G10 fx weekly 8 may 2015

Page 1

G10 FX Weekly

Group Economics Macro & Financial Markets Research

Dollar recovery ahead

Georgette Boele, +31 20 6297789 Roy Teo +65 6597 8616

8 May 2015   

Government bond developments support the euro… …while the US dollar sell-off continues Conservative win boosts sterling

Government bond developments support the euro…

year. In addition, bonds spread movements will probably

In general, expectations about monetary policy have an

become more dollar friendly.

important effect on currency behaviour. However, since March, developments in bond markets have claimed a leading role.

Conservative win boosts sterling

Initially, the 10y spread between Germany-US and EUR/USD

Sterling outperformed other major currencies following the

moved lower. In April, the recovery in EUR/USD has coincided

results pointing to an outright Conservative majority in

with higher spreads, especially for the last two weeks. The

parliament. This came as a complete surprise as polls had

euro is a very rate sensitive currency. So more favourable yield

suggested that no party would win a majority. With political

spreads are supportive. This has happened in an environment

election uncertainty now behind us, sterling rallied strongly

of an overall improvement in investor sentiment. The rally in

across the board. Going forward, the pace of fiscal

EUR/USD lost momentum around 1.14, where earlier peaks

consolidation will probably be almost 5% GDP during the next

were set (in February). We expect EUR/USD to decline below

government period. The Conservatives rely largely on

1.10 again on positive surprises of US economic data and less

spending cuts. Finally, the Conservatives promised that they

favourable spreads and/or monetary policy developments for

would hold a referendum on whether the UK should stay in the

the euro.

EU by 2017. In the long term, an in-out referendum would be a negative for UK assets.

Bond markets support the euro 10y GE-US spread

EUR/USD (inverse scale)

1.50

-0.5

Mixed commodity currencies Firmer oil prices supported oil exporting currencies like the NOK and CAD. Despite the RBA delivering a 25bp rate cut

-1.0

1.40

earlier this week, the Australian dollar recovered due to market

1.30

speculation that the monetary easing cycle in Australia has

1.20

-1.5

25bp rate cut in the third quarter of this year. As this is not fully 1.10

-2.0 Jan 14

paused. We do not think this is likely and continue to expect a

1.00 Apr 14

Jul 14

Oct 14

10y GE - US spread (lhs)

Jan 15

Apr 15

EUR/USD (rhs)

Source: Bloomberg

…while the dollar sell off continues The US dollar remained under pressure up to the release of the US initial jobless claims report on Thursday. The strongerthan-expected jobless claims supported the dollar. In contrast, Friday’s non-farm payrolls report had no significant impact, as job growth was strong, but average earnings were a bit weaker than expected. For a rally of the dollar to continue, US economic data need to surprise positively in the weeks and months ahead. It is likely that these will trigger an upward adjustment in Fed rate hike expectations for this year and next

priced in by financial markets, we remain bearish on the AUD. The NZD underperformed as financial markets priced in that the RBNZ will cut interest rates later this year. This was triggered by weaker than expected employment numbers.

ABN AMRO major currency forecasts EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD NZD/USD USD/CAD EUR/SEK EUR/NOK

08-May 1.1237 120.07 134.93 1.5459 0.7269 0.9219 1.0360 0.7905 0.7423 1.2107 9.2942 8.3993

Q2 2015 1.05 122 128 1.44 0.73 1.00 1.05 0.75 0.73 1.25 9.50 8.25

Q3 2015 1.00 125 125 1.39 0.72 1.05 1.05 0.73 0.69 1.29 9.50 8.25

Q4 2015 0.95 128 122 1.40 0.68 1.11 1.05 0.72 0.68 1.30 9.50 8.00

Source: ABN AMRO Group Economics

Q1 2016 1.00 130 130 1.47 0.68 1.05 1.05 0.7 0.66 1.31 9.50 8.00

Q2 2016 1.05 135 142 1.50 0.70 1.00 1.05 0.68 0.65 1.33 9.50 7.75

Q3 2016 1.10 135 149 1.51 0.73 0.95 1.05 0.67 0.64 1.34 9.50 7.50

Q4 2016 1.10 135 149 1.45 0.76 1.00 1.10 0.66 0.64 1.35 9.50 7.50


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