EUR: we remain negative on the single currency
As expected, the European Central Bank kept its monetary policy on hold last week, with no new measures announced likely to impact the euro. In fact, the EUR/USD benefited from the outcome of the meeting, recovering back above 1.36 with a high of 1.3645. The central bank’s 2014 growth forecast was revised upwards to 1.1%, while its inflation forecasts were shaded down to 1.2% for 2014 and 1.3% for 2015. Several members still believe that the risks overhanging the economy remain tilted on the downside, as reflected by the latest business surveys. In addition, President Mario Draghi confirmed the central bank’s forward guidance and minimised the necessity to set a negative deposit rate for the deposit facility – though the possibility of its implementation was discussed during the monetary policy meeting. The rebound in inflation from 0.7% in October to 0.9% in November rules out the threat of deflation – at least for the time being – which means there is no real urgency for central bank action. And although the ECB stated that a new LTRO (long-term repayment option) was not currently on the cards, such a strategy could be envisaged as necessary, although only if the additional liquidity goes into the real economy. Under these conditions, there was a rise in German long rates last week – notably the two-year rate, which increased by four basis points to 0.21%, whereas the week before it remained at 0.13%. Logically, the EUR/USD benefited from the sharp widening of the two-year spread. Even so, we remain cautious and are therefore sellers of the EUR/USD above 1.3680. Short positions on the single currency could increase as visibility improves on the timing of the Federal Reserve’s tapering (which we predict will occur in January).
USD: stronger
The greenback did not benefit from the positive macroeconomic indicators out of the recent ADP Employment Report and November ISM manufacturing survey. This was in addition to an upward revision of Q3 GDP to 3.6%. Having been disappointed several times, the market now seems somewhat cautious when it comes to predicting the Federal Reserve’s next steps, especially since its rhetoric remains particularly dovish. The 10-year rate experienced some tension in reaction to the economic improvement, rising to 2.86% (its highest level since September). Concern is growing, meanwhile, about the number of jobs created in November. We estimate there could be around 190,000 job creations, with risks tilted on the upside given the decline in initial claims and the strong increase in private payrolls according to the ADP (national employment) report. Market reaction will therefore be inevitable, as the labour market has been improving for several months and should warrant a scaling-back of Treasuries and Mortgage-Backed-Securities purchases from January. In the coming weeks, we expect the US dollar to rebound. Most likely, the Fed will attempt to limit strains on long rates (notably mortgage rates, which have risen back to 4.46%), by maintaining a dovish rhetoric. As a result, the greenback’s recovery will be slow.
JPY: still weaker
The current environment – marked by an upturn in US long rates – is favourable to capital outflows, as Japanese investors hunt for higher yields. According to the Ministry of Finance, Japanese investors were net buyers of foreign bonds for the eighth consecutive week. This contributed to the USD/JPY’s rise to 103.38 before profit-taking set in (triggered by the stock markets’ correction). Consequently, the yen pulled back to a low of 101.6. As we expect the US dollar to rebound, we see the USD/JPY recovering towards 103.4. Hence, we would be buyers of the pair on any correction below 102, to play its rebound. Similarly, we expect the EUR/JPY to appreciate gradually to 141.
GBP: move back into GBP/USD on any correction
Sterling continued to appreciate last week to a high of 1.6443 against the US dollar, before consolidating and falling back to 1.6330. Even so, sentiment remains positive for the currency, which has been bolstered by the positive economic outlook. The latest Purchasing Manager’s Index (PMI) surveys remain upbeat for all sectors of activity. When the US Employment Situation Report is published this week, the GBP/USD could weaken temporarily. This would present an opportunity to buy and play a gradual recovery towards 1.645. Also, take advantage of the EUR/GBP rebound to 0.8375, to play a pullback towards 0.8250. We still expect the EUR/GBP’s slide to accelerate further in 2014.
CHF: buy USD/CHF
In reaction to the stock markets’ correction last week, the Swiss franc appreciated against both the euro and the US dollar. The Swiss currency benefited from the good manufacturing PMI survey (increasing to 56.5 in November) and the recovery in industrial production (up 0.7% year-on-year in Q3 after a 1.1% decrease in Q2). This week, watch out for consumer prices – which are expected to show a 0.1% decrease year-on-year for November – and for the meeting of the Swiss National Bank. The central bank will likely keep its monetary policy on hold, and reiterate the 1.20 floor rate for the EUR/CHF. With this in mind, we would be tempted to turn buyers of the USD/CHF around 0.896, to play a rebound towards 0.92. As for the EUR/CHF, it is likely to remain under pressure below 1.23.
AUD: still under pressure
The Australian dollar remains under significant pressure in the face of the Reserve Bank of Australia’s rather neutral stance on its monetary policy and its negative stance on the strength of the AUD. The central bank’s view is that the currency needs to be weaker to stimulate growth in non-mining sectors. In this respect, the weaker-than-expected GDP growth in Q3 (+2.3%) and the higher-than-expected current account deficit in Q3 (AUD 12.7 billion) weighed on the Australian dollar last week. Keep an eye on the publication of the November employment data and NAB business surveys at the end of this week. Before that, the publication of the US Employment Situation Report could bolster the USD at the expense of the Aussie dollar. We therefore remain negative on the AUD/USD, which we see weakening towards 0.885 in coming weeks.
NZD: outperformance
Last week, the New Zealand dollar put up a stronger resistance to renewed risk aversion than the Australian dollar and the AUD/NZD tested our 1.10 target. The New Zealand currency continues to be bolstered by prospects that the Reserve Bank of New Zealand will raise its interest rates in 2014, thanks to improved economic indicators. While the central bank is expected to maintain the status quo at its meeting this week, its comments on the NZD will be of great importance. In addition, it could consider some tightening of monetary conditions in response to the still upbeat property market. In this context, the AUD/NZD could extend its decline to 1.09 in the very near term.
NOK: EUR/NOK to extend its rise
The Norwegian krone corrected following Norges Bank’s revision of its key policy rate over the next three years. This rate is now expected to reach 1.5% in 2014 (vs. 1.75% previously), 1.75% in 2015 (vs. 2.0%) and 2% in 2016 (vs. 2.50%). These revisions were prompted by the central bank trimming its forecasts for inflation. Excluding food and energy, inflation is now expected to reach 2.0% in 2014 vs. 2.25% previously. It also revised its growth forecasts, which are now 2.0% in 2014 (vs. 2.25% previously) and 2.5% in 2015 (vs. 2.75% previously). This week, watch out for inflation data and manufacturing output, the latter of which is expected to recover to +0.3% month-on-month after a 0.2% decrease in September. In this context, the EUR/NOK could clamber to 8.47.
Natixis