G10 FX Weekly – US data weigh on dollar

by: Georgette Boele , Roy Teo

G10-FX-Weekly-17-April-2015.pdf ()
  • US dollar come-back pushed back again…and the euro also remained weak
  • Currencies of oil exporting countries outperformed following the higher oil price

US dollar come-back pushed back again…

This week has been a very disappointing week for the US dollar. This is mainly because US economic data did not meet expectations and the Fed’s Beige book sounded more dovish. As a result, financial markets lowered their expectations about Fed rate hikes this year and 10y US Treasury yields and the US dollar moved lower.  The US dollar has been the weakest currency among G10 currencies since last Friday. For the US dollar to recover, US data need to start surprising on the upside and the market’s expectations of Fed rate hikes  should be adjusted upward. We expect this to happen going forward. Therefore, we maintain our US dollar bull call. However, next week, the US dollar could remain under some pressure due to a lack of economic data releases.

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…and the euro also remained weak…

ECB President Mario Draghi sounded dovish during the press conference and Q&A session. He was able to manage expectations that there will be no early exit from the QE’s programme. This weighed on the euro and will continue to weigh on the euro going forward. In addition, uncertainty about Greece has also deteriorated investor sentiment towards the euro. Next week’s Eurogroup meeting will be in focus. If an agreement is reached between the eurozone and Greece, investor sentiment towards the euro could recover, especially if Germany’s ZEW and Ifo were to come in stronger than expected.

…but currencies of oil exporting countries profited

The recovery in oil prices gave a boost to currencies from oil exporting countries such as the Norwegian krone and the Canadian dollar. In addition, the Bank of Canada was more optimistic outlook on the economic outlook. This has given extra support to the Canadian dollar, because financial markets scaled back expectations of rate cuts this year.

Swedish krona rallied on less dovish comments

The Swedish krona has been one of the top performers this week, because Riksbank’s Deputy Governor Henry Ohlsson sounded less dovish. He said that the repo rate is expected to remain at -0.25% at least until the second half of 2016. In addition, he indicated that the central bank is prepared to ease monetary easing further. He also said that the process of inflation returning to its target is also a very slow process. Overall, his comments were less dovish than financial markets were anticipating. Therefore, the Swedish krona rallied and ended high in this week’s performance. Going forward, it is likely that the central bank will ease monetary policy further if the Swedish krona is appreciating further.

Cosmetic adjustments in some forecasts

We have made some adjustments in our Canadian dollar and New Zealand dollar Q2 forecasts. The New Zealand dollar will probably be supported by carry trade demand in the near-term. Moreover, it is likely that investor sentiment towards the Canadian dollar will be less negative in the near-term.

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