FX Convictions – Maintaining our US dollar long views

by: Georgette Boele , Roy Teo

FX-Convictions - 2 April 2015 - Maintaining our US dollar long views.pdf ()

We have stuck to our main FX convictions

Since our latest report on 10 March, we have kept in place our long US dollar views versus the euro, the yen the Australian dollar and Sterling. We have also recently added the New Zealand dollar to our conviction list of currencies that will underperform the US dollar.

EUR/USD weakness far from done; target end of 2015 of 0.95…

We remain of the view that EUR/USD will move lower. The aggressive ECB’s QE programme will continue to push eurozone yields and the euro lower. In addition, strong US economic data will warrant a 25bp rate hike at the September Fed meeting. Furthermore, financial markets will adjust to factor in further more Fed rate increases this year and next year. This is a major positive driver for the US dollar. Our new EUR/USD forecast for the end of 2015 is 0.95 (previously 1.05).

…also more yen weakness because of more monetary policy easing ahead…

It is likely that weakness in the Japanese yen has also further to go. This is because USD/JPY is very sensitive to developments in the interest rate spread between the US and the Japanese economies. While US short-term interest rates will go higher, we expect the BoJ to step up its monetary easing programme later this year.

…and political uncertainty to push sterling lower

We expect sterling to underperform because of political uncertainty ahead of the May elections and the prospect that the US Federal Reserve will start hiking earlier than the Bank of England.

We initiated short NZD/USD on 30 March…

We initiated a short NZD/USD on 30 March 2015. It is very likely that the Reserve Bank of New Zealand will intervene to weaken the currency. In addition, the currency is overvalued and weakness in commodity prices is not fully reflected.

…and we also remain negative on Australian dollar on monetary policy divergence

We also remain negative on the Australian dollar. We now expect two 25bp rate cuts by the Reserve Bank of Australia this year. In addition, widening monetary policy divergence with the US should push AUD/USD lower.