EUR/USD: pushed lower by ECB
The EUR/USD extended its slide to 1.27, fuelled by expectations of a full QE by the European Central Bank (ECB). Following the disappointing September TLTRO and concerns over the success of the ABS and covered bonds purchase programmes, the market has doubts over the ECB’s capacity to expand its balance sheet by EUR 1,000bn in coming quarters. Also, the deterioration of the Eurozone business surveys, the 1.5% contraction in lending to the economy in August and the decline in inflation expectations support the scenario of a full QE, which would enable the ECB to expand its balance sheet to EUR 1,000bn easily enough by buying sovereign debts.
As a result, recent statements by Mario Draghi suggesting the ECB could announce further nonstandard measures accelerated the EUR/USD’s slide towards 1.27. Our scenario of a decline by the EUR/USD towards 1.23 in 2015 is still on, but it could unfold more rapidly than envisioned if the ECB decides on a full QE even before the end of the year, which we doubt at this point in time.
USD: DXY dollar index heading towards 86.4
The US dollar extended its recovery, bolstered by some good macroeconomic data, notably a strong 18% month-on-month increase in new home sales in August, and continuing prospects of a hike in the Fed Funds rate mid-2015. The DXY dollar index is currently testing a major resistance at 85.4 and is poised to break out above this level sooner rather than later, probably next week.
A raft of economic indicators will be published next week, notably the Employment Situation Report and ISM business surveys. Expectations are that job creations will reach 200 thousand in September, which ought to support expectations of a hike in the Fed Funds rate mid-2015. Despite appreciating by more than 7% since the start of July, the DXY dollar index will have some upside potential, although technically the index is overbought and a temporary consolidation cannot be ruled out.
EUR/USD towards 1.244
Under these conditions, the EUR/USD should correct next week in reaction to a weaker euro and a stronger US dollar. In the run-up to the publication of the Employment Situation Report and ECB meeting next week, the EUR/USD is likely to correct towards 1.266, then quickly 1.244 if the ECB continues to suggest a full QE remains probable and/or the Flash Estimate published next week indicates that annual inflation declined below 0.3%. The DXY dollar index could appreciate to 86.4 next week.
USD/JPY: still heading higher towards 110.6
The Japanese yen corrected sharply in the face of a stronger US dollar. The slowdown in Japanese growth, which should be confirmed by the Q3 Tankan Survey published next week by Bank of Japan, strengthens the probability of further measures by the central bank, in turn weakening the yen. However, the yen’s sharp decline is not welcomed by the government, which sees in this a risk for the Japanese economy, its view being that the currency’s adjustment is now over. It has to be said that the Japanese yen is now undervalued in terms of its real effective exchange rate. In fact, it is mainly the swiftness of the yen’s slide that is worrying the government, as the elasticity of Japanese exports to the exchange rate has deteriorated in recent years. In particular, the sharp fall of the yen since the start of 2013 has not had much of a positive impact on Japanese exports. Furthermore, the weaker yen is driving up the cost of imports, especially for imported energy. This ought to penalise further the country’s trade balance, hence Japanese growth. Whatever might be said by the government, this is unlikely to lead to a sharp upward correction by the Japanese yen. The USD/JPY will remain mainly under the influence of a still strong US dollar. In the very short term, the USD/JPY could appreciate to 110.6 before something of a correction from mid-October, with some profit-taking likely during the quarterly earnings reporting season. The underlying uptrend by the USD/JPY will not be brought into question, however, with the pair set to appreciate to 112 and even higher in 2015.
GBP: turn buyer on any correction towards 1.61
Sterling did not rebound as hoped in the wake of the Scottish referendum. It managed, with some difficulty, to hold at our 1.6635 buy level, mainly after the latest statements by Mark Carney warning that short rates remaining durably low could encourage risk-taking and that an interest rate hike was imminent. Given the absence of a rebound despite Mark Carney’s hawkish rhetoric, we have formed the view that it might be preferable to turn cautious on sterling, which could correct temporarily in the near term. Many statistics will be published next week, which ought to confirm the vigour of the British economy and heighten anew expectations of a hike of the Bank of England’s bank rate. All in all, therefore, we recommend turning buyer of the GBP/USD on any significant correction towards 1.61.
USD/CHF: heading higher towards 0.96
In the face of a weaker euro, the EUR/CHF held near its 1.20 floor rate, which was defended once again by the Swiss National Bank Chairman. Thomas Jordan reiterated that the Swiss franc remained overvalued and that, therefore, the central bank stood ready to intervene in the foreign exchange market, without any limits on purchases of foreign currencies. In the short term, the EUR/CHF will hold at 1.20, whereas the USD/CHF should extend its rise, chiefly on the back of a strong US dollar. Our short-term target has been revised to 0.96, bearing in mind we see a restoration of parity in 2015.
Natixis