02 Feb 2018
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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:
• A hawkish Fed talking three 2017 hikes even if the market is currently thinking nearer two.
• Ongoing growth differentials and Trump's seemingly pro-growth policies still to come.
• Ongoing EU political uncertainty ahead of elections amid a perceived populist march across Europe and that Brexit Article 50 trigger (perhaps before the end of Q1).
• A still usually dovish ECB (still not overly impacting on our bets).
We also have to acknowledge the potential NEGATIVE USD RISKS that are lurking in the background and they're largely TRUMP related too.
• He's already describing a number of countries as FX manipulators, not just China, and has intimated he will not necessarily continue to back the traditional strong Usd policy.
• Related, a potentially protectionist lurch (prompting an escape to other safe havens Chf and Yen).
• Inevitable doubts whether the US pres can get all his reflation/stimulus goals through Congress.
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.
IGM FX and Rates, IGM Credit
By Marcus Dewsnap 20 Nov 2017
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