Weekly forecast - page 22
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EUR/USD: Look Out Below As Cyclical Low In Sight
Renewed downward momentum for the euro against the US dollar remains firmly in place in the near-term.
EUR/USD is now moving to within touching distance of testing key technical support at 1.0458 which was the cyclical low from March 2015. A break below would open the door for a potential test of parity.
The euro is likely to remain offered in the week ahead driven by positioning in the run up to the Italian constitutional referendum on the 4th December. Comments from President Draghi will also be watched closely ahead of the ECB’s policy meeting next month. The US dollar rally has come a long way in a short period of time increasing the risk of a pullback although any dips are likely to be bought.
The main US economic data release in the week ahead will be US GDP report for Q3 which is expected to reveal a modest upward revision to growth, and the latest ADP survey for November. We do not expect the reports to alter the market’s view that a December Fed hike is a done deal. US dollar performance will continue to be driven more by expectations for faster tightening in the coming years under President Trump.
5-Day Pound To New Zealand Dollar Rate Forecast: Is Risk Aversion To Send The NZD Higher?
Will the Pound New Zealand Dollar (GBP NZD) Exchange Rate Outlook See an Push Higher or a Test of 2016 Lows?
The British Pound was unable to advance against the New Zealand Dollar on Friday, falling by around -0.7% to trade at a near-weekly low of 1.76.
The main source of negativity for the Pound was a statement from Malta that the UK would be unable to stay in the EU single market without loose immigration controls, dashing UK Government hopes of such an outcome.
In domestic news, the Pound was unsettled after second estimates for Q3 GDP growth rates fell on the quarter but rose on the year; elsewhere, Confederation of British Industry (CBI) trades in November rose instead of falling on the month.
Latest Pound/New Zealand Dollar Exchange Rates
On Sunday the Pound to New Zealand Dollar exchange rate (GBP/NZD) converts at 1.77
The NZD to GBP exchange rate converts at 0.565 today.
The NZD to EUR exchange rate converts at 0.663 today.
At time of writing the new zealand dollar to us dollar exchange rate is quoted at 0.704.
GBP NZD Exchange Rate Predicted to Dip if Brexit Questions Remain Unanswered Next WeekThe coming week will bring high-impact UK data from Wednesday to Friday, though the underlying influencer is likely to be any Government response to the claims of restrictions in Brexit negotiations.
Wednesday’s data will be the GfK consumer confidence figure for November, which is expected to show marginal movement towards a positive range from -3 to -1.
Thursday and Friday’s news will cover UK manufacturing and construction PMIs; unhelpfully for GBP NZD forecasts, the manufacturing variant is expected to fall while construction has a slight rise forecast.
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Week Ahead: EUR/USD Bottoming Out; Watching Italian Vote, ECB, RBA, BoC
As the US data flow eases and we head into the pre-FOMC meeting blackout period, the market will have the opportunity to reassess its long USD position and focus on events outside of North America. This is especially true as the focus turns to the Italian Constitutional Referendum and the ECB monetary policy announcement. While keeping a longer-term bullish USD stance, we think selection is key as pairs such as EUR/USD may still be in the process of bottoming out.
The outcome of the Italian referendum should be known by Monday morning CET, with exit polls pointing the way from Sunday 11pm CET. Opinion polls put the ‘no’ vote slightly in front, but with a large number of undecided voters. A ‘no’ vote would not be a prolonged negative for the EUR, in our view, especially if PM Renzi remains. If he were to resign, he would likely receive a second mandate to form government. It would also take a decisive victory by the ‘no’ vote to turn Italy away from its reform process. Austria’s Presidential election re-run, also Sunday, is unlikely to generate significant volatility.
Our economists expect the ECB to extend QE by another six months. An extension of the issue share limit to 50% as well as dropping of the deposit floor on the purchases of EGBs should provide the ECB with enough assets to prolong its asset purchases programme. However, as an extension is widely expected, it is unlikely to trigger sustained currency downside. We also note that an extension of QE is the ECB simply maintaining its current policy stance, not loosening it.
The RBA and BoC also meet next week. We expect the RBA to remain on hold and for its decision statement to broadly confirm market pricing. The bigger local risk for the AUD is the Q3 GDP data release. Based on prevailing partial data, Australia is at risk of recording its first contraction in GDP in over five years. We remain short AUD/USD* to express our bullish USD view. The focus for the CAD in the coming week will be the BoC meeting. The central bank is likely to remain on hold and ambiguous with respect to its bias.
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USD: Trend Is Your Friend. Bullish.
We have revised our USD forecasts higher, expecting a 6% move higher in the Broad USD TWI. Three major policy initiatives as a result of the US election (fiscal stimulus, trade, corporate tax reform) are likely to be USD positive, and we now expect the Fed to hike 6 times by YE18. USD strength will be most pronounced against the low yielders like JPY. Data continues to come in strong and Fed commentary suggests that it is willing to put up with a stronger USD if it's due to an improving economic outlook (as opposed to earlier in the year). We are watching closely for indications on future policy changes.
GBP: Near-Term Outperformance. Neutral.
We maintain ourview that GBP may outperform in the near term, with the potential for GBPUSD to stage a tactical rebound to 1.30. The EU's Dijsselbloem and UK's Davis suggesting that the UK may be able to retain single market access could continue to help GBP lose some of its risk discount. An adjustment of the market's large short GBP positioning could also support the currency. However, we think GBP may weaken again going into Q117 due to falling business investment, which we would use to buy against EUR as one of our top trades for 2017.
CHF: More Room for Strength. Neutral.
We think CHF could have more room for appreciation, particularly against EUR and JPY. The SNB has been concerned about a strong CHF because of local deflation, but Switzerland's CPI has been rising steadily this year and global inflation is also picking up, which could make the SNB more tolerant of CHF strength. The SNB allowing EURCHF to fall below 1.08 (which has been a line in the sand for the SNB previously) may be an early indication of this. We like expressing our constructive CHF view against JPY as they could also be supported by the Eurozone political risks in 2017.
CAD: Best Performing Commodity Currency. Neutral.
We expect CAD to weaken against USD but outperform other commodity currencies. CAD is not as vulnerable as MXN to trade protectionism given a prior free trade agreement which would take effect if the US backs out of NAFTA, though this still remains a risk. However, a better US economic outlook (from other policies like fiscal stimulus) should benefit Canada. 3Q GDP was in line with expectations and the bar for easing from the BoC is high given its downgraded forecasts for 4Q and moderate worries around the housing market. Poloz noted this week that it would take a "significant departure" in the outlook for easing, supporting ourview.
AUD: Structurally Bearish. Bearish.
We are structurally bearish AUD and expect it to underperform NZD. The market has priced too hawkish a path for the RBA given weak employment data, signs of a housing slowdown and our expectation for a negative 3Q GDP print. Australia will also be hurt as China's mini-cycle recovery slows (as we already see in the housing data). While the RBA may not cut rates for the foreseeable future, in ourview it will make sure the market reflects its easing bias, weakening AUD. AUD is also particularly vulnerable to rising US interest rates given its high yield (relatively speaking) status and current account deficit.
NZD: Outperformance vs AUD. Neutral.
We expect NZD to range trade for now but outperform AUD. New Zealand's economic outlook has remained relatively strong with high migration and booming housing supporting growth. The RBNZ's Financial Stability Report this week also posed new concerns over rising house prices. This is likely to be enough to offset the RBNZ worries over the inflation outlook and, in particular, the exchange rate. However, we don't rule out another rate cut or even FX intervention, though the latter would occur only after substantially more FX appreciation. We expect NZDUSD to continue to depreciate due to the USD rally but unless we get substantially higher bond yields or a hit to risk appetite, we expect NZD outperformance of AUD in the near term.
USD: Correction into Year-end. Neutral.
We still expect USD to rally significantly next year but now see a USD correction into year-end as likely. With a rate hike fully priced for December and the Fed saying it will not incorporate expected fiscal policy changes into the outlook until they occur, there is limited room for the Fed to push US bond yields even higher. In addition, we could see additional profit taking on USD longs initiated post-election. Next year, major policy initiatives as a result of the US election are likely to be USD positive, and we now expect the Fed to hike 6 times by YE18. USD strength will be most pronounced against the low yielders like JPY. Improving data in recent weeks supports our call as well.
EUR: ECB Weakens EUR. Bearish.
We expect the EUR to weaken autonomously following the ECB meeting. The ECB has made it clear that they are here to keep monetary accommodation in the market. The decision to extend QE while reducing the size of the program illustrates the ECB's desire to support peripheral bond markets to maintain financial stability. By allowing purchases of bonds in the 2-year sector and below the deposit rate, short-end bond yields should remain low, which will weaken the EUR. We sell EUR against GBP this week.*
JPY: USDJPY Consolidation into Year-end. Neutral.
We think USDJPY can correct lower in the near term as the USD rally temporarily runs out of steam into year-end and US yields consolidate around current levels. In the medium term, reflationary impulses support our structural bullish USDJPY view. Fiscal stimulus-led yield curve steepening and positive risk appetite make long USDJPY one of our favorite trades next year. The BoJ's yield curve management should ensure that global yield curve steepening pushes rate differentials against JPY. We look to buy USDJPY dips near 112.
GBP: Room for Risk Premium Reduction. Bullish.
We stick to the view that GBPUSD could tactically rebound to 1.30/1.31 in the near term as some of the hard Brexit risk premium in GBP has the potential to be priced out. Following news on the UK potentially being able to pay to access the single market, a 'hard Brexit' scenario may become more difficult to achieve with PM May agreeing to publish her negotiation plans and promising that MPs could vote on the final exit deal. The market's short positioning in GBP has also barely changed, suggesting that any GBP rally could be helped by an adjustment of the large short positions. We buy GBP against EUR in our portfolio this week.*
CHF: Not Weakened By SNB. Neutral.
Despite the latest FX reserves number indicating that the SNB intervened in large volumes in November, EURCHF remained unchanged on the month, indicating large CHF buying pressure. The SNB has been concerned about a strong CHF because of local deflation, but Switzerland's CPI has been rising steadily this year and global inflation is also picking up, which could make the SNB more tolerant of CHF strength. We think CHF could have more room for appreciation, particularly if Eurozone political risks come back into focus, and like expressing this view through buying CHF against JPY.*
CAD: Best Performing Commodity Currency. Bullish.
We expect CAD to outperform other commodity currencies and may strengthen in the near-term against USD. CAD is not as vulnerable as MXN to trade protectionism given a prior free trade agreement which would take effect if the US backs out of NAFTA, though this still remains a risk. However, a better US economic outlook (from other policies like fiscal stimulus) should benefit Canada. Data has remained weak with another disappointing trade report this week. However, this week's BoC meeting provided no surprises and while the Bank pointed out uncertainties around the outlook, they reaffirmed their neutral bias and made clear the bar for easing is high. Poloz noted this week that it would take a "significant departure" in the outlook for easing, supporting ourview.
USD: Bullish Following Fed. Neutral.
We previously saw USD beginning to rally again in the new year. Following the hawkish Fed meeting, we are bringing forward that expected strength and expect USD to rally in line with the themes we have been discussing. The revising up of the 2017 dots and the neutral rate, along with Yellen's pushback on her support for an overheating economy, are all hawkish signs and more reason for the rates market to reprice higher. Next year, major policy initiatives as a result of the US election are likely to be USD positive, including fiscal stimulus, risk of protectionism and corporate tax reform. USD strength will be most pronounced against the low yielders like JPY.
EUR: Making New Lows. Bearish.
Amidst the broad USD strength from a hawkish Fed, EURUSD has reached the lowest level since January 2003, giving it more momentum to the downside. We expect EURUSD could continue to head towards parity driven by USD strength and an accommodative ECB. The ECB allowing purchases of bonds in the 2-year tenor and below the depo rate weakens the EUR by lowering front-end yield differentials – which EURUSD is more sensitive to – and steepening the yield curve which will help bank profitability and encourage the export of capital.
GBP: Potential for Rebound. Bullish.
We maintain the view that GBPUSD could tactically rebound to 1.30/1.31 going into year-end. With the BoE maintaining its neutral stance, coupled with recent UK data such as CPI and retail sales holding up well, the downside in GBP is likely to be capped. GBP also has a high 'hard Brexit' risk premium priced in, and with recent news indicating that this risk is lessening, there is potential for some 'hard Brexit' discount to be priced out. We remain short EUR/GBP.*
CHF: More Strength Tolerated. Neutral.
We continue to look for CHF strength against selected currencies such as JPY. The latest SNB meeting adds further support to our argument that the SNB may be more tolerant of CHF strength. The statement that they will intervene "while taking the overall currency situation into consideration" suggests that they may focus more on the CHF TWI which is not at extreme levels, allowing more room for CHF appreciation. With a busy Eurozone political risk calendar in 2017, CHF could also benefit from safe haven demand.
CAD: Best Performing Commodity Currency. Bullish.
We expect CAD to outperform other commodity currencies. CAD is not as vulnerable as MXN to trade protectionism given a prior free trade agreement which would take effect if the US backs out of NAFTA, though this still remains a risk. However, a better US economic outlook (from other policies like fiscal stimulus) should benefit Canada. Data has remained weak with this week's poor manufacturing sales report following a poor trade report last week. However, last week's BoC meeting provided no surprises and while the Bank pointed out uncertainties around the outlook, it reaffirmed its neutral bias and made clear the bar for easing is high. Poloz noted that it would take a "significant departure" in the outlook for easing, supporting ourview.
NZD: Outperformance vs AUD. Neutral.
We expect NZD to outperform AUD but weaken against USD. New Zealand's economic outlook has improved with high migration and booming housing supporting growth. The half-year update this week from Bill English confirmed this, with growth being revised higher and rising budget surpluses. This is likely to be enough to offset the RBNZ worries over the inflation outlook and, in particular, the exchange rate. However, we don't rule out another rate cut or even FX intervention, though the latter would occur only after substantially more FX appreciation. We expect NZDUSD to continue to depreciate due to the USD rally but we expect NZD outperformance of AUD in the near term unless we see worsening data in New Zealand or dovish rhetoric from the RBNZ.
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USD: Time To Be Selective In Longs; 2 Trades To Consider
The greenback has surged since the surprise election of Donald Trump in early November. The broad trade-weighted nominal effective exchange rate is within striking distance of its all-time high set in 2002. It is also up 4% from over a year ago, though this pace is much smaller than the rallies seen over the past two years. The recent bounce nevertheless reflects a few interrelated factors that should continue to reinforce broad USD strength in 2017-H1. These include:
1. Rising real and nominal rates in the US against the rest of the majors 2. Divergence in business cycles and varying timeframes for closing output gaps and 3. Scope for fiscal stimulus that amplifies some of the aforementioned drivers. 4. USD funding concerns and tighter global liquidity conditions.
Taken together this framework argues that the USD rally should persist into early next year. As market liquidity deteriorates into year end, however, we caution about chasing the move now. Less liquidity and a lighter news flow suggest choppy trading conditions, increasing the possibility for further position squaring.
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Goldman Sachs' China outlook for 2017: "long $/CNY is one of our 2016 Top Trades"
In brief from Goldmans on China next year
Best Euro To British Pound (EUR GBP) Exchange Rate For Investors On New ECJ Trade Ruling
The EUR to GBP exchange rate continued to advance on Friday afternoon as the day’s UK data failed to make a lasting impression on GBP traders.
Movement in the euro to pound sterling exchange rate is likely to continue on its current trajectory in the coming week unless Brexit jitters worsen over the holiday period.
Next week’s German retail sales results and UK house price figures are unlikely to cause any shifts in EUR GBP exchange rates either.
The EUR to GBP exchange rate continued to rise today as Sterling sentiment was pressured by a new trade ruling from the European Court of Justice (ECJ).
With the mood towards the Pound remaining decidedly bearish the EUR/GBP extended its gains further ahead of the weekend.
The finalised third quarter UK GDP report encouraged further selling of the Pound, revealing that the current account deficit had widened markedly in the quarter.
Given the softness of Sterling this exacerbated concerns over the potential detrimental impact of the Brexit vote on the health of the UK economy and could be seen to raise the odds of the Bank of England engaging in further policy easing.
EUR GBP continued to trend upwards on Friday after the ECJ made a landmark ruling concerning a free trade deal with Singapore.
Eleanor Sharpston, the European Court of Justice Advocate General ruled that in order to ratify the trade deal it must be agreed upon by all member states, with a total of 38 national and regional parliaments being required to vote on the deal before it can be finalised.
This could complicate any of Prime Minister Theresa May’s plans for any trade deal with the EU once Britain leaves as the deal is likely to face the same process and caused further concerns for investors that a new deal could take years to pass through each parliament.
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