G10 FX Weekly – The dollar’s come-back

by: Georgette Boele , Roy Teo

G10-FX-Weekly-10-April-2015.pdf ()
  • Come-back of the US dollar and the trend will probably accelerate next week
  • Surprises in CPI data next week will likely result in large currency moves

Come-back of the US dollar

The US dollar has made a strong come-back this week. For a start, the weaker than expected US employment report last Friday only temporarily weakened the US dollar. This resilience is a sign of strength. In addition, stronger than expected US economic data have supported the dollar. Last but not least, the Fed made it very clear in the FOMC minutes and in speeches from officials that it will raise interest rates this year. This was in contrast with expectations built in financial markets that the Fed might not hike at all this year. As a result, US rates and Treasury yields have moved modestly higher and the US dollar has recovered. Next week, higher US retail sales and CPI numbers will probably result is a sharp rise in the dollar. Our EUR/USD target for the end of June is parity.

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Central banks continue their current stance

The Australian dollar outperformed major currencies this week, because the Reserve Bank of Australia left monetary policy unchanged. Financial markets had expected a possibility of a 25bp rate cut. We expect the RBA to lower the official cash rate by 25bp in May followed by another 25bp cut in the third quarter of this year. Our year-end AUD/USD target remains unchanged at 0.72. The Bank of Japan also left monetary policy unchanged this week. We expect further easing of monetary policy at the July meeting.  Next week we expect the ECB to continue its QE programme at its current pace and to dismiss any talk on an early exit. The Bank of Canada is set to leave monetary policy unchanged.

Switzerland sells first negative yielding 10y bond ever

Switzerland has become the first major country to auction a 10 year sovereign bond at a negative yield. The question is why the 10y yield has turned negative? The Swiss National Bank (SNB) has negative official rates far below the ECB’s official rates.  In addition, the ECB started to purchase sovereign government bonds. Government bond prices of high sovereign credit ratings have rallied the most. Switzerland as triple A country has also benefitted. Moreover, waves of risk aversion have also supported the Swiss franc and Swiss bonds. The latest data of SNB FX reserves show an increase in March, but currency moves were unlikely be the reason for this. Instead, we suspect that the central bank intervened again. It is likely that the SNB will aim to minimize the impact of euro weakness on the Swiss franc. Therefore, the SNB will probably ease monetary policy further. We expect the Swiss franc to weaken versus the US dollar this year, with our year-end target of 1.11. Our year-end target for EUR/CHF is 1.05.

CPI surprises to result in currency swings

Next week CPI data for a number of countries will be released such as the US, eurozone, Canada, Sweden, Norway and Denmark. The dollar is very sensitive to an upward surprise in US CPI data, especially core data. Because this will increase the likelihood of earlier than expected Fed rates hikes. For all the other countries, the focus is mainly on lower CPI data, because financial markets expect more monetary policy easing.

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