USD: bolstered by the Fed
The US dollar continued to appreciate last week. The DXY index reached 84.80 against the backdrop of a steady decline in commodity prices, and there was an upturn in US long rates. While in the wake of the Federal Open Market Committee (FOMC) meeting, the US 10-year rate recovered to 2.62%. Although the subsequent press release was largely unchanged, Fed Funds rate forecasts by FOMC members for 2015 and 2016 were up compared to the previous meeting, even though the Federal Reserve said in the FOMC statement that it would maintain the current target range for the Fed Funds rate for a considerable time. In turn, the revised forecasts by FOMC members stirred the markets, which saw this as a sign that the Federal Reserve is tightening monetary policy. Furthermore, Janet Yellen seemed less concerned by the fact the labour participation rate remains low, with her view being that this is becoming a structural phenomenon.
In the short to medium term, we remain positive on the US dollar given the improvement in US economic activity. That said, we must keep a close eye on the real estate market data released today, and tomorrows durable goods order. However, technically the US dollar has been overbought since August. Although the US dollar’s uptrend is not brought into question, it suggests that a technical correction should not be ruled out – particularly since the “No” campaign won the Scottish independence referendum, meaning sterling could strengthen at the expense of the US dollar.
EUR: EUR/USD heading towards 1.27
EUR/USD extended its correction, with a low at 1.2835. This was predominantly due to the greenback’s rebound after the FOMC meeting, before stabilising just above 1.29 after weaker than expected US real estate data. The disappointment over the European banks long-term refinancing operation (TLTRO), with EUR 82.6bn to be allotted, as opposed to the EUR 150bn expected, did not have a negative impact on the EUR/USD. In short, it seems that banks are not in any great need of liquidity.
Although banks may have preferred to wait for the results of the Asset Quality Review (AQR) in October before turning to the TLTRO, the European Central Bank’s objective of expanding its balance sheet by EUR 1,000bn looks even more daunting. This could prompt the European Central Bank to ramp up its asset-backed securities (ABS) and covered bond purchase programmes, in turn stoking expectations of a fully-fledged quantitative easing (QE) – including purchases of sovereigns – in the coming months. This would then bolster lending to the economy and reduce deflationary pressure. Under these conditions, the EUR/USD will remain under pressure over the coming weeks, particularly if the next business surveys are down once again.
The Markit manufacturing purchasing managers’ indexes (PMI) is expected to decline slightly to just above 50. Similarly, figures concerning lending to the economy are expected to reveal there was another contraction in August. Finally, the downturn in crude oil prices is taking on worrying proportions for the EUR/USD. It appears that the two have become closely correlated, in as much as it has led to a decline in 5Y5Y inflation for the eurozone, to 1.92%. Indeed, this could create deflationary concerns, in turn heightening the probability of fully-fledged QE by the ECB.
JPY: USD/JPY on course towards 112 come the year-end
Of all the G10 currencies, it is the Japanese yen that has recorded the sharpest correction against the US dollar, taking the USD/JPY to nearly 109. The pair has just about retraced its fall since Lehman’s collapse, and is back at its 2008 level. Prospects of further monetary easing by Bank of Japan end-October are also fuelling the pair’s ascent. Come the end of the year, the USD/JPY could appreciate further towards 112, chiefly on the back of a stronger US dollar.
CHF: USD /CHF heading towards 0.95
Following the meeting of the Swiss National Bank (SNB), the Swiss franc appreciated to begin with, notably against the euro, with the EUR/CHF weakening to 1.2065. Like the ECB, the SNB failed to announce any new measures to weaken its currency. Instead, it continued to stress that monetary policy would be unchanged for a prolonged period.
The SNB lowered its inflation forecast for 2015 to 0.2% and its forecast for 2016 to 0.5% from 0.9% previously. This move suggests that the central bank will continue to pursue a very accommodating policy to stave off deflation. Chairman Thomas Jordan indicated that, as yet, the central bank has not been forced to intervene in the foreign exchange market to defend the 1.20 floor rate. In the short term, the EUR/CHF is likely to hold near 1.21, whereas the USD/CHF will continue to appreciate towards 0.95, mainly due to the vigour of the US dollar
GBP: GBP/USD on course to reach 1.660
The GBP/USD rebounded sharply to 1.6460 after the victory of the “No” campaign in the Scottish independence referendum. Sterling was also bolstered by the latest macroeconomic data, notably the further decline in the unemployment rate to 6.2%, the 0.4% month-on-month increase in retail sales in August, and the minutes of the last Monetary Policy Committee meeting – the tone of which remained hawkish. In short, economic fundamentals are regaining the upper hand, which ought to pave the way for a more substantial rebound of the GBP/USD towards 1.660, and of the GBP/JPY towards 183.7
Natixis