G10 FX Weekly
Group Economics Macro & Financial Markets Research
28 January 2016
Improvement in sentiment Georgette Boele
• Downward adjustment in Fed rate hike expectations weighs on USD…
Co-ordinator FX & Precious Metals
• …and the euro profits
Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
Roy Teo
• Recovery in oil price supports NOK and CAD… • …while AUD is supported as inflation firms… • …but NZD declined after RBNZ signals further rate cuts
Senior FX Strategist Tel: +65 6597 8616
Downward adjustment in Fed rate hike expectations weighs on USD…
roy.teo@sg.abnamro.com
Ahead of the FOMC meeting market expectations about possible rate hikes had been scaled down. Therefore, the US dollar was under pressure. This together with lower oil prices and hopes of global monetary stimulus meant that investor sentiment was more constructive. The statement was more dovish-than-expected and as a result the US dollar remained slightly under pressure. Financial markets now expect only one Fed rate hike for this year. We judge that they may have gone too far. We still expect three rate hikes of 25bp with the next rate hike being scheduled for June. Though the risk has certainly increased that there will be later or fewer rate hikes. 2y spread Germany-US and EUR/USD 2y spread in %
EUR/USD (inverse)
3.0
1.60
2.0
1.50
1.0
1.40
0.0
1.30
-1.0
1.20
-2.0
1.10
-3.0
1.00 08
09
10
11
12
2Y spread Germany-US (lhs)
13
14
15
16
EUR/USD (rhs)
Source: Bloomberg, ABN AMRO
On the other side of the Atlantic, we expect the ECB to reduce the official deposit rate to -0.5% with a 10bp rate reduction in March and a 10bp rate cut in June. In addition, we expect an increase of the asset purchase program by 10bn per month at the March meeting. If investor sentiment improves again on the back of improvement in economic data and a stabilisation in oil and other commodity prices, monetary
Insights.abnamro.nl/en
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G10 FX Weekly - Improvement in sentiment - 28 January 2016
policy divergence should make a come-back as main driver in currency markets. Therefore, we expect EUR/USD to move to parity during the course of this year. ‌and the euro profits A re-occurring theme is that the deterioration in financial markets since the start of this year has resulted in a relatively resilient euro. Analysts suggest that the euro seems to have become a safe haven currency. We disagree with this conclusion. When investor sentiment deteriorates, investors tend to move back into assets that appear to be less risky and therefore often pay low or even negative interest rates (reversal of interest rate carry or growth carry trades). In addition, currencies of countries that have a current account surplus, often receive support as well. The euro and the yen have the characteristic of having low interest rates and are backed by a region/country with a current account surplus. Historically, the yen has traded as a safe-haven currency. Does this mean that the euro is a safe haven currency now? We don’t think so. A safe haven asset has an extra feature which makes a real difference in times of severe stress namely liquidity. On this front the US dollar is unique because of the depth in their financial markets.
FX performance since last Thursday In %, with the USD as basis
2 1 0 -1 -2 NOK
CAD
AUD
SEK
GBP
EUR
CHF
NZD
JPY
Source: Bloomberg, ABN AMRO
Recovery in oil prices supports NOK and CAD A recovery in crude oil prices supported the Norwegian Krona and Canadian dollar. Both currencies have been heavily sold off given the bearish momentum in oil prices in recent months. Looking ahead, we still see a material risk of a rate cut by the Bank of Canada in April. The divergence in monetary policy between the US and Canada is expected to weigh on the CAD this year. We maintain our year-end USD/CAD forecast of 1.48. The risk has also increased that the Norges bank will also reduce interest rates on 17 March to dampen the impact of low oil prices on the economy.
AUD supported as inflation firms The Australian dollar (AUD) was supported after inflation in the last quarter of 2015 came in slightly higher than market expectations. We expect temporary factors (federal excise tobacco tax increase which came into effect from 1 September 2015) and seasonal demand for recreation and cultural services to fade and inflation to trend lower in the coming quarters. Slower house price inflation and a soft labour market will continue to weigh on inflation outlook. A weaker AUD is also needed to cushion the economy given
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G10 FX Weekly - Improvement in sentiment - 28 January 2016
that Australia’s key commodity export prices have declined twice as much compared to the AUD (against basket of currencies of its main trading partners) in 2015. We expect the Reserve Bank of Australia (RBA) to lower the OCR by 25bp to 1.75% in May. Our year end AUD/USD forecast is 0.62.
NZD declines after RBNZ signals further rate cuts The New Zealand dollar (NZD) came under some pressure after the Reserve Bank of New Zealand (RBNZ) kept the Official Cash Rate (OCR) unchanged at 2.5% but signalled that further policy easing may be required over the coming year to ensure that inflation returns to the middle of 1-3% target range. We expect the RBNZ to lower the OCR by 25bp to 2.25% as soon as March. As this is not fully priced in by financial markets, a weaker NZD towards 0.62 is expected by the end of this quarter.
BoJ stimulus expectations weigh on JPY A combination of improving risk sentiment and expectations that the Bank of Japan (BoJ) may increase monetary stimulus sooner rather than later pushed the Japanese yen (JPY) towards 119 against the USD. Indeed, we expect the BoJ to strike a dovish tone on 29 January, highlighting that downside risk to their inflation projections last made in October 2015 has increased. This will pave the way for an increase in their qualitative and quantitative easing program in April. Our year-end USD/JPY target is 130.
ABN AMRO major currency forecasts Change in red/bold
EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD NZD/USD USD/CAD EUR/SEK EUR/NOK EUR/DKK
28-Jan Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 1.0902 1.06 1.04 1.02 1.00 1.00 1.02 1.05 1.10 118.79 120 123 126 130 126 123 120 120 129.50 127 128 129 130 126 125 126 132 1.4259 1.41 1.37 1.32 1.33 1.35 1.40 1.46 1.57 0.7646 0.75 0.76 0.77 0.75 0.74 0.73 0.72 0.70 1.0152 1.04 1.08 1.12 1.15 1.15 1.13 1.14 1.09 1.1068 1.10 1.12 1.14 1.15 1.15 1.15 1.20 1.20 0.7078 0.68 0.66 0.64 0.62 0.64 0.68 0.70 0.72 0.6459 0.62 0.60 0.58 0.58 0.60 0.62 0.64 0.66 1.4072 1.44 1.46 1.47 1.48 1.40 1.38 1.35 1.30 9.2790 9.50 9.50 9.50 9.50 9.25 9.00 8.75 8.50 9.4266 9.50 9.25 9.00 9.00 8.75 8.50 8.25 8.00 7.4624 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46
Source: ABN AMRO Group Economics
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G10 FX Weekly - Improvement in sentiment - 28 January 2016
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