencies s. This is somewhat surprisingg as the UK Brrexit agains referen ndum (to be he eld on 23 June) draws closer and the mediaa attention is fully on this on for sterling’s topic. The T main reaso s impressive rise is the perceeived lower pro obability of a Brexit. As the graph below shows, sterling s tracks closely the pollling average fo or remaining in the EU. Our base ccase is for no Brexit. B Howeve er, financial maarkets could un nderestimate this pro obability of a B Brexit. Ahead of o the referendu um, we expect uncertainty to increase and ste erling to come under pressurre before rallyin ng again if the rreferendum ou utcome is for no Bre exit.
Rate hike expecta ations and the e dollar Calculatted effective exchhange rate UK
Polling averagge
5 50
92 90
4 48
88 4 46 86 4 44
84 82 n 16 Jan
4 42 Feb 16 6
Mar 16
Apr 16
Calculated effective exchang ge rate UK Source: Bloomberg, Bankk of England
M 16 May Remain (rhs)
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FX Weekly y - Moves ov verdone - 26 6 May 2016
Firme er oil prices s upport currencies of oil exporting cou untries Firmerr oil prices have e supported cu urrencies of oil exporting counntries like the Norwegian N krone, Canadian dolllar (CAD) and Russian ruble. As expected, tthe Bank of Ca anada (BoC) left mo onetary policy rrates unchange ed earlier this week. w We expeect monetary policy to also remain n unchanged th his year. It is lik kely that rising household vulnnerabilities willl be addres ssed by more m macro prudentiial tools. The price action in U USD/CAD is sh howing some encouraging signs th hat a top just be elow 1.32 has formed. f We exxpect the Canadian dollar to strengthen versus the US dollar towards 1.28 in n the coming w weeks.
Weaker iron ore prrices weigh on o the AUD; RBNZ R to pausse in June? Weake er iron ore price es and capital expenditure in the first quarteer of this year weighed w on the Au ustralian dollar (AUD). Nevertheless, businesses’ intentionn to invest in the e current fiscal year y rose, thou ugh at lower lev vels than the previous year. W We maintain ou ur view that the Re eserve Bank off Australia (RBA A) is likely to lo ower the Officiaal Cash Rate (O OCR) by 25bp in August. Thiss is almost fully priced in by fin nancial markets ts. Technical in ndicators imply that t the AUD iss in near oversold territory and hence may ffind some supp port above 0.71 in n the coming w week. Separately, the New Zealand dollar (N NZD) declined to t 0.67 versus s the US dollar as the dollar fiirmed. As the NZD N trade weigghted index is edging e lower, the risk of a 25 5bp rate cut in June has rece eded. Indeed, thhe Reserve Ba ank of New Zealan nd (RBNZ) mayy decide to pau use next month h as they assesss developmen nts surrounding the timin ng of a rate hike by the Fed and the UK refeerendum before e resuming its eas sing cycle in Au ugust.
e yen and Ch hinese yuan Resilient Japanese The Ja apanese yen trraded in the ran nge of 109.00 and a 110.50 in tthe past week as rising Fed ra ate hike expecta ations supporte ed the dollar. Meanwhile, M theere are some signs of higher hedging flowss from Japanes se investors supporting the yeen. Ahead of th he FOMC meetin ng next month, we think that any a yen strength is likely to bee capped arou und 109 with weakn ness limited tow wards 112.
Separrately, the larg ge deviations in the Chinese e yuan fixing inn the past wee ek have reignited d market conccerns that Chin nese policy ma akers are shiftfting away from m a market based d exchange ratte regime. In our o view, the long term objeective to let the e yuan be more market m determ mined has rem mained unchan nged. Howeveer, in practice the t authorrities take a grradual approa ach, turning to stability-oriennted measures s in volatile times. Those measu ures may be suited s to addre ess speculativve forces, as financial marke ets start to antiicipate that the e Fed may tighten monetaryy policy soone er than later. Indeed, I histor ically, a strong ger USD has resulted r in largger capital outtflows from China. Neverthelesss, market bets s that China po olicy makers w will not be able e to handle volatiliity and deprecciation pressure in the yuan has receded recently. We expect the yuan to t decline onlyy moderately to t 6.70 against the USD thiss year.
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FX Weekly y - Moves ov verdone - 26 6 May 2016
ABN A AMRO m major currenc cy forecasts
EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD NZD/USD USD/CAD EUR/CAD USD/SEK EUR/SEK EUR/NOK EUR/DKK
26--May 1..1189 10 09.96 12 23.03 1..4708 0..7607 0..9904 1..1082 0..7228 0..6745 1..2936 1..4475 8..3023 9..2893 9..2635 7..4366
Q2 2016 1.15 105 121 1.40 0.82 0.96 1.10 0.73 0.68 1.25 1.44 8.04 9.25 9.25 7.46
Q3 2016 2 1 1.15 110 127 1 1.42 0 0.81 0 0.96 1 1.10 0 0.72 0 0.68 1 1.22 1 1.40 8 8.04 9 9.25 9 9.00 7 7.46
Q4 201 16 1.15 110 12 27 1.4 48 0.7 78 0.9 96 1.10 0.7 74 0.6 68 1.2 20 1.3 38 8.0 04 9.2 25 8.7 75 7.4 46
Q1 2017 7 1.15 5 110 0 127 7 1.50 0 0.77 7 0.97 7 1.11 1 0.75 5 0.69 9 1.18 8 1.36 6 8.04 4 9.25 5 8.50 0 7.46 6
Q2 2017 1.15 110 127 1.52 0.76 0.97 1.12 0.75 0.70 1.17 1.35 7.83 9.00 8.50 7.46
Q3 2017 1.15 108 124 1.54 0.75 0.98 1.13 0.75 0.71 1.16 1.33 7.83 9.00 8.25 7.46
Q4 2017 1.15 105 121 1.56 0.74 0.99 1.14 0.75 0.72 1.15 1.32 7.61 8.75 8.25 7.46
Q4 201 16 6.7 70 6.7 70 67 7.0 1,16 65 1.4 40 35.0 00 33.0 00 13,50 00 6 60 2.7 75 14.5 50 4.3 35 27.0 00 30 05 3.5 50 16.7 75 65 50
Q1 2017 7 6.75 5 6.75 5 67.0 0 1,150 0 1.38 8 34.80 0 32.80 0 13,400 0 59 9 2.75 5 14.25 5 4.30 0 27.00 0 300 0 3.45 5 16.50 0 640 0
Q2 2017 6.80 6.80 66.0 1,140 1.36 34.60 32.50 13,300 58 2.75 14.00 4.25 27.00 300 3.40 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 26.50 295 3.35 15.50 620
Q4 2017 6.80 6.80 65.0 1,120 1.35 34.00 32.00 13,000 55 2.75 13.50 4.20 26.00 290 3.30 15.25 600
Source: S ABN AMR RO Group Econom mics
ABN A AMRO em merging marrket currency forecasts
USD/CNY (on nshore) USD/CNH (offfshore) USD/INR USD/KRW USD/SGD USD/THB USD/TWD USD/IDR USD/RUB USD/TRY USD/ZAR EUR/PLN EUR/CZK EUR/HUF USD/BRL USD/MXN USD/CLP
26--May 6.56 6.56 67.2 1 1,180 1.38 3 35.61 3 32.40 13 3,585 65 2.93 1 15.53 4.40 2 27.02 314 3.58 1 18.39 691
Source: S ABN AMR RO Group Econom mics
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 2 27.00 310 3.60 17.25 670
Q3 2 2016 6 6.60 6 6.60 6 67.0 1,,165 1 1.38 35 5.00 32 2.80 13,,400 64 2 2.80 14 4.75 4 4.40 27 7.00 310 3 3.55 17 7.00 660
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FX Weekly y - Moves ov verdone - 26 6 May 2016
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