G10 FX Weekly
Group Economics Macro & Financial Markets Research
ECB’s comments weigh on euro
Roy Teo +65 6597 8616
22 May 2015 • • •
ECB’s Coeure comments weigh on the euro US dollar profits from improvement in investor sentiment and weakness elsewhere We expect EUR/USD to drop below parity between the third and the fourth quarter of this year
ECB’s Coeure weigh on the euro
addition, the FOMC minutes did not surprise on the dovish
Comments from ECB Executive Board member Benoit Coeure
side. Financial markets had already moved expectations about
were the trigger for lower German government bond yields and
the start of the Fed rate hiking cycle to September instead of
a lower euro. He announced in a speech that the ECB would
June. Next week, the second estimate of US GDP will be
frontload asset purchases in May and June ahead of the
released. Expectations are for a 0.9% drop in Q1 compared to
summer lull, when new issuance will dry up and activity eases
the 0.2% for the first estimate of this quarter. We are not as
due to holidays. Indeed, developments in bond markets and
negative as current market consensus, so there is room for the
interest rate expectations continue to drive EUR/USD. What
US dollar to rally. Going forward, we expect the US economy
has changed is that the 10y yield spread and 2y yield spread
to strengthen and a rate hike to arrive in September. We
provide the same signal now. The widening interest rate
continue to expect EUR/USD to move below parity between
spreads (2y and 10y) between the US and Germany have
the third and the fourth quarter of this year but the pair to
been weighing on the euro versus the US dollar. This does not
recover towards the end of the year.
come as a surprise. Weakness elsewhere
Wider spreads across the Atlantic weigh on EUR/USD
The RBA minutes were dovish and this weighed on the AUD.
Spread in %
The NZD eased lower as economic data releases generally
EUR/USD
0.0
1.40
disappointed market expectations. Meanwhile, the yen declined to the lowest level in 2 months despite a stronger than
-0.2
1.30
expected economic print in the first quarter. This is because the large positive contribution from inventory has negative
-0.4 1.20 -0.6
implications for GDP growth in the second quarter. As such inflationary pressures are expected to only recover gradually,
1.10
-0.8
putting more pressure for the BoJ to increase stimulus later this year. Indeed BoJ governor Kuroda will have more support
-1.0 Jan 13
1.00 Jul 13
Jan 14
2y spread Germany-US (lhs)
Jul 14
Jan 15 EUR/USD (rhs)
Source: Bloomberg
to increase stimulus after a BoJ member (who voted against the decision to increase stimulus in Oct 14) term ends on 30 June. He will be replaced by another candidate which is deemed to be a supporter of Abenomics. We expect the Bank of Canada to leave monetary policy unchanged this year, a
Mr Coeure’s comments have not only pushed German
view that financial markets have adjusted to recently.
government bond yields lower, but also resulted in the realization that the ECB is here to stay and tapering or an end of QE is still far off. So the weakness in the euro was because of lower yields and expectations of QE to continue. We expect the euro to weaken further. Recovery of the US dollar Investor sentiment towards the US dollar has improved and this has resulted in it outperforming other major currencies this week. This is mainly because stronger housing data at the start of the week and weakness elsewhere (see below). In
ABN AMRO major currency forecasts EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD EUR/AUD NZD/USD EUR/NZD USD/CAD EUR/CAD EUR/SEK EUR/NOK
22-May 1.1135 121.03 134.77 1.5679 0.7102 0.9340 1.0400 0.7885 1.4123 0.7315 1.5222 1.2225 1.3614 9.2511 8.4202
Q2 2015 1.10 122 134 1.55 0.71 0.95 1.05 0.78 1.41 0.73 1.51 1.23 1.35 9.50 8.25
Q3 2015 1.00 125 125 1.47 0.68 1.05 1.05 0.73 1.37 0.69 1.45 1.27 1.27 9.50 8.25
Q4 2015 1.00 128 128 1.49 0.67 1.05 1.05 0.72 1.39 0.68 1.47 1.30 1.30 9.50 8.00
Source: ABN AMRO Group Economics
Q1 2016 1.05 130 137 1.52 0.69 1.00 1.05 0.7 1.50 0.66 1.59 1.31 1.38 9.50 8.00
Q2 2016 1.05 135 142 1.50 0.70 1.00 1.05 0.68 1.54 0.65 1.62 1.33 1.40 9.50 7.75
Q3 2016 1.10 135 149 1.51 0.73 0.95 1.05 0.67 1.64 0.64 1.72 1.34 1.47 9.50 7.50
Q4 2016 1.15 135 155 1.51 0.76 0.96 1.10 0.66 1.74 0.64 1.80 1.35 1.55 9.50 7.50
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G10 FX Weekly - ECB’s comments weigh on euro
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