FX Convictions – The fall-out from the turmoil

by: Georgette Boele , Roy Teo

150901-FX-Convictions.pdf (269 KB)

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Adjustments in our forecasts

The market turmoil, fall in commodity prices and China risks have resulted in an adjustment in our major currency forecasts. Although not our base case, chances of more QE by the ECB have increased sharply and this will hang over the market in the months ahead. As a result, it is unlikely that financial markets will start anticipating a QE exit by the ECB in the first half of 2016. Therefore, we expect the euro to remain under pressure until around the middle of 2016. Moreover, we have pushed out our first Fed rate hike to December from September. This will have a dampening effect on the dollar’s rally in the near-term. Monetary policy divergence will continue to drive EUR/USD lower in our view.

More economic slack and headwinds to exports – JPY negative

Our bearish view on the Japanese yen has not changed. Economic slack has increased and more headwinds to Japanese exports are expected due to a weaker Chinese yuan. We expect the Bank of Japan to increase monetary stimulus by early 2016 as inflationary pressures are likely to fall well below the 2% target by the first half of Fiscal year 2016. Widening interest rate differentials between the US and Japan will continue to weigh on the yen versus the US dollar.

Downgrade of AUD and NZD forecasts

The Reserve Bank of New Zealand is expected to cut the Official Cash Rate by 25bp in September and to maintain a dovish stance. Looser monetary policy in Australia is also likely later this year. More importantly, financial markets have still not priced in the rate hike cycle in the US, in our view.

SGD added to short conviction list

We have included long US dollar versus Singapore dollar (SGD) into our conviction list on 18 August. The Monetary Authority of Singapore is likely to shift its current modest appreciation of S$NEER policy to neutral in October. The SGD is also vulnerable to a weaker Chinese yuan and firmer short term yields in the US. We expect the SGD to decline towards 1.46 against the US dollar later this year.

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