IGM FX and Rates
03 Apr 2020
China Insight: Potential scenario of special bond supply
|Currency Forecast Matrix - all vs USD||Last Updated Feb 6|
Feb 6 - WINNERS
A decent start to the year as IGM win latest one and three-month G10 currency forecast tables this week in FX Week's FX polls of 30-plus leading firms.
This is what we told FX Week.
Our relatively neutral-to-USD positive forecasts proved largely productive in 2018 and we decided to hold these views despite the changing backdrop of softer global growth outlooks and expectations of slower Fed tightening this year (see bottom middle of Dashboard, a rate cut as seen as more probable at 15% vs 8% hike) and less obvious Dollar props through the course of the period.
One reason we have not changed estimates much since late 2018, unlike many of the big investment banks who have become big USD bears, is that we still struggle to find obvious sustainable alternatives to the Dollar:
USD/JPY - The Yen intermittently proves popular on safe haven flows, but following the January BOJ meeting rate cut probability for 2019 (now around 20%) exceeds that of a hike by some distance. Off highs, but Dollar resilience will be a theme through the year generally and we forecast 111 in 12 months.
EUR/USD � We have long described the ECB's H2 intimation that a rate hike would be coming in Q4 2019 as optimistic and we disagree with those seeing yield convergence this year. IGM see an EZ economy with net downside risks and political concerns still weighing. Maintain our 1.15 12 months forecasts and staying within ranges, as the EZ economy and ECB disappoint in 2019.Many of the Dollar bears have cited upcoming yield convergence as part reason for their turn in stance. We do not buy that and economies like the EZ are just not strong enough to withstand potential slowdowns elsewhere. We could see a (more dovish) change in Draghi's forward guidance, perhaps as early as Ma, as well as flagging a possible new TLTRO.
EUR/JPY � This market is one of our favorite gauges of broader market sentiment and that is with growing negative risks, with the US-China trade talks showing few real signs of breaking the current impasse. We see the mid-120s trade at least until the second half of the year. Forecast 132.25 in 12 months on expectations the global outlook becomes less pessimistic, ie no recessions in the major economies, China stimulus positively impacts and trade disputes do not become an all-out war.
GBP/USD � On balance, we still expect an eventual Brexit that is satisfactory for both sides and markets. However, for now, all that markets can agree on is that a no-deal Brexit is unlikely and though there has been some extra reassurance on parliament seemingly taking more control of the process the House of Commons is still gridlocked. Near consensus among the big firms for 2019 was the belief that the Pound was most undervalued currency. We support this view to an extent and see an overdone charge to 1.47 in 12 months. After a Brexit deal is secured which supportively allows the UK to keep close ties with the EU, BOE rate hike expectations will rise and we'll see at least one 0.25% move in 2019.
USD/CHF � Relatively bullish estimates still, as the SNB maintain their policy of negative interest rates and willingness to intervene in FX markets to stem Franc gains. We see 1.05 in 12 months, as the Swissy even underperforms in times of increased risk aversion.
Ahead, in the ongoing debate of whether the Usd goes up or down in 2019 we do not think enough attention has been placed on the prospect of the US economy outperforming again. US growth could slow towards 2.5%-2.6% this year vs near 3.0% last, but a combination of lower taxes, compulsory overseas profits repatriation, increased deregulation and immediate expensing of capital expenditures should encourage increased capital expenditure.
There is of course the enigma of Trump still to bear in mind. Though we do not expect major broad Usd losses this year we will have to pay attention to the president's attitude towards so many potentially impacting factors such as the value of the Dollar, whether trade wars begin and end with China and his relationship with Congress and whether he'll be able to push his agenda through.
Dec 17 - THE START OF 2019
It's always a big one, forecasts for the start of the next year.
There is a pressure to change, but we do not feel like revising things that much over the 3, 6 and 12 months periods just yet.
Our largely neutral-to-USD positive forecasts have proved largely productive in 2018 and we are loath to give up on these trends and our bias just yet.
We do expect a changing backdrop in 2019.
Like many of the banks/investors, we also suspect that we might have already seen an economic peak in the US (4.2% in Q2?). Generally, softer global growth forecasts suggest that it's not just the US who will feel the strain with question marks on the outlooks of China, the EZ and the rest of the developed economies also.
That should mean slower Fed tightening next year (two seems a realistic starting point) and less obvious USD props through the course of the period.
However, one reason we did not change estimates much in H2 particularly was that we'd need an alternative, one or a bunch of currencies that are obviously attractive. Going into 2019, it remains the case that they are thin on the ground.
EUR - Clearly, the ECB has started down the path to normalisation by putting a halt to QE, but policy will likely remain very accommodative in 2019. Further, staff estimates for next year were lowered for inflation and growth. Politics will be to the fore again and looks a weight, with EU parliamentary elections scheduled for May. Italian budget issues are not yet resolved, Macron's France has fallen increasingly under the same microscope and Merkel and Germany is no longer the stable govt (and economy) that we have previously been able to take for granted. We are not here to be overly dramatic, but we think the EZ is a risk in 2019. No crisis predicted, but what happens if the UK manages to actually implement a satisfactory Brexit and one of the populist govts in the zone look longingly at greater independence as the answer to their problems?
Current forecasts 1.15, 1.18 and 1.15. We will change Eur/Usd to 1.10, 1.13 and 1.15 and unlike some of the banks we think the Euro will struggle to recapture 1.20+ during the period.
JPY � Talk about accommodative policy. The Japanese economy continues to show positive signs, but the BOJ is not seen as accelerating the normalisation process any time soon as the 2.00% prices goal remains an elusive target. Much will depend once again on broader market sentiment and whether the Yen can regain its outsize safe haven prop. Whilst US-China trade discussions are yet to bring official agreement this might have to wait, as some investors will stay cautious on the possible negative impact of a deterioration on Japan/the rest of the Asian economy as well as concern that Trump might turn his ire on Tokyo and its admin for artificially keeping its Yen down via a low low interest rates policy. So Usd/Jpy could rise in H1 to new highs beyond 115, but deficits/surpluses differentials could weigh in the second half of 2019 and spark a drop.
Current forecasts are for 110, 112 and 115. We will change Usd/Jpy to 117, 113 and 111 amid possible pressure from the US admin to keep a cap on the Dollar to ensure strong US stocks performance.
GBP � Oh the 'Proud Pound'! What to do with this volatile EM and temptation to believe that this Brexit mess will never get sorted. As we end 2018 amid worries of govtal collapse, no-deal and even UK PM Corbyn in 2019, we maintain that somehow these two dysfunctional families, the UK and EU, will eventually have to resolve this mess to the mutual benefit of the two parties and an orderly Brexit. That should be good for the economy and a prop for BOE rates in 2019 (and at least one hike?) for a European FX outperformer.
Current forecasts are 1.30, 133 and 1.37. We will change Gbp/Usd (with some trepidation) to 1.32, 1.40 and 1.47 as we agree with many of the banks that the Pound is highly undervalued (in the absence of Brexit anyway!). Even if it all bombs, the prospect of a second referendum could even stir Gbp further, particularly if the remain option is included. We do not rule out, however, that the falling off a cliff scenario is viewed as an increasing possibility in the interim and a 1.20/1.23 run is not seen first!
CHF � Recall last week's SNB included serious downside revisions to inflation forecasts for 2019 and 2020 (to 0.5% and 1.0% vs of 0.8% and 1.2%). Jordan and co also indicated no changes to monetary policy and we think they will stay behind the ECB regarding a tightening outlook. Positive risk could emerge via European politics and if UK and Brexit and the Euro and EZ states' budgets and populists leaders issues escalate the Swissy could emerge as a safe haven of choice amid some expectations the SNB could show greater restraint intervention wise near-to-med term.
Current forecasts are 1.00, 1.02 and 1.05. We will change Usd/Chf only slightly to 0.98, 1.01 and 1.05.
CAD � We wrote a Forecasts special in mid-Jul asking the question where is the BOC Cad support? It's worth a reminder that the BOC has hiked interest rates five times since Jul 2017. That obviously outguns all other G10s apart from the Fed and the Usd, which contrasts pretty favourably (seven 0.25% rises since Dec 2016). Sitting about half way up the G10 GDP table too and Canada and the Loonie should feel the benefit of the new NAFTA, ie the USMCA, and sitting around the Usd 60/brl currently we cannot see too much in the way of greater oil losses in 2019 (Usd 45/50 base?). So, overall, we think the Cad is also one of the more undervalued G10s out there and we look for some signs of greater demand next year, at least vs some of the more vulnerable crosses.
Current forecasts 1.33, 1.27 and 1.25. We will change Usd/Cad only slightly also to 1.36, 1.31 and 1.26.
Nov 14 - THE LACK OF GROWTH ALTERNATIVE
Last time out, it was all about the mid-terms.
See below, then we didn't really see it as a DOLLAR game changer. The expected outcome that did ultimately pan out, ie Dems taking the House, drew minor losses, but they were probably even more brief/limited than most expectations.
The latest run to a new 2018 DXY best of 97.693 has been part inspired by high expectations/probability of a Fed hike in Dec. See bottom middle of Dashboard, around 76.0%, as US data continues to show strength, most recently evidenced by the US Oct NFIB. Though moving off Aug's 108.8 peak at 107.4 small business optimism continued its two-year streak of record highs, setting the stage for solid economic and employment growth in Q4, while inflation and interest rates remain historically tame. Small businesses are moving the economy forward.
Also, in the last few days, there has been some positive speculation that even though the Reps have lost control of Congress post mid-terms bi-partisan support for infrastructure projects can still be achieved and the US pro-growth story can continue into next year.
Props then, but we are slightly surprised that the Dollar is holding up so well given:
So, we revert back to our mantra for much of 2018. Okay, we'll tweak it a touch given the repetitive nature of it and ask where is the Usd alternative?
That could well be a main factor behind the latest moves. There might not be one.
G10 rivals are arguably split into two camps:
Meanwhile, the negative growth picture is impacting and after some very mixed data the softer than forecast -0.2% q/q GERMAN Q3 GDP has proved a Euro weight, while the JAPAN numbers were even more horrific (-1.2% q/q annualised). Advance data out of the US was stronger than expected at 3.5% (annualised q/q).
We had previously talked of a possible top and the beginning of a sustained Dollar correction towards year-end. That's beginning to look a touch fanciful if G10 counterparts continue to look so unattractive.
Oct 31 - MAKING AMERICA GREAT AGAIN?
On Nov 6, it's mid-terms time.
DEUTSCHE BANK analysis noted some months back that since the 1930s there has usually been a sharp swing away from the President's party in this vote. The well followed German bank adds in the run up to the elections, ie a month, as this is priced in, the S&P usually slides, but then registers large net gains within two months after. These rallies tend to be independent of which party there is a swing towards.
Arguably, as this is Trump related, the norm could well be off anyway and though latest betting/polls show a move towards the Dems market participants having been burned too many times before (2016 US election, UK referendum) are unlikely to be carried away by those.
Last week, US Q3 GDP came in firmer than forecast at 3.5% (vs 3.3% median), but Trump's approval rating is slightly lower after the Pittsburgh shootings and the president's response to it.
However, we're not going to expend too much energy on what the backdrop means for the possible outcome, but rather the likely implications of the three main possibilities.
Why? Well, apart from the alternative havens such as the YEN and CHF what are the other obvious G10 alternatives to the Dollar?
Of course, there is huge risk attached to the third outcome in particular and spark greater volatility. Would that bring impeachment proceedings closer or would it force Trump to revert to his calculating best and try and get some Dems on his side by calling for tax breaks for the less well off? They might not be able to reject such a proposal even if Trump plans on trade, immigration could hit a brick wall.
Oct 29 - A LESS HAWKISH PERSPECTIVE
No major surprise to hear, but still worth a listen as Fed dove KASHKARI looks for a pause in the tightening cycle to help the labour force grow after eight hikes in three years.
In the WSJ, he notes the Fed set its annual inflation target at 2% in 2012. In 2016, the target became a �symmetric one, meaning inflation can deviate modestly above or below the target in the short run without causing alarm. The symmetric objective gives the FOMC flexibility to see how the economy evolves before determining if further rate increases are necessary, Kahkari writes.
With the federal-funds rate at 2% to 2.25%, monetary policy is now close to neutral and prematurely tapping the brakes could restrain wage growth and keep many Americans from participating in the economic recovery, ie workforce.
A pause on rate increases would allow the FOMC to gain important insights, incl determining how much slack remains in the labour market. The FOMC's current estimate is unemployment cannot go below 4.5% without triggering inflation. Kashkari, however, states the unemployment rate though is 3.7% and wage growth and inflation are still muted.
There is also considerable uncertainty surrounding the long-run impact of the 2017 tax cut. If consumers/investors believe the economy is overheating and additional debt from tax cuts will lead to greater price increases in the future, that should register in inflation expectations. It isn't.
Kashkari in the WSJ concludes until inflation or inflation expectations get meaningfully higher, the Fed should allow the economy to continue to strengthen, so as to allow as many Americans as possible to participate in the recovery.
See below, we have been mulling the possibility of a USD TOP in Q4 since mid-Aug.
We largely stand by that, particularly as much of the positive Usd news appears to be priced.
However, there needs to genuine alternatives to spark a sustained turnaround in the Dollar:
So, it looks like it will have to be the YEN. Le's see what the BOJ delivers this week. Apparently, we're on the path to policy normalisation, but right now growth and yield differentials do not inspire us to short Usd/Jpy.
Oct 9 - BEFORE THE MID-TERMS
We were trying to focus on the mid-terms, but it feels like a host of fresh or changed/improved ingredients are being thrown into the pot.
They're not all USD positives, but it feels like overall the big Dollar should stay supported.
First, the US YIELDS CHARGE - Four successive higher highs and multi-year best of 3.26% made following recent hawkish comments from Fed's Powell. GS' underlying bias remains higher on a med-to-long term basis and confidence will increase above 3.54% for 3.68/88%. From our perspective, we think it's worth acknowledging the, wait for it, break of the 200-mma (at 3.21%) for a first time since way back in Mar 1989 (9.54%), which could open up 3.50%, 4.00% and even 4.75/5.00% in the next 5-10 years, some analysts suggest.
US STOCKS - In particular, the S&P 500 and after mega record highs a tentative top building at 2940/41 following the spike in US yields and hawkish Fed chat as well as the continuing US-China trade dispute and global economic outlook fears as a result. We have long linked the two props - US stocks and USD/JPY - a stalling/correction in the former could work to being a cap below 115.00 FX wise.
USMCA - That deal is being viewed as a med-term Usd positive too and thanks to BofAML who see upside potential towards 117/118 as a result. Presently, they do not expect Usd/Jpy to reach 120 as that may trigger the BOJ to normalise policy further. However. if the Reps score landslide victories in both houses and expectations for further tax cuts emerge it could well be possible.
From our perspective, we are still fairly comfortable with our long held 110, 112 and 115 estimates over the 3, 6 and 12 moths, while continuing to monitor the path of stocks (most).
Sep 18 - INSIDE THE THREE MONTHS, THE US MID-TERMS
We're not for changing at the present time.
Only Usd/Chf is starting to look stretched. It took its time, but the Swissy comeback on heightened risk aversion centring on the US-China led trade dispute is on the march.
We wrote in our Aug 20 (one month winners) piece that we are largely Usd bulls very near-term, but less so further out. We suspect a Usd top could well be seen in the next couple of months. Much of the good news such as more Fed tightening, a strong US economy (albeit one that is viewed as close to a peak) is arguably already priced, while risk events such as the Nov mid-terms and a potential 2019 slowdown are not. We could well see the Dollar easing into 2018-end and the US admin would likely not be disappointed.
The Nov 6 mid-terms are the first chance for voters in the states to pass judgement on Trump admin since the 2016 election, says the BBC. All 435 seats in the House of Reps are up for grabs and a third of the Senate. If the Dems win control of the House, they would not only be in a position to halt Trump's legislative agenda, but could begin impeachment proceedings too.
In latest CNN polls, Dems are said to hold an advantage in two states (AZ, TN) that are critical to its chances of taking control of the Senate.
Trump is betting that America's trading partners will capitulate promptly, but US farmers and manufacturers are worried, while allies such as Canada are furious at the ongoing trade dispute/tariffs.
For the most part, this RISK AVERSION has been Usd supportive, particularly vs the likes of Eur and the commodity bloc.
However, it can be divided into two parts:
There is a feeling and some evidence that the Usd has generally followed the president's approval rating (Nomura) See chart, however, the latter has been falling on concerns over the trade dispute, the Mueller investigation, his abrasive style is tiring etc.
The Dxy is back below 95.000. Could it be about to play catch-up to the sliding RCP Trump approval rating? If those polls worsen we could be set for a retreat towards 90.000 through the remainder of the year.
Will those supporters in rural America stay loyal?
Can he win the trade war/dispute by Nov 6?
Sep 4 - SAME HERE, BOAML ON THE MOVE
After winning a recent FX Week G10 one-month forecasts poll (of around 30 of the major banks/firms), our participation in this week's Reuters poll for Sep was something of a no-brainer.
Our mantra of no Usd alternative has been a winning one so we kept to (previously?) relatively Dollar bullish 1.15, 1.15, 1 18 and 1.15 Eur/Usd estimates this month too, although we did caution at the end of our last piece that we suspect a Usd top could well be seen in the next couple of months. On Aug 20, we wrote much of the good news, ie more Fed tightening, a strong US economy is arguably already priced, while risk events such as the Nov mid-terms and a potential 2019 slowdown are not.
Intermittently, we look for inspiration from elsewhere.
We have been keeping a close eye on BOAML. Thanks to the well followed US inv house who noted they started the year with a contrarian long USD view. After much success (apart from in Q1) they now think most of the move has taken place.
It is hard to make the case for an even stronger Usd now. Global data have stabilised and Eur/Usd is now broadly consistent with relative data and rate differentials. The market is long Dollars, they say, and is not supportive anymore. Both the Fed and the ECB are fairly priced, particularly compared with early 2018. Most of US profit repatriation may still be ahead, but the pace has been too slow so far to have a sustained impact. The EM market position is now flat, with their EM strategists constructive on EM FX this fall. Trade tensions continue, but have eased somewhat (US-Mexico deal, US-EU ceasefire), supporting risk assets and global data, and indirectly weakening the Dollar. BOAML believe the USD is somewhat overvalued now, by 5-10%.
BOAML adds we may see one more leg to the Usd rally short term, from Italy risks and trade tensions, pushing the Euro below 1.15 again. However, that may offer an opportunity to buy the EUR dip.
BOAML forecast 1.20 Eur/Usd at 1.20 for 2019 and their estimate for L-T equilibrium is 1.22. The ECB will end QE by year-end and will start hiking in H2 2019, while the market will start pricing a US slowing as the impact of the fiscal stimulus ends by late 2019 as Fed hiking slows.
RISK: Trade tensions could still escalate into a full trade war, which would be Usd supportive. And/or BOAML mulls the possibility of more US fiscal stimulus next year. EZ uncertainty could also continue, ie Italy could face crisis risks if the budget gets out of control and funding pressures intensify, Draghi's term is ending and populism could spike anew during the EU Parliamentary elections.
Aug 20 - ONE MONTH WINNERS
We were pleased to hear that IGM won last week's FX Week G10 one-month forecasts poll of around 30 of the major banks/firms.
We told FX Week that Pound wise, UK international trade secretary Fox on Aug 4/5 stating the likelihood of a 'no deal' Brexit now stood around 60% surprised markets, panicked them to an extent and GBP/USD has slumped about 2.5% since to a new 2018 low.
If that scenario does pan out, it likely means broadly lower still. Cable might not fall to those 1.1841 lows seen in Oct 2016 in the wake of the shock referendum result, but certainly we see sub-1.25 Cable (perhaps a new 1.20/1.25 range) and even a push above 0.95 Eur/Gbp.
Our Gbp/Usd forecasts are 1.26, 1.30, 1.33 and 1.37 across the 1, 3, 6 and 12 months curve. Our 'base case' scenario though is not for a 'no deal' Brexit. The Cons govt might even do better ultimately than a hard Brexit. We are concerned by Fox/Hunt's comments, but IGM are sticking to the view eventually a compromise deal in the best interests of both the UK and EU will be obtained in a similar manner to Mar's transitional deal agreement.
One for the diary, we also told FX Week that we're looking forward to the Sep 5 BOC rate meeting. No economists are officially calling for a hike from current 1.50% next month, with Oct tightening seen as far more probable. However, with data since the Jul hike such as retail sales, employment, GDP and CPI showing underlying Canadian economic strength why not the back-to-back tightening in a similar vein to last year? The Cad has been a recent winner on the crosses. It could be set for serious spike gains if Poloz and co do surprise.
We concluded that we are largely Usd bulls very near-term, but less so further out. We suspect a Usd top could well be seen in the next couple of months. Much of the good news such as more Fed tightening, a strong US economy (albeit one that is viewed as close to a peak) is arguably already priced in the Dollar, while risk events such as the Nov mid-terms and a potential 2019 slowdown are not. We could well see the Dollar easing into 2018-end and the US admin would likely not be disappointed.
Aug 7 - DEAL OR NO-DEAL?
Gbp has inevitably stayed on the back foot following the weekend line from UK international trade sec Fox said the chance of a no-deal Brexit is growing. He put the likelihood of such an outcome as high as 60%, blaming the "intransigence" of the EU.
Cable nine-month risk reversals in Cable are currently at the most bearish since Feb 2017 months, on the slide since mid-Jun, although clearly nowhere near the levels seen in and around the Jun 23/24 2016 referendum and shock result.
Though we are no fans of the current admin, in fact we are often left head scratching at just how fragmented and unprepared the govt is still for Brexit and you cannot completely rule out a collapse and the succession of the far scarier Corbyn, we still (kind of) 'believe'. Despite the weekend words of Fox, we think there's been enough signs of contrition from the likes of Barnier that eventually/ultimately an agreement of sorts will be reached. Just like we saw in Mar with the signing of the transitional deal agreement. Our base scenario is that both parties need an agreement. Neither party is negotiating from a position of outright strength. The UK could well be regretting its vote anyway, while the EU needs that divorce bill and will not ultimately want to be held responsible by German manufacturers etc for damaging the (favourable) status quo. At present, we think the market has not quite priced high expectations of a worst scenario 'no deal'. That would be nearer 1.25 and 0.94. We are no Gbp bulls, but we are positioned for some gains ahead.
Here's what other strategists think ahead (via Bbg) and it's not all that optimistic!:
Jul 17 - WHERE'S THE BOC CAD SUPPORT?
It's worth a reminder that the BOC have hiked by 100 basis points to 1.50% (Jul 11 2018) currently since raising for the first time in the cycle in Jul 2017.
Since the start, the Cad has been a very mixed performer, losing out in the interim to the likes of the USD, JPY, EUR, NOK and GBP. During that time, only the Fed (three) and the BOE (one) have also hiked rates.
It's also worth noting that during the same period OIL had gained over 70%!! Currently, it's up about 52%.
So, why the relative Cad underperformance during the period?
Is it just NAFTA?
Ahead of the Jul BOC, thanks to some of the big banks who wrote:
Our 1.27, 1.25 and 1.25 forecasts for the 3, 6 and 12 months look plain wrong.
However, we are loath to give up on the merits of the Loonie just yet. Further Usd/Cad gains could be seen towards 1.33 in early Q4, but then to top out towards 1.35/1.38 ultimately and to return towards the mid 1.20s later in the forecasting period.
Jun 20 - INVERSION TIME? It's been a busy period. Plenty to mull in our approximately bi-monthly Forecasts updates.
Our current Eur/Usd estimates over the 3, 6 and 12 months curve look way out at 1.25, 1.27 and 1.20 respectively.
What were we thinking?
In our defence, we have tried to restrain some of our bullish thinking through 2018 and before, but it's hard to stand firm in the face of Trumpism (a less than strong Usd policy, trade wars etc etc etc) and until recent more bullish and hawkish expectations for EZ recovery and ECB policy. We are little bit comforted by the fact that our 12 months bets are well shy of the 1.2400 median, 1.3500 extreme seen in Jun FX Forecasts poll in which we participate.
Last Thu's unquestionably dovish ECB was the possible game changer and no hike until summer 2019.
On the day, after the event, we compared and contrasted ECB and FED policy:
The Fed has already hiked seven times since Dec 2015. The dot plot says two more hikes in 2018 and three in 2019.
As one US MACRO FUND put it how can you think 1.20+ before 1.12?And that was at 1.17+ still, not when the psych 1.1500 is getting threatened.
We are reluctant to get too bearish now, perhaps because we've been burned before tospide wise.
As Usd/Jpy fails to make a big break above 110 too, we are left head scratching as to just what could be holding the Dollar back and we are left thinking that hot topic inverted Fed yield curve.
Market talk centres on US bond markets showing signs of inversion as the gap between 7 and 10 year notes narrows to around 4bp. This spread has been a harbinger of the past three inversions- The spread between 7- and 10-year yields slipped below 3.5 basis points Tue, after shrinking to 2 basis points in May, the smallest gap since at least 2009. The difference between the maturities, the narrowest among on-the-run benchmarks, may not be particularly well-watched. However, its descent into negative territory has historically been a harbinger of similar moves elsewhere along the curve, often in as little as a few days. A 2s10s spread inversion has been on the radar scope of a number of Fed Govs with 8 inversions over the past 60 years preceding short lived recessions within two years some 66% of the time.
Could the curve invert as soon as Sep('s hike) and a recession by late 2019 or 2020? Such fears don't seem to be putting the Fed off its strategy of higher rates.
Jun 6 - THE Q2 PICK-UP: It's taken its time, but there is growing evidence that the global economy is getting back on track following the well publicised weather related Q1 soft patch in Europe and elsewhere.
The chart below shows that the JPM global composite PMI has recorded two straight positive months and 54.0 in May albeit off the series best of 54.8 in Feb.
The Dxy Usd Index, meanwhile, has peaked for now at a 2018 best of 95.025 (May 29) and has backed off about 1.5% since.
Perhaps this is in part due to raised expectations for global growth. There is a perception that HIGHER GLOBAL GROWTH MEANS A SOFTER DOLLAR amid reduced yield differentials and less monetary policy accommodation from other major CBs (recent rhetoric from the ECB!) and the US C/A deficit could begin to widen further (US tax cuts will bring higher US imports). Simultaneously, as the soft patch ends there should be a positive influence on demand for commodities, which could spark life into the likes of Aud, Cad and Nzd.
We wonder if the pullback is trade/Trump related too, particularly as markets head towards this week's G7 meet with the US and its stance on tariffs looking increasingly isolated. Not a great investor environment right now.
Our EUR/USD forecasts at 1.25, 1.27 and 1.20 look a bit overdone, particularly in the front end of the 3, 6 and 12 months curves. We are tempted to move them lower, but let's see how this plays out, ie the ECB and global growth and whether that 95.025 Dollar top remains in place for at least the remainder of the quarter.
May 16 - A NEW GBP/USD RANGE: We feel change is needed.
Particularly in the front part of the curve, our Cable 3, 6 and 12 mths forecast look out of sync compared with Reuters poll medians of 1.38, 1.40 and 1.42.
It was looking pretty good about a month ago, but from mid-Apr there has been a sorry UK data run, which helped deliver a 1.4377 range top and a -6%-plus decline since to sub-1.3500 levels:
From 1.4377 highs on Apr 17 the -6.0% decline has coincided with:
A sorry run and little wonder that the BOE left well alone at 0.5% in May even though in late Mar rate hike probability for this month was standing at near 100%.
Amid relative broader Dollar strength, Cable looks to be sinking and a big break below the 1.3500 psych mark could well open up attacks on the post 1.3400/10, even 1.3100/10 ahead.
However, we're only changing to 1.33, 1.36 and 1.37 at this stage as we continue to see mixed drivers ahead.
First, the potentially Usd negative:
Also, genuine potential iindependent positive impacters:
Recently, we have talked about there being a lack of alternatives to the Usd G10 wise, but it cannot be ruled out that the Pound becomes one of the beneficiaries if we see a market turn around over the coming months.
Gbp/Usd to see out 2018 within a rough 1.31/40 range?
May 1 - A 1.2500/55 CAP? That certainly looks the theme having peaked in mid-Feb and is now threatening to break south of the 200-dma (1.2010/15 last) for the first time since spiking higher on Apr 24 2017 after the semi-surprise win by macron in the first round of French elections.
We have been mulling a weaker Euro for some time and last time out we wrote about the 'off the radar' mystery slowdown (see below).
We have been 1.25, 1.27 and 1.20 for some time in the 3, 6 and 12 mths, which is a little more bearish overall than the Apr Reuters poll median of 1.23, 1.25 and 1.28. We will leave alone in May's poll, in which we participate, but it will be interesting to see whether the broader market collectively turns less bullish given the continued softer numbers in Apr amid a sustained Usd rebound.
Noted long-term contrarians and Usd bulls who are forecasting 1.15 by end Q2, BOA cites a number of reasons for selling EUR/USD now:
Techs wise, c/o firstname.lastname@example.org:
Why are we staying cautious?
Well, it was not like we were holding those 1.30+ bets anyway. Not only will we wait on upcoming data out of the EZ as we monitor whether this is a mere soft path or something more sinister, but we are not completely sold on the idea that the USD is capable of extending/holding on to these gains.
That and its issues could well be main driver ahead:
Apr 17 - EURO'S 'MYSTERY SLOWDOWN': Interesting stuff from the FT this week, talking on the surprisingly strong economic turnaround in 2017 for its largest economies and in the EZ as a whole, ie Germany 4.0% and Spain 3.5%.
Though EUR/USD is struggling to make a sustained break above current topside pivot of 1.2500 we think the slowdown since has emerged off the radar and there has been very little said on latest Nowcast results for the EZ, which suggests activity growth has dropped to only 1.2% in Apr.
The FT believes the slowdown has come as a definite surprise to the ECB forecasters, who expected growth to slow only slightly in 2018, with the Mar Bulletin talking 2.5% y/y for Q1 and Q2.
Further, there has been no real accompanying decline in China or US activity growth as the global expansion probably remains intact, while in the EZ export orders and sentiment have not really dumped so the (strong) Euro cannot really be blamed..
What's to blame? The FT cites:
The FT concludes by suggesting the ECB will likely give the economy the benefit of the doubt in Apr, but the combination of fading growth and stubbornly low inflation (Apr Minutes) could mean the objective of ending asset purchases in 2018 might yet be delayed.
Mar 27 - RESERVE MANAGERS TO TURN AGAINST THE DOLLAR? An interesting piece in Bbg on a possible change in global rankings in FX reserves over the coming years.
Here's the current table, according to latest listings:
|CURRENCY||TOTAL ($ Blns)||%|
The crux of the piece is that the time might be ripe for diversification from the USD into the EUR in particular. Even a small shift could have big consequences though:
Emerging countries and oil-exporting Mid East nations, which rely heavily on international trade, are most likely to lift their Euro allocations. China tops the list obviously at Usd 3tln+, but these type of countries overall easily hold over 50% of global reserves.
WHY? Big reason in three words increased US protectionism. That could undermine the Usd's global standing and so could admin talk of preferring a weaker Dollar to help US manufacturers. China, the chief target of US complaints, has retorted that �all options," incl scaling back its top Usd 1.17tln purchases of USTs, are available.
Nine years after peaking at 28%, the Euro share could be set to hit record levels ahead because:
These same arguments have been levied in the last year for the EUR/USD rise from just north of 1.05 to 1.25+ in Jan and for possible marches on 1.30, 1.50 even ahead.
Certainly, the Euro does seem the favoured alternative to the Usd reserves wise right now.
However, the wheels do not turn that quickly. History teaches us that even though in the last couple of years the US has passed from one extreme (Obama) to another (Trump) and there's little difference so far. The Trump Way might not last past four years.
As ever, we'll wait on the data with an open mind, but we will not hold our breath waiting on a big sea-change.
Also, how about CHINA who if the admins and headlines can be believed are far more enthusiastic about chances and could be best placed to take the US hegemony on? The Usd 900bln Belt and Road Initiative is to improve connectivity and cooperation between Eurasian countries. Meanwhile, Beijing, the world's largest oil importer, is launching a Yuan-denominated crude futures contract with the potential to become a benchmark for global oil transactions.
If these numbers are to move, do not bet against the big one coming from China's current 1.1% by 2020.
Mar 15 - PROBLEM CHILDREN PREVENT A 1.25+ BREAK? - Thanks to JULIUS BAER in a research note who talk Italy (1.6%) and Greece (1.5%) remaining far at the bottom of the EZ's GDP ranking. The problem children, they describe them.
The Swiss private bank adds annual GDP in both is still below levels of 10 years ago, facing independent difficulties too:
JB concludes by suggesting most of the EZ mess has been cleared and the risk of Italy and Greece seems manageable, according to market risk indications.
However, some markets tell a more negative tale.
Via data from our partners at EPFR, we can see that though there were positive inflows on Mar 13 of Usd 10.4mln by Italy focused equity ETFs/mutual funds the trend for 2018 is very much negative.
Daily flows for the year stand at -Usd 845.0mln, just off last week's worst levels of -Usd 855.5mln.
EUR/USD has been a 5%-plus winner this year so far, but it didn't hang around above 1.2500 for long following the first break.
Yes,. Draghi is not in a rush in the road to policy normalisation, but given the negative sentiment surrounding the broader Dollar surely it should be. Supporters talk of diverging growth and the EZ's bright outlook as a prop for the Euro, but perhaps it's the 'problem children' that is holding it back for now.
Mar 7 - A LOOK AT CAD FORECASTS PRE BOC - Recall a 'dovish' hike was duly delivered by the Bank on Jan 17, taking the key rate to 1.25%, its highest level since January 2009. The data proved to be too strong to ignore and the rise followed similar 0.25% hikes in Jul and Sep 2017.
The BOC revised its growth forecasts for 2018 and 2019 slightly higher, in the accompanying monetary policy report, but the whole tone of the release and the following press conference from Poloz, was dominated by their worries over the uncertainty regarding NAFTA talks. Trade frictions are now the main issue for the BOC, but they will be pleased to see growth rising by 0.4% in Nov, its best result since May. The NAFTA uncertainty should keep the BOC on the sidelines until the talks conclude.
That is what we wrote in the wake of the hike. It was described fairly consensually as a dovish hike, but aren't interest rate hike supposed to be supportive for a currency, particularly as no other developed world CB has done so since?
Even more striking are the big broad losses.
In the interim, data has largely been VERY SOFT :
Is the market punishing the BOC for making the mistake of hiking three times (and in five meets) since Jul? Perhaps, although we suspect much of the Cad losses can be attributed to politics, Trump and the threat to NAFTA and tariffs generally and of course Canada is very much in the US president's sights. Inevitably all are concerned what this means to the Canadian outlook.
Hopefully, we get to hear more what the CB thinks from it in the next hour or so.
It's worth noting however that BOC rate hike probability in H1, ie May, remains above 50.0% (56.4% last) and 2018 generally is near 100% (95.1%)!
This suggests that Cad downside could well have been overdone so far this year, particularly if tariffs threats fade over the coming weeks.
For now, clearly our forecasts of 1.23, 1.20 and 1.25, particularly the front-end, are looking behind the curve. We'll raise our 3, 6 and 12 months estimates to 1.27, 1.25 and 1.25. That better reflects the current position and negative sentiment, but leaves room for a rebound in the Loonie through the remainder of the year, especially if we get that May move. For now, on balance, we don't think we do.
Worth noting, IFI techs, think higher still Funds:
Feb 28 - ROUGH 1.20-1.25 AHEAD - Month-end time, which we are told is/will be above average RHS Usd positive flows.
It will also be a time to reassess forecasts and looking at EUR/USD specifically today our 1.25, 1.20 and 1.27 estimates.
We will also be putting forward our latest estimates for the Reuters FX poll for Mar. At present, we are thinking of leaving well alone.
It could well be a rough 1.20/1.25 market for the time being.
In Feb, the Reuters consensus was 1.23, 1.22, 1.24 and 1.25.
Eur/Usd has stalled at 1.2500/55 in recent weeks amid a tentative broader Dollar comeback.
Bear in mind this is still a very long Euro market, to the tune of 126126 net on the IMM in the last week:
So, topside Euro caution for the time being then.
Chart c/o email@example.com.
Feb 21 - THE GS REASONING - At the start of the month, the well followed US inv house publicised their new FX Forecasts.
They certainly weren't too controversial or outlandish, see below, although it's worth noting they expect further broad Dollar downside over subsequent years to 1.40, 100 and 1.52 through to 2021.
It's worth noting straight away that GS do not believe it's twin US deficits, the Trump admin endorsing a less strong/weak Usd policy that is overly impacting negatively.
GS cites a favourable risk environment and faster global growth, which favours other economies and their currencies:
For GS, POSITIONING is an issue. Hedge funds and CTAs have moved to short Dollars, but other investors are 'likely to have scope for additional selling' and states sovereign accounts, incl reserve managers are yet to diversify.
Dollar 'trend depreciation', Goldman calls it, though regarding US deficits notes historically the Dollar has both gained (1980s amid Fed tightening) and fallen (early 2000s, low rates) during periods of widening.
This period is like mid-2004 to mid-2006, a tightening cycle and shrinking the balance sheet, but Usd losses. Expectations for monetary-policy normalization in Europe and Japan mean there's less fixed-income demand even as interest-rate differentials widen for now, as an an improving global environment means investors may see better equity and foreign-direct investment opportunities elsewhere.
So we have it.
Feb 13 - TIME TO PANIC? IT'S ALL A BIT OF A MESS: Thankfully, the VIX Fear Index has moved off those 50.30 spike highs of Feb 6 , highest levels seen since Aug 2015, way way beyond its post Brexit result peak of 26.72 (Jun 27 2016).
Since, it has steadied largely north of the psych 25.00 and a fair current pivot, we are told.
US stocks have steadied a little over recent sessions following the late Jan/early Feb slide (Feb 5 it crashed over 1000 points and -4%) on major concerns global interest rates are heading higher and amid very real valuation concerns over historically expensive stocks.
Thanks to BOAML who stated last week that there is no need to panic yet. The well followed US giant described it as a rough few days, but fears this marks the beginning of the end for the US economy and the Fed will abort the hiking cycle are greatly exaggerated.
It's worth noting that BOAML are relative market contrarians right now. FX wise, they maintain the view the USD will correct higher as US inflation and profit repatriation surprise the consensus, while state. EUR/USD has overshot data and rates, while positioning is long.
We also need to ask the question whether the USD/JPY decline is beginning to look disorderly, with Japan's currency chief Asakawa remarking earlier that the admin is closely watching if there's speculative factors behind the Yen's rise.
We suspect the sustained break below 110.00 has alarmed Japan and a further quick decline towards 105.00 would concern further.
We suspect the broader market has been burned too many times before in Usd/Rmb (6.50, 6.40 and 6.30) to start talking lines in the sand now here, but we need to continue to monitor the path of stocks, US yields and the utterances of the US president on the budget et al.
Jan 25 - MNUCHIN THE GAME CHANGER? This week, we have been writing how it's starting to look desperate for the Dollar. Just when you think we had run out of sticks to beat the Usd with the US Treasury Sec says 'a weaker Usd is good as it relates to trade and opportunities'.
An already well offered and range breaking Dollar needed no second invitation, inspiring a clean break below the psych 90.000 mark in the DXY for the first time since late 2014 in the process.
Next big bear targets are 88.40/50 and even 85.000 and if the Dxy makes a sustained break of 90.000 then the market is going to believe those levels are realistic in Q1, H1.
At this stage, we do not think it's a major game changer. I mean how many times did we see previous incumbents - Paulson, Geithner et al - pay mere lip service to the infamous 'STRONG DOLLAR POLICY' ?
In fact, it's not the first time we've heard this type of thing during the during this admin.
We suspect that Mnuchin's comments have caused such a stir in markets because he said them spot on at the right time, (perhaps designed to have most impact? At Davos too.). The Usd was already under heavy pressure, while other G10 rivals have forceful independent props currently. We write this just as Eur/Usd soars through 1.2500 as ECB's Draghi says underlying inflation will rise in the med-term. That's the MONETARY POLICY CONVERGENCEeffect.
Not completely unrelated either, arguably impacting even more is the possible new US TARIFFS on steel, solar panels and washing machines. As CBA notes this decision could well be viewed as an admittance that US firms are not coping with perceived free trade, drawing fresh attention to the persistently-wide US trade deficit (up to 3.0% of GDP).
So, did Mnuchin merely provide a fresh reason to sell Dollars given he also noted that ' longer-term Usd strength is a reflection of the strength of the US economy and the fact that it is and will continue to be the primary reserve currency? In fact, thanks to BOAML who remain relative Dollar bulls (1.10 Eur/Usd by end-2018 as of Jan 24) who prefer to look at the the statement in its entirety as reaffirming existing policy as a reflection of US economic fundamentals, while acknowledging a more competitive Usd valuation situation vs this time last year.
BBH's Chandler notes demand at UST's auctions have been strong, with Tue's Usd 26bln two-year note sale very well received, the 3.22 B-C the strongest in over two years. Indirect bidders (incl asset managers, CBs) at 58.3%, was the most since Jul. It's early days, but numbers like that do not suggest the world is turning away from the US and that we're set for mass FX reserves diversification.
For now, we're fairly confident this Usd bloodbath is largely spec market driven and those Usd 9.59bln of net shorts on the IMM in the week to Jan 16 will have increased substantially in the latest week (fresh data tomorrow).
Jan 10 - NOT THE ONLY ONES - We have to admit there was a little sense of trepidation completing our forecasts pages and participating in the Reuters Jan FX poll at the very start of the year.
Generally, as we talked previously, we think there is a slightly unjust turn against the Dollar currently, largely on the perceived converging central banks expectations and brighter global growth outlook.
However, we cannot ignore prevailing broader market anti-Usd sentiment and so we had to change estimates last time out.
The Euro is expected to be one of the beneficiaries in 2018 and our new forecasts reflect this changing mood at 1.23, 1.19 and 1.15 across the 3, 6 and 12 months curve.
There has been no big break of the psych 1.2000 mark so far, but the latest market impacter and RED HEADLINES influence has proved a positive:
Of course, China has threatened this before on USTs, but with Japan remains far and away the biggest holder of US Treasury Secs. Why would Beijing wish to instigate a crash? Clearly, CHINA FX RESERVES data will garner plenty of attention over coming quarters, particularly if China goes further down the route of diversification. At this stage, the EURO looks best placed to benefit (will the ECB see it that way?) by a move away from the Dollar given the EZ's C/A surplus, a strengthening economy and arguably a safe haven status (flash-points across the world do not seem to involve Europe).
Note Reuters poll medians in Jan were 1.19, 1.18, 1.18 and 1.21 across 1, 3, 6 and 12 months. High extremes are 1.23, 1.25, 1.28 and 1.32. However, it is the medians that interest us most, the Euro and in G10 generally. Not a lot of volatility is expected. Perhaps this can be attributed to an extent to New Year Blues and no current major views, as some investors/participants instead focus on those wild crypto currencies.
Keep an eye on China and USTs ahead. That could be an impacter, while we also maintain focus on the respective EZ and US economies, those central bank outlooks, Trump sentiment and European politics.
Jan 3 - EARLY 2018, 1.40 IN FOCUS: We wrote earlier that BTMU reportedly says it maintains a structural bullish Gbp/Usd bias, targeting 1.40-plus over the coming months. On Brexit negotiations developments in the coming weeks will be important and the Japanese bank expects a transition deal to be struck quickly,
Another bank targeting 1.40 is ING and the Dutch bank also sees an 0.85/0.86 Eur/Gbp ahead.
While progress during Phase II of Brexit negotiations and subsequent clarity over the UK's new macroeconomic paradigm will be the overarching theme dominating Gbp direction, ING sees two factors dictating the Gbp narrative short-term:
Noise around a fragile Cons government may act as a limiting factor. However, ING's Patel notes that the bar to actively sell Gbp on UK politics remains high. This has been evident in Gbp positioning data. Whilst specs have turned net long recently, this has been mainly driven by shorts bailing, suggesting the attractiveness of selling has faded as risks of a delay to Brexit talks and a Mar 2019 cliff-edge also recedes. ING states only a 2018 General Election may feasibly see such risks being priced.
They focus on potential catalysts for a positive reassessment of the UK economic cycle and a hawkish re-pricing of BOE policy expectations following an agreed Brexit transition deal in Q1. This could bring a H1 BOE rate hike (likely May) into play.
From our perspective, we are far more cautious on the Gbp path and for now (albeit tentatively) we are standing at 1.37, 1.34 and 1.32 across the 3, 6 and 12 months curve.
Dec 14 - TRUMP GOOD FOR GROWTH AND GOOD FOR THE DOLLAR - Since the much criticised Trump admin took office the US has registered GDP outturns of 1.2% in Q1 2017 followed by 3.1% and most recently 3.3%.
His top adviser Cohn said recently that the US economy would eclipse 4% in 2018 'easily' with the tax bill in place. In fact, if it were not for the negatives of the hurricanes the president would be hitting those levels already.
The US economy is performing strongly enough that a Fed rate increase this month is a given and between two and four will hikes will likely take place next year. GS bets on the latter as well as a 3.0% handle when it comes to the US 10-yr yield in 2018.
The Dollar has been an underperformer this year, perhaps harshly treated by the negative reaction to all things Trump and repeated controversies. Once the market gets used to the way the president goes about things, the Usd should begin to play catch-up with its relatively frothy fundamentals.
We will look to go long Dollars vs both the Chf and Gbp.
For the Franc, Swiss growth and inflation have been on the rise and 'Chf strength' (really? Still?) will remain uppermost in the SNB's minds and actions (intervention? You bet) and so expect the CB to change as little as possible so as not to inspire a Chf correction. Like many others in the market, we also do not countenance the SNB hiking before the ECB, again possibly Chf value related.
For Gbp, we think a tentative Brexit deal reduces only a tiny part of enduring risk. Economically, UK growth estimates continue to be dropped, while inflation is widely tipped to have peaked/peak soon and so the BOE should be in rush to hike again next year (certainly not in H1). Politics, however, remains our main focal point and a negative one. The Cons/DUP 'alliance' looks vulnerable and the more UK PM May is perceived to be caving in to EU demands the more likely a leadership challenge and the biggest threat of all to the Pound CORBYN and a hard left Labour govt. That would really scare investors.
RISKS - Trump obviously and possible action to curb Usd strength.
Nov 7 First things first after last week's BOE rate hike.
Despite it being a 7-2 result, it was anything but a hawkish BOE. Interest rate hikes are usually interpreted as coming from a position of strength, but that's not how the market saw this one amid the downbeat tone from CB gov Carney.
We mulled beforehand whether the rough 1.30/1.35 range would hold post BOE. That looks to be in danger after the MPC highlighted Brexit risk to the outlook and softer inflation forecasts, while FALLON's departure this week reminds investors/markets that the UK political/governmental situation remains problematic to say the least. It could be viewed as in crisis still.
We think a sub-1.3000 break is a very real possibility, which could open a further run on 1.2850/60 and the 200-dma over coming weeks, a line that has not been breached since mid-Apr. If so, a run on our 6 and 12 months estimates of 1.25 could pan out quicker than expected.
However, we are more optimistic than that, at least very near-term due to:
What are the fund flows saying? Our partners at EPFR show that UK focused equities (all domiciles) ETFs/mutual funds were net sellers for an eighth straight week to the tune of -Usd 118.7mln in the week to Nov 1 vs -Usd 279.8mln last. That's a negative eight week run of -Usd 2091.2mln.
UK outflows stand at -Usd 5202.6mln for 2017. Post Brexit result (Jun 24 2016), these outflows stand at -Usd 11274.6mln, a highest for the period, the series EPFR tells us is the best gauge of current investor sentiment towards a country.
That says it all. Mixed hard UK data, all things Brexit uncertainty, a UK political/governmental crisis and now a BOE rate hike. A sick cocktail.
However, again clutching at the positive straws, after a slowest outflow of the eight week run, we tentatively mull whether investors will react positively next week to the dovish BOE and encouraging noises from Barnier on talks. At the very least, Gbp is cheaper!
Sep 6 It feels like USD negative sentiment is really picking up in pace.
We are yet to see many 1.30-plus EUR/USD or sub-105.00 USD/JPY estimates filtering through from the big banks, but many are struggling to come up with factors/potential ones that will support the ailing Dollar near-term.
Just this week the Usd has been given a fresh jolt by FED SPEAK:
Those investors expecting the Fed to stay on hold are growing in number. See below, the first shows a 74% probability of NO CHANGE through the remainder of 2017, while near 33% is for nothing through 2018 too! Changing yield differentials to the fore even if there has been a recent tempering of ECB tapering expectations.
These changing expectations have also inevitably impacted on the US 10-YEAR YIELD and sparked (together with North Korea missile testing) a break below key 2.13% fibo and opened up moves on 2.00% and perhaps the 1.98% fibo (50% of 2.64/1.32) near-term.
ING says the break below 2.13% has come as a surprise to most and so far sparked a benign Usd selloff, with most high yielders continuing to perform very well in its place.
However, the Dutch bank adds it is noticeable that in OPTIONS space there is some serious buying of back-end vol (e.g. one-year JPY volatility staying bid above 10%), suggesting some strategic risk management measures are underway. Rsk assets might be a little more vulnerable than they have been all summer consequently, says ING. Either way, this leaves the USD vulnerable vs low yielders (Eur, Jpy?) and DXY for 91.60.
Aug 31 Having touched on it in the Jul minutes, the ECB stated earlier that policy makers are concerned about Euro strength.
One US BANK's FX Viewpoint warns markets not to fight the central banks. According to BAML, markets have been doing this and they will be proven wrong, leading to a lower EUR/USD in the months following the recent rally.
A new trade sees the well followed firm shorting the Euro just south of 1.1900 for 1.15, leaving a stop at 1.21.
As usual, BAML states its RISKS to the trade and they include the Fed not hiking again in 2017, the ECB announcing fast QE tapering and the EZ economy continuing to decouple from the US.
From our perspective, we've been battling against the losing Usd tide for some months. Refraining from a dramatic change in stance, it's just been best to stick with trend such as the Eur/Usd charge. BAML's view gives plenty of food for thought and we have some support for their takes on the Fed and ECB ahead as we do not rule out one more hike before 2017 is out from Yellen and co.
However, there have been multi Eur/Usd drivers in the last six months or so and not just monetary policy outlooks and perceived changing fundamentals. We will talk more in the weeks ahead, but also needing/continuing to be priced is:
Plenty of questions and there are more and most recent being the impact of Hurricane Harvey. The only thing we can safely conclude right now is that it's getting even harder to predict levels for the months ahead.
Jul 25 We touched on it last week - LOWFLATION. ING remarked markets have all but priced out any hopes of fiscal stimulus this year amid lower long-term inflation expectations. The Dutch bank talks the rest of the world playing monetary catch-up, narrower interest rate differentials means the Usd will stay offered. However, they also point out that conditions might have well overshot and there's a chance that markets are currently over pessimistic on all things US and just as importantly on recovery prospects elsewhere.
We have been well behind the curve Usd/Cad wise for some time, the message hitting home particularly after the Jul 12 BOC decision to raise interest rates by 25Bps to 0.75% and such is the confidence of the market in the recovering Canadian economy another unwinding of the previous stimulus is expected in Oct too.
Are we jumping ahead of ourselves though? The Fed is increasingly advised/expected to rein in expectations for H2 and exercise caution on balance sheet reduction and a third interest rate hike of 2017 as investor confidence in the US economy and the Usd drops on Trump non-stimulus/tax cuts/reflation and a weak data run (incl 1.6% y/y CPI in Jun).
In the interim, however, Canada CPI came in at a softer than forecast 1.0% y/y (albeit with a firmer core of 1.4%) and similarly with the BOC we are left wondering what's the rush?
In this backdrop, we think Usd/Cad could find a bottom in and around 1.2250 after trading temporarily below the 200-wma at 1.2375/80 currently (see below). We'll move our current 1.35, 1.36 and 1.38 forecasts down, but to a more realistic 1.23, 1.25 and 1.30. Trump obviously a big risk factor here, particularly if the infighting and inaction in terms of policy extends well into 2018.
At this juncture, we cannot help but be swayed by the admittedly cautious DRAGHI. Monetary stimulus, the ECB pres believes will be needed for a very long time and 'inflation is not where it should be'. How does EZ inflation rise towards the 2.0% target at the same time the Euro surges? It doesn't.
Jul 19 The DXY Usd Index has hit a near 12 month low this week of 94.476 (Jul 18).
That's a full retracement and some of the Trump election victory inspired charge from Nov 9 and approx 95.900 to 103.820 on Jan 3.
What's behind the move has been well documented. The soft US data run, picking up in pace in Q2, calls into question the need for further Fed tightening action through H2 amid a collapse of Trump's healthcare reform bill. The latter, of course, is viewed by markets as meaning a likely further delay or even abandonment of Trump's Usd supportive campaign promises of reflation/tax cuts/stimulus.
According to ING, markets have all but priced out any hopes of US fiscal stimulus in 2017 and the narrative has become a 2018 story amid a return to the to the status quo 'lowflation' world that dominated prior to last year's US presidential elections.
Again, the Dutch bank noted that scheduled today, the House Budget Committee votes on its FY 2018 budget proposal. That could mark the start of the Rep's tax policy overhaul. The process will be long and arduous and small positive (and unexpected?) steps towards a tax reform bill could draw a line under the recent USD-selling them.
ING sees support around 94.00.See below, we also see it at 93.000/050 and 91.900/9500.
Jul 4 DEUTSCHE BANK in the news in the last week or so EUR/USD wise. yest, we wrote they were gunning for 1.16 from 1.1404 (stop 1.1295) as their TOTW and cited:
This follows last week's decision to raise end-2017 Eur/Usd forecasts from 1.03 to 1.16. Draghi aptly marks the culmination of a number of developments that inspired the German giant to change forecasts amid risks of a break-out of the 1.05-1.15 range. Among them:
More structurally, unless an existential EZ crisis returns, Deutsche sees conditions as ripe for 1.03 to mark the bottom in the med-term bear market.
But note adds the EUR is set to be the key vehicle via which financial conditions in the EU will be tightened. That could well mean that, like the Fed's exit, the ECB is unable to tighten as much as it (and the market) thinks amid a rising Eur/Usd.
We also need to move our forecasts, clearly. Our 1.13, 1.05 and 1.01 through the 3, 6 and 12 months look increasingly unrealistic.
YIELD DIFFERENTIALS have increasingly pared in recent weeks in particular post Draghi (ECB hike by end 2018? See below) and market caution over the Fed's ability to hike in H2 2017 too given the very mixed US data run over recent months.
For now, we are going to concentrate on POLITICS and arguably the main driver of G10 FX the last 12 months or so at least.
Politics is now a net Euro positive notwithstanding the huge uncertainty for the EZ too over Brexit and we have Macron and France to than for that. The far-right threat has seemingly dissipated.
Over in the US, since taking office on Jan 20, it has been one disappointment after another for US President Trump and all the fanfare and hope and mighty Usd gains from Nov 9 onwards has been blown to pieces. Regarding current (or more accurately soon to be previous) forecasts, the Trump reflation/stimulus/tax cuts trade was a major reason for our on balance Usd bullish forecasts.
The question we are asking now is he a lame duck president throughout his four year term? Perhaps he still has a chance to be a relative success and we are going to take it, as we conclude that is what at least many Americans hoped/voted for back in Nov 2016. Some stimulus etc success will pan out and the Usd will recover.
For now, we are betting on if not 1.1500 holding topside wise then 1.1600/20 (red), 1.1700/20 (green) or 1.1825 and the 200-wma to provide the resistance.
Not feeling overly confident at this juncture, but we take a stab at new 1.15, 1.11 and 1.07 forecasts, as we also mull whether Draghi and co would want to risk 1.20-plus by prematurely tightening anyway?
Jun 22 What to do in GBP? Thanks to the Jun 8 UK electoral disaster and seemingly next to no progress on the Softer Brexit front GBP/USD failed abjectly ahead of the first key Brexit move recovery fibo at 1.3055 (38.2% of 1.5018/1.1841). Now, we're almost bang on our 1.26, 1.25 and 1.25 3, 6 and 12 months forecasts, only raised a touch from the 1.23, 1.23 and 1.26 bets we started 2017 with.
It's worth repeating our mantra that we are not for turning every time an event goes against unless it really is seismic, a game changer.
The trouble with this market so many seem to be happening right now that it is difficult to keep up, but they're worth noting in lists of the good and the bad.
Whilst we remain bearish we're also acutely aware that we are already at historically low levels and so are loathe to move them any lower at this stage. We're constantly at amber warning, while on a short-term basis continue to look for sell opportunities below 1.2800/20 and the 55-dma and 1.3000.
May 18 THE VERY END OF THE REFLATION TRADE?: The US 5Y5Y swaps, a measure of US Inflation expectations, has dropped to its lowest since the Trump election win.
Another one the US 10-YR YIELD on the back foot after five lower lows to 2.18%, but holds above a couple of Trump influenced support levels at 2.13/14 and the 200-dma (not breached south since the election result day), 2.07% (61.8% of the Trump trade of 1.71/2.64) and the psych 2.00%.
FX wise, there are a couple of levels still to be breached in USD/JPY. We are going to work for now under the premise (if the BOE can with an orderly Brexit so can we) that ultimately the Trump negative obsession will blow over and there will be some sort of administration ahead. Not all those stimulus/tax cuts promises will go through, but some will and with the BOJ still in mega easy mode we would be tempted to be dip buyers ahead of first the 200-dma at 109.70/75 and 107.85/90 (61.8% of the 101.20/118.66 move).
Until they are lost, we will keep to our 113, 115 and 116 3, 6 and 12 mths forecasts.
May 17 We talked Mon about our FX Week interview after topping their 12 months forecasts. We suggested that 1.1300 and a complete unwind of the post Trump election in was possible in Eur/Usd during the summer months. That doesn't sound so bold today (1.1122 high), but it was made last week when we were on the 1.08 handle.
We have been watching the TRUMP REFLATION TRADE get unwound with increased incredulity as mixed US data releases might only be just suppplanted by the regularity of the US president's gaffes (and that's obviously putting it mildly).
Much of the Euro positive talk has centred on improving EZ fundamentals and possible preparation for the exit of the ECB super easy stance over the net couple of months. We have been touting this boon too, but we have also been suggesting the single currency is in the best possible place to take advantage of the Trump Usd woes as the world's MAIN RESERVE CURRENCY ALTERNATIVE.
Elsewhere, via FTAlphaville:
Leveraged, real money, macro and model accounts have all been touted as Eur/Usd buyers this week, but it is the activity of sovereigns we are most interested in. We suspect they have been buyers too.
May 15 We're in the process of moving some of our forecasts, particularly in the 3 and six months. Working better has been our longer-term estimates and IGM topped latest FX Week poll of the major banks for that period.
We told the publication that Eur/Usd could make a charge at 1.13 in the summer and head to levels seen before Trump's election win if ECB's Draghi follows his hawkish peers and takes a less accommodative tone.
For now, the main drivers of FX markets are still developments in the US, we told FX Week. Attention will focus on the next Fed rate hike, which could happen as soon as next month, and then possibly one more in Sep and perhaps a third in Dec. The Dollar has been a mixed performer through 2017 so far, as Fed expectations get repriced to an extent and investors mull whether there will be one, two or even three more rate moves this year.
Hurdles hit by Trump in the implementation of his promised policies have dampened the greenback's buoyancy, and the broad gains made in the immediate aftermath of the election have been retraced as the market gave up hope of stimulus measures and tax cuts arriving soon.
Meanwhile, comments from the president about the Dollar becoming too strong and his preference for low interest rates have also weighed on sentiment. In mid-Apr, Trump warned the it 'is getting too strong' and he would prefer the Fed keep interest rates low. To some participants, the latter statement was a potential game-changer and though we would not go that far, as this 'stance' could well be changed in the next few weeks, we do not envisage a return to early Jan Dollar highs any time soon.
Apr 6 We cannot get that great line out of our heads, the GS one that the FX market response has been like a Fed rate cut rather than the latest in a cycle of hikes. On Mar 15, USD/JPY was standing just south of 115.00, while this week's trade so far has been all about Japanese banks just about keeping it above the psych 110.00 mark.
There have been plenty of reasons (and good ones) for the decline since, incl it being a very dovish hike, while many investors (not alone) are blaming all things Trump for the -4%-plus slip and cite his general suitability for the role as US President as well as the damaging defeat in the healthcare bill and likely delays and possible opposition to his implementation of his stimulus/tax cuts promises, which of course were such a key Usd prop to 118.66 highs in mid Dec.
GEOPOLITICS is also rearing its head and plenty of firms are talking of an impact recently.
Talking of an increased risk in East Asia, DEUTSCHE BANK says FX markets generally go through three phases in times of such crisis, ie a drop off in risk positions and securing of liquidity, pressure between debtor and creditor nations and a change in fundamentals. If a worst case scenario pans out of an attack on Japan by North Korea the German giant would expect an exit of Japanese assets by foreign investors and a Yen selloff. However, a decline in Japanese equities would heighten risk-off sentiment, recalling those post 1995, 2011 earthquake reactions for many and upward Yen pressure could ultimately prevail near term.
From IGM's perspective, we find it pretty difficult to gauge the extent of the geopolitical effect in a post 9/11 world. Yes, we factor in at least a small Usd/Jpy weight and relative Usd firmness vs the supposed risk currencies, but we would argue on just how much impact this subject matter has played in the last 16 years or so. The Middle East has played out a Cold War, sometimes much hotter particularly since the emergence of ISIS, during the period. However, apart from an intermittent more volatile oil price impact on G10 FX has been seemingly limited. Perhaps Pyonyang's regime is seen as the bigger threat to world stability, the greater unknown. Though North Korea is back under the microscope this week we think that would be a very complacent attitude to take.
Mar 14 We have had the same 1.23, 1.23 and 1.26 forecasts in Gbp/Usd through 2017 so far.
We have considered them neutral to bearish, although we have refused to rule out deeper slides beneath current range bottoms of 1.1986 and 1.1841 in the interim.
Relative resilience inside a very rough 1.20/1.25 market has been a theme for the year so far, but there is a sense that the Pound is coming under real pressure once again as UK PM May is set to trigger Art 50 in the next couple of weeks and a 'Hard Brexit', while Scotland's Sturgeon has made it abundantly clear she is targeting a second independence referendum.
DEUTSCHE made a valid point earlier, that through this latest decline the market is slowly realising Brexit is NOT priced and it's pretty much impossible to price in an event that has never happened before. They're very bearish Gbp and target a move close to 1.05.
SEB writes cleverly that being cheap is just not enough and targets sub-1.20, 0.90 in Q3 even if the Scandi bank describes the Pound as substantially undervalued, ie 25% vs the Usd, 20% vs Eur on L-T fair value estimates. Ongoing weights cited include expectations of a harsh tone in upcoming EU divorce negotiations and over-optimistic OBR UK GDP forecasts. Recall 2017 has been raised to 2.0% vs 1.4% in Nov.
We were fairly successful in 2016 (2nd in Thomson-Reuters poll), particularly post Brexit vote by adopting the mantra of not getting carried away. We'll continues with that policy, but a clear break below of either 1.1986 and 1.1841 would leave us twitchy, particularly if external developments provide reasons to sell too, ie an even more hawkish Fed, the ECB and a potential new outlook.
Yield differentials will continue to be at least part driver and the BOE should maintain its neutral bias this week and reiterate that it can move 'in either direction'. On balance, we expect an unchanged MPC through 2017 at least (and to provide a relative Gbp prop?), as the post GFC world plays out and Carney and co attach more weight to slower growth than too high temporary inflation.
Mar 3 Looking at our grid above, we are fairly content with our light Usd bullish forecasts for the most part, although we have been less than convinced that we have got the right stance in USD/JPY in recent weeks.
Thankfully, it has been grinding higher this week and after bottoming out at 111.50/70 suddenly it is looking more constructive again and we're headed in the right direction.
We are still tempted to move, however, with 120, 118 and 122 3, 6 and 12 mths forecasts still looking a stretch at this juncture, as we sit just below 115.00.
Today is unlikely to be a complete game changer, but clearly YELLEN's speech and to an extent V-C Fischer are very significant.
If the Fed chair echoes recent hawkish comments from the likes of Dudley, Williams, Harker and Brainard then it should be all systems go for a return to 115.00 and beyond.
To reassure us that 120+ is still possible then Yellen has to indicate MAR is live at least, likely even and perhaps even more significantly that the Fed is on track to raise interest rates three times in 2017. That is, on balance, what we are surmising after famed doves Brainard and Dudley seemingly turned Mar hawks.
If she reins in expectations, however, then notwithstanding the Fed will set themselves up for criticism/ridicule for those mixed messages then we will be looking to lower topside expectations for a rough 115.00/120.00 2017 range.
Outside Fed risks also look less than supportive, ie Brexit and EU elections still and of course Trump and those ongoing certainties:
Feb 16 IGM won the Thomson Reuters Awards for Forecasting EUR/USD in 2016, whilst finishing a clear second overall in the FX Majors polls that over 100 of the biggest banks, financial firms contribute to.
We think it's worth reminding ourselves the thinking behind these estimates and whether anything much changes into 2017.
Eur/Usd began 2016 at approx 1.09 and our 3, 6 and 12 months' forecasts on Jan 4 read 1.08, 1.05 and 1.03. We noted then that we were reasonably content to sit and wait on Eur/Usd even though the likes of ABN AMRO were mega bullish and targeting 1.25. We described ourselves then as relative bears to 1.03, but sub-parity calls were not for us given the recent ECB tone (less dovish than expected) and Fed verdicts and market responses to them.
We decided early not to get too excited and most importantly not shift our levels, on the ECB given its propensity to flit between less dovish and more dovish stances.
Our focus for much of the year was on US data and the Fed and decided a rate hike was probably coming and by the start of H2 we had surmised that it would most likely take place in Dec. That proved somewhat prophetic.
Two lines on the chart below proved game changers and though we managed to respond well to the outcomes, no we didn't expect a vote for Brexit (red line, Jun 24) or the Trump win (white, Nov 9). We also finished a clear second in Gbp/Usd forecasts in 2016, helped by being quick to conclude that the UK vote to leave Europe would prove a major Pound negative AND a Euro one, albeit to a lesser degree.
In the interim, we talked of the Euro elections weight on Nov 1, helpfully somewhat ahead of the curve and expressed concerns over the Dec 4 Italian referendum (NO!), the Mar Dutch election and the dynamic Wilders, the Apr/May French elections (Le Pen still in the running) and then after that it's all about Germany for the rest of 2017. We worried whether Brexit was the start of a populist trend and this increased political uncertainty would prove a potential ongoing drag.
It's easy to forget that pre US presidential election, markets overwhelmingly concluded that a shock Trump win would be bad for the Usd. Hence, the early Euro spike towards 1.1300 after the Reps' candidate won the likes of Ohio and it fast became clear that a victory for the long shot was possible, probable and confirmed. In the next few hours, to the shock of the market again, the Usd went on the charge as a mix of reflation/stimulus promises/policies on top of a coming (?) Fed Dec hike now proved a huge fillip. After, we moved forecasts down to 1.05, 1.03 and 1.01.
At the beginning of 2017 we stood at 1.01, 0.97 and 0.95, but have been slightly uncomfortable being so Eur/Usd bearish given the resilience of the Euro currently. However, we argue those weights largely still apply, ie:
We also have to acknowledge the potential NEGATIVE USD RISKS that are lurking in the background and they're largely TRUMP related too.
Keeping an eye on EU political developments (not necessarily the polls) we will stay relative, but not outright bears, and move to 1.03, 0.99 and 1.01 through 2017.
Feb 9 IGM finished 2016 as second top in the Reuters awards for forecasting FX Majors. Our theme for much of the year was that a Fed rate hike was probably coming and by H2 we had surmised that it would most likely take place in Dec. That proved somewhat prophetic.
Six weeks or so into 2017 and we admit that it feels a lot harder this time around. Our mantra when forecasting is ignore the noise and stick to our underlying beliefs/expectations. However, it's proving difficult amid the big uncertainties of Trump, Brexit and EU elections, but mostly Trump.
We decided at the start of the year to go 120, 118 and 122 across the 3, 6 and 12 months' curve after USD/JPY had very recently peaked at 118.66 on Dec 15 on the possibility of three Fed hikes through the year on top of Trump's reflation/fiscal stimulus policies. We were also impressed on election victory day that Trump reined in his rhetoric and talked with a conciliatory/magnanimous tone.
Since, he's done anything but and has reverted to type, ie his campaign promises. We cannot say we weren't warned! Trump says he's building the wall, filed executive orders on migrants/refugees and cast the US' traditional strong Usd policy in doubt by criticising Germany, Japan and China, while there is absolutely no imminent sign of reflation/fiscal stimulus policies implementation etc.
As a result, the first major Trump fibo has been tripped at 111.95/00 (38.2% of 101.20/118.66) and the 50% and 109.93/00 is increasingly targeted as markets nervously await the first Trump/Abe meet.
Ahead, we are at an amber state of alert on our early 2017 forecasts and are mulling going a conservative 110-115 with the topside favoured for choice. We do not expect things to get much clearer after, but we will hold for now, tentatively encouraged on our relatively Usd bullish forecasts by the overnight less than hawkish RBNZ and last week's (surprisingly?) dovish BOE. The Fed forecasts three 2017 hikes, but there are no signs of any movement anywhere else in G10 land. That has to be a major Usd prop doesn't it? We'll hold for now, betting that 109.93 or at least 107.40/00 and the 200-dma holds no matter what Trump does/says.
Jan 25 The Usd pullback continues:
Trump aggressively touting protectionism over reflation/stimulus has been a Usd loser this week, but also so has MNUCHIN. The US Treasury Sec nominee stated this week that 'from time to time, an excessively strong dollar may have negative short-term implications on the economy'. Of course, it could negatively impact on growth via an increase in imports rather than a decrease in exports, according to the FT.
However, what is less well known is that Mnuchin's line was in answer to a very hypothetical question from a senator about the implications of a possible future 25% Dollar rise. To us, that's a fair enough response and does not mean that Mnuchin will be the Treas Sec to turn his back on the mantra 'a strong Usd is in the US interest'.
We have to wait and see on Mnuchin and of course Trump and policy targets and those he can get through Congress. In the interim, a couple of our estimates look a bit of a stretch, but it's worth reminding ourselves that on the yield differentials front (and ongoing hawkish Fed speak) and US economic data wise (getting even stronger?) these bets have never looked so good before.
Jan 11 Clearly, the Dollar charge has stalled in the last week even after another solid NFPs and higher average earnings, but what we think is most interesting is the lack of genuine pullbacks there has been. Just to be talking pullbacks rather than corrections says it all.
Ahead of what markets are mulling could be a key speech later it is worth showing just how far the Dollar has rallied since the Trump win on the promise of reflation/stimulus.
Markets have ground to a halt this week, but the lack of pullback suggests either it remains cautiously optimistic that Trump will reiterate those campaign promises or like us suspect that today is not the time to lay down his new policies ahead of the Jan 20 Inauguration (even then it's unlikely?).
We like a Bbg piece that says markets reacted positively to a sober and constructive acceptance speech, but the bar was set low (!) and questions whether this big Usd uptrend will require more than 'don't be outrageous' to continue on. If he does do policy, what form will this fiscal stimulus take (tax cuts)? Is it needed? Can the US constructively take on even more debt? What is good deregulation? What about damage to the climate, does the market care about/price that? Bbg concludes by acknowledging that powerful trends (and this is one) tend to confound those looking for a market-reversal for longer than it seems possible.
RISK is best laid out by a UK CLEARER who went short Usd vs a Eur, Gbp & Yen basket as its TOTW and cited increased US political uncertainty as reason this week. A strong trade-protectionist tone may worry markets (Usd/Cnh in particular?) as nominees make their first formal policy statements and Dem scrutiny could delay govt formation and lead to questions over likely speed of policy implementation.
It's so difficult to second-guess such a divisive, shoot from the hip president elect, but on balance we expect him to keep things light today, be magnanimous again and steer clear of policy for the most part and so the Usd charge trend can continue for now, but it's worth acknowledging the risks if he does cause a surprise (?) and so bear those retracement levels in mind in these long Usd markets.
Dec 29 We talked last week of our guarded semi-bullish Usd/Jpy forecasts of 120, 118 and 122 across the 3, 6 and 12 months curve. We cited two reasons for our fairly cautious stance:
Basically, Usd/Jpy forecasting will be a tough gig in 2017 and a piece in the WSJ gives credence to this view. The Journal says 2017 could be another wild ride as from 81 outlooks there is a range of 97 to 128 and adds:
Who knows what will happen in 2017. Trump obviously, ongoing Mid East tension is likely and what about other G10 CBs to follow the Fed with a more hawkish twist, the Fed though could turn back to more cautious, UK to trigger Art 50 probably and of course those EZ elections. Perhaps 2017 will be just as rocky (seismic?) as 2016 has been.
Dec 20 We were taken slightly by surprise by Yellen last week. Overall, she sounded relatively hawkish and to us that is a fair departure from the cautious Fed chair we have seen for the best part of the last three years. That change of stance and the predicted three hikes to come in 2017 has left at least some of our forecasts looking a little behind the curve. We have considered ourselves Usd bulls through the year, but have been left behind by the shock positive response to the surprise Trump win and the expected stimulus/reflationary/protectionist policies he will undertake.
It's been a spike 9% DXY rise since the Trump win to 103.65, a 12.5% jump from early May US soft patch lows below 92.00, but only a 5% rise since the turn of the year when the Fed was 'due' to raise interest rates FOUR TIMES through 2016.
There are two main reasons why we will make guarded higher forecasts for early 2017. These are:
We concentrate on the Dollar for now, but there are other potential major independent impacters ahead, ie EU politics and elections and Brexit/Art 50 triggers.
For now, we go 120, 118 & 122 in Usd/Jpy vs 110s last, but we will be ready to move higher for 125 if it looks like the Fed could in fact hike on three occasions.
We have talked plenty on growing EU political risk and Eur/Usd in Q4 and we lower our forecasts to 1.01, 0.97 & 0.95 vs 1.05, 1.03 & 1.01.
Dec 13 Just 24 hours or so to go until the expected second hike of the Fed's tightening cycle. Much will depend on the accompanying statement and Dots etc and we are on amber alert for at least some of the pairs. Usd/Jpy is the obvious one, torched by Trump campaign promises of fiscal expansionism, reflationary policies and now two Fed hikes are being priced in for 2017 as well as Dec's apparent done deal tomorrow. We have no problem with tomorrow's hike, particularly as we have been targeting Dec for another hike for much of 2016, but we have been cautious thereafter. Currently, our forecasts reflect that, especially Usd/Jpy, which is still 110 across the board. We are on amber alert for a hawkish rubber stamping of growing market expectations. Rightly or wrongly, however, we have been taking Yellen at her word and she has been one cautious Fed chair so far so we are not giving up on our more conservative estimates just yet and do not rule out a dovish hike still. What constitutes that?
If we get some or all of those in the accompanying statement the Dollar could well back off from the current 115+ and we might have to only move on the front-end of our estimates and only by a little.
Dec 6 First to the Yen and our cautious 110 across the board forecasts. We talked plenty about why we are in amber mode in our previous update, ie Trump promises/expectations vs reality and possible Congress opposition, the over priced multi Fed hikes in 2017 etc? This compares with Dec Reuters poll medians (in which we participate) of 111, 111, 112 and 114.17 across the 1, 3, 6 and 12 months' curves. For the one month, min and maxes are 104.00 and 116.00, in the three it is 95.00 and 120.00, the six 96.67 and 120.00 and in a year's time 99.33 and 128.00. Another expected positive (wow, they're stacking up) is US Treasury Sec Mnuchin. His silence so far on Usd policy has enabled investors who are winning on Usd longs to conclude that the status quo and Rubin policy since 1995 of a strong Usd is in the US' interest will be maintained. Mnuchin has stated that international investors see value in US assets, money is pouring in for those reasons and laid out his priority focus of economic growth and creating jobs. Does that fit with a strong Usd policy? CITI's Englander thinks so, saying Mnuchin so far seems to be willing to tolerate a strong Usd. However, how well does that fit with Trump's promise to revive manufacturing? How much does a strong Usd policy fit with recent comment towards China and raised rhetoric on Beijing's apparent FX manipulation? With so many uncertainties right now, it's little wonder that Mnuchin is not revealing too much of his hand yet. That's the standpoint we are coming from. We will play wait and see for now, looking to enter 2017 the way we conducted our strategy for much of 2016. We don't like whimsical FX forecasts changes. We want to see at least some of what Trump will deliver before nailing our colours to the mast.
Nov 30 We have just submitted our forecasts for Dec's Reuters FX poll and the overall findings will make very interesting reading. We admit we have gone conservative, albeit on amber alert, as we wait on the Dec 4 Italian referendum and the political climate generally ahead of 2017's clutch of key elections in the EZ. We have sat awestruck (and turned more Usd bullish) at the speed of the Usd charge post Trump win on the back of expectations of fiscal stimulus/reflationary policies and the possibility of more Fed rate hikes in 2017 than previously envisaged. The Pound and the UK also remain in limbo as the country, markets wait on the triggering of Art 50 and/or a fight in the courts/parliament on the plausibility of a second referendum. So, we are at 1.05, 1.03 and 1.01 in Eur/Usd across the 3, 6 and 12 months curves. We note that the likes of DEUTSCHE and ABN AMRO have already gone sub-parity during 2017. However, these firms might be forced to reassess yet given a number of banks seem to have bet big on an unravelling of Europe and a similar to the US anti-globalisation, nationalist move and it's worth noting that since Merkel stated that she would be standing for re-election the Euro has held easily enough above 1.0500. It will also be interesting to see how big firms are prepared to bet on Usd/Jpy beyond the 110 mark. Interest rate differentials look a Dollar winner at the moment as Abn looks for 115 by Q4 2017, but much will depend on the performance of the US economy next year and we are not prepared right now to conclude that possible Trump policy will have an impact similar to Reagan's first-term in the early 1980s and prove a major Usd winner too and so are staying 110 across the board for now. Similarly, in Gbp/Usd, we have to be in wait and see mode, although we take on board that the BOE says it is in neutral mode, although we cannot completely rely on their FG either too! We'll sit it out for now at 1.23, 1.23 and 1.26 and expect to be more bullish than many.
Nov 16 We literally have no choice. Thanks to Trump, some of our forecasts are now way out and after leading the polls in Sep we are reluctantly forced to move. We are slightly comforted by the fact that many firms will be doing the same ahead of Dec's official polls and recall the huge number of firms talking 100 tests and below on a Trump win. The fact we got that, but based at 101.20 and charged 8%+ towards 110.00 in no time has stunned markets. So, where do we go from here? There seems to have been a leap towards 110 to 120 on expectations for looser fiscal and tighter monetary policy, as the new admin inspires higher growth and inflation and the US 10-year yield certainly agrees at 2.27% currently. At this juncture, we will take the cautious approach. The guy is not going to be taking his seat in the Oval Office for another two months and judging by some of the early appointments he has made (some arguably part of the establishment, ie Priebus) then it is difficult to fully trust in his campaign promises on the economy too. Also, not only does Yellen need to point to a Dec hike, but arguably to sustain the Dollar charge expectations for at least two 2017 rate increases will likely be needed. She's certainly not sounded that hawkish before. So, we will take what we believe is the sensible approach and go 110.00 right across the curve vs 102, 103 and 106 currently in the 3, 6 and 12 months. We will go lower in Eur/Usd too at 1.05, 1.03 and 1.01. We are betting on finally the break below the 1.05/1.15 range, but we are at least attempting to rein in extreme scenarios. Some of our forecast turn is Trump related, but also on the upcoming EZ elections threat that we discussed on these pages (first?) on Nov 1. If the doom monger and right wing turn results pan out and the demands for referendum and EZ exit are loud then we will be forced to reassess just like we will if the likes of Le Pen and Wilders begin to lose support. From a forecasts perspective at least (certainly not vol and direction wise), we had been enjoying the period of stability and certainty. All of that seems to be out of the door and so flexibility is going to be the new mantra.
Nov 9 The chickens have come home to roost as Trump takes the US presidency as the pattern of Rep/Dem/Rep asserts itself. So far, in the post-election environment, uncertainty remains the rule & with the outlook so clouded there is as yet little to cause us to change much of our longer term ccy predictions. although global trading may lean towards a more protectionist environment given the new President-elect's 'America first 'policy. Near term this should help support the safe haven ccies - the Yen & the Swissie in our grid - & has pulled them back towards our pre-election 3mth view. We would thus stick with these at present. Obviously, as one one those suffering collateral damage, the Canadian Dollar (as a member of NAFTA along with Mexico) may move into a higher band & so we recast these around the 1.35 handle as a holding operation for the moment. But even here the impact longer term may not be necessarily negative, especially if the US economy accelerates & the commodity universe plus associated ccies receive a boost. Moreover, the long term effects on the Dollar in general could be very mixed. This ranges from the potential for a much larger fiscal stimulus & impact on Fed policy (expansionary fiscal/tight monetary policy are unequivocally positive for a ccy) and in the same the same ball park as whether Trump would interfere with Yellen's term when it expires in 2018. But at the same time, whilst wary overseas investors (and capital outflows) may be offset by US domestic capital repatriation, although even the former may not be the case if US momentum continues . Overall, in this environment, largely leave the majors where they are.
Nov 4 Political uncertainty continues to dominate mkts. The latest court ruling in the UK's Brexit episode has thrown a spanner in the timetable (if upheld by the UK's Supreme court with a December judgement) & potentially complicate the whole process. This has helped give Sterling a slightly more bid tone & now within distance of our 12mth Gbp-Usd 1.26 forecasts. But with so much uncertainty around, & despite some talk that Brexit fears on Sterling's fortunes were in any case abating, allied to the switch in the BoE's stance to neutral on a worsening growth/inflation trade off, we still deem it too early to make any revisions. Like the Dollar, amber lights are starting to flash, but for the Dollar, the immediate crunch point is now only a few days away with the US Presidential election & the race too close to call. The safe havens have been strongly bid as a result with the Swissie, Yen & gold all taking up the cudgel, although the de facto Eur-Chf floor is limiting Dollar losses here, but even so the Dollar may still not be discounting the full effects of a maverick Trump's victory. While a Clinton win may lift some of this pressure s/t, it is by no means certain that it will be off longer term. Trump's largely anti-globalisation/protectionist stance could leave an aftertaste even if he losses as the US becomes more introverted, & this could play to l/t Usd weakness in any case via greater uncertainty over the global trade picture & shifting Usd vs domestic ccy preferences. All this may start to become clearer after Wed, so for now, we leave things alone & wait & see.
Nov 1 Looking beyond the upcoming Clinton/Trump vote we are going to focus for now on the EZ. We talked earlier that Italexit is viewed as the new Grexit, as it's no longer Greece but Italy now the country most likely to leave the Euro, according to Sentix. Amid ongoing banking sector concerns, there is a key referendum on the constitution on DEC 4, which could trigger a new Italian election. According to NORDEA, the opposition is in the lead and there could be a campaign for a Euro referendum. Also on Dec 4 is a repeat Austrian presidential election and Hofer from the Freedom Party, viewed as Eurosceptic and anti-Islam, is currently reportedly in the lead. Then a break until MAR 2017 and the Dutch general election and could the controversial Wilders' leading Party for Freedom (anti-EZ, anti-Islam) be set to attempt to form a govt? Next up the French election in APR/MAY 2017 and Le Pen's National Front (anti-EU, anti-immigration) is gaining in the polls, but is not predicted to win any two-person duel. Recall in mid-Sep we reported that MORGAN STANLEY apparently warned that a far-right win in France appears more probable than markets are pricing in. Then, Germany takes over in MAY 2017 with regional elections on the 7th and 14th and in Sep/Oct an election to the Bundestag. The alternative AfD has purportedly been gaining support recently as Merkel's controversial mass refugees intake and the terrorist/criminal attacks since have weighed on her popularity. We are at 1.11, 1.12 and 1.10 across the 3, 6 and 12 months Eur/Usd curve vs Nov Reuters poll median of 1.09 across the board. We view ourselves as for choice relative Eur/Usd bears but have had to play a wait and see stance due to the lack of direction in 2016. EZ politics is a potential weight ahead.
Oct 27 Towards the end of the first mth of the final qtr, & it is very much a as you were. Apart from Sterling (we have revised a 3 mth Cable outlook down to 1.21 in recognition of the flash crash), for the others, there has been very little break in the ranges, Eur-Usd has touched towards the weaker percentile of the broad Eur-Usd 1.07/1.15 range that has prevailed over much of this yr & we have stuck, & still do, with a continuation of this scenario. 3mths ago when we made our predictions, we pencilled in 1.1 vs the Reuters FX Poll consensus (in which we participate) of 1.07, so into the end of this mth just split the difference. Usd-Jpy has been a tad firmer than we expected, above 104 vs our 102 prediction, but were right in not seeing a sustained break below 100 as the Usd-Jpy bears did within this timeframe (Usd-Jpy around 101 at the time the forecasts were made). With the Yen stabilising/stronger, the question now is whether the ranges that our forecasts assume over the next 12mths remain intact. Longer term portfolio flows are likely to be Yen negative as the search for yield dominates. But with these being hedged, the ccy impact will continue to remain muted & talk that with the FOMC only slowly expected to raise rate, the hedging costs into Dollar denominated assets leaves little difference in JGB/UST returns. But we have nonetheless cautiously shifted our 12mth view up to 106. All this does throw the focus on whether the expected Dec16 FOMC hike & subsequent Fed speak/forecasts leave mkts anticipating another long interval before the next move even though post-Presidential election there is the whiff of fiscal expansion in the air. As for Sterling, we were way out of court with the outright 3mth bears taking the crown Gbp-Usd 1.19 (vs our 1.31 & the Poll consensus of 1.26). .
Oct 24 It's not a time frame we look at very often, but we are interested in the one-month right now and in particular Oct direction. The Usd has been a broad winner so far, up 0.5% vs the Aud to 3%+ vs the Nok and Sek and the Hard Brexit weighed Gbp at 5.7%. Fed expectations will have been a mover as markets were looking at just an approx 58% chance of a Dec hike at the start of the month to around 70% currently. However, we do not suppose just changing Dec chances have been the sole reason for the change in sentiment and broader Usd value. A GERMAN BANK argues that even very gradual tightening in 2017 in addition to one in 2016 will be Usd supportive, with so little currently priced and if we do get that Dec 14 hike the German giant suggests the late 2017 Fed Funds futures contracts will likely sell off as they see less than a 50% second hike priced. According to the web/social media, DEUTSCHE also cites Clinton's (leading and) supportive standing in the polls, but whoever wins argues a 2017/18 fiscal stimulus is expected, unlikely matched elsewhere in G10 land. They also talk of few alternatives right now, ie Cad and the dovish BOC, Aud and Nzd's valuation concerns, Gbp and Hard Brexit and Usd/Jpy needs to fall sub-100 to spark increased hedging, while they prefer to play long Chf and Scandis vs the Eur. The firm also targets 1.05 Eur/Usd by year-end, but adds a new catalyst is probably needed and suggests political concerns (admittedly apart from Brexit) have a greater negative impact before the event. We are 1.11, 1.12 and 1.10 across the 3, 6 and 12 months Eur/Usd curve, but for choice we are small albeit very patient bears and political concerns are one of those possible weights.
Oct 21 With Fed Funds futures upping the odds of a Dec rate hike & some of the uncertainty of a Trump Presidency being allayed by the last US Presidential debate as the polls widen in Clinton's favour, the Dollar has taken on more of a bid tone, helped by the lack of any mention of tapering of QE by the ECB yest. Nonetheless, the ECB programme ceases in Mar & if the disinflation background has further substantially improved by then, signals could still emerge in the three meetings before expiry. Persistently weak inflation & outright deflation have been the prime movers behind central bank policy over the past five years. Whilst economic slack has been a major driver, the IMF WEO identifies that weaker commodity prices reflected in the relative deflation of US Dollar import prices have served to play a significant role in the last two years as the major economies seek to gain growth traction via extremely accommodative monetary policies But this may now be starting to change as commodity prices in general receive a new lease of life. Oil prices have risen by over 50% this year alone & other industrial commodity prices are improving. Indeed, the latest World Bank predictions see a more generalised commodity price increase continuing through to next year as well. Metals & mineral (ex oil) are seen up 1.2% in 2016 & edging higher by 1.65% in 2017. Whilst, unlike energy, this may all seem rather muted, it nonetheless suggests that the period of deflationary dynamics is past, & even those CBs presently stuck in an extremely accommodative monetary paradigm may have to change their tune. Hence, reasons to be cautious that the Dollar & the Fed may not be a one-way bet.
Oct 19 Those safety features have often been touted as key support drivers for the Yen & the Swissie. Whilst the Yen also has its own dynamic in terms of the deflation & BoJ parameters, the Swissie has been far more subdued this yr despite the ebb & flow of risk on-off. But long term correlations between the Swissie & volatility indicators suggest virtually no correlation & this is also the case in the period since the financial crisis of 2008 despite the general assumption that this is the case. On a daily basis there is a stronger correlation, albeit still relatively weak at around 15%. Indeed, over this period it is higher for the Yen at around a third, which gives credence to the view that in troubled times, the Jpn ccy is one of the safe haven ccies of choice. But unlike the Swissie, this has been subject to little interference in the way of official intervention. The Swissie has been highly controlled on the downside by the SNB over the period, which would bias the results for testing the correlations between the Chf & volatility indices. Indeed, SNB FX reserves have been swelling over this period with the SNB balance sheet (which mainly consists of FX) trebling . The Fed, BoE & the BoJ have also seen massive expansions of their balance sheets, but this is in domestic assets as a result of QE. To this extent, the reserve expansion is a key indicator of the extent to which the Swissie has performed in its traditional role rather than correlations between the fhd & volatility indicators. Interestingly, the ccy most in danger from risk aversion on the basis of these correlations is the Loonie, followed by the Aussie, the latter more so than the Kiwi, & even the Dollar G10 index is not immune, in contrast to the Eur, a net beneficiary.
Oct 13 The die has effectively been cast on the Fed hiking rates by the end of this yr with the probabilities now around 67% post-FOMC minutes that Dec will the favoured meeting (the first after the US Presidential election on Nov 8 - the Fed in the past has not raised rates in the meeting immediately prior to the Presidential vote). But the real question is whether this turns out to be more Dollar supportive than the hike in Dec last yr plus & at the time, the fairly aggressive stance that this would be one of a series through 2016, although this outlook was significantly pared back on both domestic & global developments. The Dec 16 2015 rate hike buoyed the Dollar index by around 1.5% to around 99.25 & it edged only slightly higher through Jan but still was shy of the Usd 100 mark before retreating to the lows of 92.60 in early May as Fed expectations for 2016 were pared back. The peak of the G10 Dollar bsk was achieved above 100 in Nov 2015 after the steady rises from mid-2014. To this extent, therefore, this latest experiences on the Dollar & the Fed suggests that the perceived outlook from the subsequent statement also holds the key as to whether the US ccy will be able to hold on to any broad gains following a rate hike. But at the same time, the longer term pattern suggests that rate hikes are losing their pull on the Dollar . While the Fed rate hikes in the 1980s & 1990s pulled the Dollar index higher, albeit with diminishing lag, the series of hikes in 2005 through to mid-2006 failed to follow the traditional pattern & the short lived strength (up 13%) of the G10 Dollar bsk petered out before the Fed rate hiking cycle ceased. Indeed, By this time, the Dollar index was already sliding backwards. To this extent, the jury still remains out whether the Dollar can gain long term sustainable support from a Fed rate hiking cycle. Thus for the moment we are minded to keep our Dollar f/casts unchanged.
Oct 11 At times like this, it is fairly easy to doubt yourselves. We wrote earlier in Oct that we were forced to move in Gbp/Usd after the sustained sub-1.30 break amid negative reports of early Art 50 triggering and tough rhetoric from the likes of Hollande and May. We fell on 1.25, 1.23 and 1.26 estimates across the 3, 6 and 12 months curves vs 1.31, 1.30 and 1.34 previously, although since that collapse to 1.1841 late last week there's been plenty of further debate and temptation. We'll stick with what we have for now, at least until we get a sustained sub-1.30 break. We also note that others have moved towards our vicinity:
There are not too many firms who are not vocal bears at present, although BNPP have been fairly public semi-contrarians. They advised even Fri not to chase the Pound lower again after the earlier flash-crash and even talked 1.35 as fair value, while today they argue the selloff is unjustified by short-term fundamentals and and its model triggered Gbp longs targeting 1.3003 (and 0.8693 vs Eur). Meanwhile, a Telegraph piece is garnering some attention today and after years of supportive magnet mega speculative property flows from Russia, China and the Mid-East City as the City of London continued its dominance as the financial centre of Europe, a bubble that was further leveraged by cheap Dollar credit, a welcome rebalancing is now taking place. A former IMF official said Gbp was 20/25% overvalued pre Brexit and there is still some way to go before 1.10 fair value is reached. That will hopefully help the UK's C/A position, currently at 5.9% of GDP the worst in the developed world, while the Telegraph concludes with a warning - to the EZ. All things Brexit and the Gbp fall is bad for their exports (others say a 20% fall expected), companies' revenues and their deflationary spiral.
Oct 7 Since the Sterling flash crash, the f/casts for Cable may look somewhat out of kilter. Indeed, as noted Wed, we in any case had changed our view to a more bearish one following the weekend Brexit announcement & the risks of a hard exit, but this was before Sterling fell out of bed. The Reuters consensus is well above current levels with a Gbp-Usd 1.2810-1.2650 profile in 3mths through to 12mth horizon. Cable bears see 1.20 in 3mths & 1.05 in 12mths. But our f/c has a different profile with the bearish content in the run up to the official triggering of Article 50, thus in the 3mth/6mth outlook before a recovery then sets in, to around the level of the consensus in the Reuters poll. But in the present uncertain & volatile environment, any Sterling predictions are fraught with difficulties &, as expected, the usual measures of uncertainty around the forecasts have increased. Usd-Jpy has been another pair that has been very jumpy. But in this case the profile from the Reuters poll has dropped to be more in line with our predictions, but with a 102/105 range on a gradual shift higher. vs our broadly flat profile Dollar bears still see under 100 in 3mths to 94 & bulls up to 112, but this is relatively consistent with the recent f/c range. Any Usd-Jpy weakness is essentially confined to the n/t horizon with 12mths bears at the same level vs 124 for the bulls. As for Eur-Usd, again there is not any marked difference with both ourselves and Reuters. The latter poll median postulates a continued long period of range trading. The Eur-Usd bull/bear spread is 0.98/1.20 in the 12mth & 1.05/1.18 in 3mths. To this extent, little cognisance seems to be taken of the US Presidential election & the potential risks that this creates if there is a change of administration, whilst the consensus, & ourselves, are suggesting that there is little motivation for a stronger Dollar, even if the Fed hikes.
5 Oct The chickens may be coming home to roost on Cable. After holding up around the 1.30 level, since the Brexit vote, Sterling is taking fright as the timetable starts to firm up with end-Q1 2017 given as the potential deadline for the UK to start the article 50 consultations to officially leave the EU. To this extent, the reality is being driven home and this may start to increasingly weigh on the UK ccy. Whilst wary of being dragged into short term moves (& keeping range trading for a prolonged period has stood us well), we now consider it time for the Cable outlook to be downgraded as jitters about a potential 'hard' Brexit increase. Indeed, the period up to the PM's announcement at the Conservative Party Conference has seen relatively positive UK data - the UK PMIs higher in Sep - but overall uncertainty is likely to intensify & Sterling is vulnerable to the exit process. To this extent, even though the BoE has promised more supportive action if necessary & the Autumn Statement by the Chancellor (Nov 23) will show the fiscal side of the balance sheet to soften the blow of an EU exit on the UK economy, Sterling is likely to be dominated by 'fear' over the next 3/6 mths & the risk that Brexit poses for capital/financial flows in particular. Indeed, there is the risk that some funds may have had their heads in the sand over the period of the 'phoney war' since the Brexit vote, & could now re-appraise their position. Hence we have taken the view to significantly lower our Cable profile, particularly over the next 3/6 mths, to a 1.23 low in the latter period. Brexit has echoes of 1992 with the sharper & more violent ejection from ERM 1. Total high/low Cable collapse then around a third to a 1.42 low - so far only half of this has occurred under Brexit.
IGM Credit, IGM FX and Rates
By Tim Cheung 30 Mar 2020
As Emerging Markets go into recession, EM policymakers have rapidly deployed a broad range of support measures with more to come, but it remains to be seen how effective these will be in mitigating the EM growth hit. As far as China is concerned, negative GDP growth in Q1 looks unavoidable. The most pessimistic estimate in the street is -9%. For the full-year GDP growth, the revised estimates in the street fall between +1% and +4%. In light of the gloomy economic outlook, Beijing definitely will step up stimulus. Now a cut in the benchmark deposit rate is on the cards, which could be a more meaningful means to boost retail consumption. With interest rates trending downward, onshore government bonds and policy bank bonds have kept rallying recently on the back of strong buy-and-hold demand (chart 1). The latest data suggests the China bond market saw USD11bn of net inflows from foreign investors in February, up from only USD2bn in January (chart 2). Among the paper which is already or being included in the major global government bond indices, policy bank bonds (PBBs) registered a bigger increase in foreign investors' portfolios than China Government Bonds (CGBs). Of the USD11bn of net inflows in February, USD5bn was taken by PBBs, USD4bn by CGBs with the remainder by negotiable certificates of deposit (NCDs) and medium-term notes (MTNs).
Topics Industry News