G10 FX Weekly – come-back of the US dollar

by: Roy Teo , Georgette Boele

G10-weekly-24-September-2015.pdf (144 KB)
  • Come-back of the US dollar…
  • … and Draghi  downplayed the likelihood of immediate action
  • Downgrade of AUD, NZD and NOK forecasts


Come-back of the US dollar

Since the FOMC meeting, some members have clearly expressed that last week’s outcome was a close call and that a lift-off this year remains likely. This has given a boost to the US dollar across the board.  Meanwhile, in a speech before European parliament, ECB president Mario Draghi reiterated his dovish stance that the QE programme can be altered in size, composition and duration. However, Mr Draghi also downplayed the likelihood of immediate action. In short Mr Draghi dampened market prospects for more QE and this has given some support to the euro. Despite these remarks, we still stick to our base case scenario that the ECB will step up its monthly QE purchases by EUR 20bn before year end. In addition, we expect the Fed to start hiking in December. As a result, EUR/USD will likely to fall to parity.

Downgrade of AUD forecast: RBA to cut OCR in November

We have downgraded our outlook for the Australian dollar. Weak business investment spending and slower China economic growth (6.5% in 2016) will remain headwinds for the Australian economy and the AUD. We now expect the AUD/USD to decline further towards 0.68 (from 0.70) and 0.60 (0.64) by the end of 2015 and 2016 respectively. We still see a case for the Reserve Bank of Australia (RBA) to further ease monetary policy later this year in November, which is not fully priced in by financial markets. In addition, we now think that the RBA is likely to keep monetary policy loose for the rest of 2016, compared to our previous expectations of 50bp rate hike in the second half of 2016.

RBNZ easing bias and weaker NZD outlook

Similarly, we have also lowered our forecast for the New Zealand dollar (NZD). Though the Reserve Bank of New Zealand (RBNZ) is likely to keep the Official Cash Rate (OCR) unchanged at 2.75% in October (due to recovery in dairy auction prices), we expect them to maintain their dovish bias. As the full effects of weak dairy prices have yet to filter through to household disposable income, we expect consumer spending to weaken further. Last but not least, business confidence has deteriorated to the lowest level since early 2009. This is expected to weigh on business investments and domestic growth. Looking ahead, we expect the RBNZ to lower the OCR by 25bp to 2.5% in December, keeping monetary policy low for the rest of 2016. Our 2015 and 2016 year end NZD/USD forecasts are now 0.60 (from 0.63) and 0.55 (from 0.58), respectively.

Norges bank surprise triggers new EUR/NOK forecast

Norges bank surprised financial markets by cutting rates to 0.75% and left the door open for another reduction. Our energy analyst expects oil prices to recover in the coming months. Our year-end target for Brent oil prices is USD60 per barrel. It is likely that this recovery in oil prices will only work through the economy next year. Still in the short-term,  a weak economic backdrop will likely prompt the Norges Bank to cut rates one more time. Therefore, we now expect one more rate cut by the Norges Bank this year to support the economy. The krone has a tendency to move in tandem with oil prices. In time a recovery in oil prices could therefore support the krone and dampen the effect of another rate cut on the krone. We have adjusted our year-end forecast in EUR/NOK to reflect the above-mentioned dynamics and see a bit more krone-weakness than we had expected. Our new year-end forecasts for EUR/NOK for 2015 and 2016 are 9.50 (9.00) and 8.50 (8.00), respectively.

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