G10 FX Weekly – Dovish ECB weighs on euro

by: Georgette Boele

G10-FX-weekly-3-September-2015.pdf (146 KB)
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Dovish ECB pushes the euro lower

Neutral Riksbank boosts Swedish krona, however further stimulus set to weigh on SEK

The Australian dollar dips below 0.70 on weak data and we expect further weakness ahead

Dovish ECB pushes the euro lower

The recent waves of risk aversion did not result in support for the euro. Instead the yen and the US dollar moved higher. This confirms our view that the spike higher in EUR/USD in August was not safe-haven demand related but merely the closing of euro short positions. In addition, the increased likelihood for additional QE by the ECB has weighed on the euro this week. The ECB left monetary policy unchanged today. It adjusted downwards its forecasts for growth and inflation, as expected. Mr. Draghi sounded very dovish during the press conference and the Q&A session. There are two strong signals that the ECB will likely step up QE.  For a start, the lower 2017 inflation forecast. Moreover, the ECB’s view that there are downside risks to the inflation outlook. As a result, EUR/USD dropped from 1.1230 before the start of the press conference to a low of 1.1112. We remain bearish on EUR/USD mainly because of monetary policy divergence across the Atlantic. Our target for the end of 2015 for EUR/USD is parity.

Neutral Riksbank boosts Swedish krona…

The Riksbank left the repo rate unchanged at -0.35%. In the press release it stated that “economic activity in Sweden is strengthening and inflation is showing a clear upward trend. The economic outlook and inflation prospects remain largely unchanged since the decision in July.  The Riksbank remains prepared to make monetary policy even more expansionary in the event of inflation prospects deteriorating.” As a result of this decision and statement, the krona strengthened. We expect further monetary policy easing in the form of more quantitative easing, a lower repo-rate path, further rate cuts, FX interventions or a combination of these. The chances of additional monetary easing by the ECB have increased significantly. This will probably weigh on the euro also versus the Swedish krona.  It is likely that the Riksbank will see a strengthening of the Swedish krona versus the euro as a threat to its inflation target. Therefore it would probably step up monetary policy easing. Our target in EUR/SEK for the end of 2015 is 9.5.

…while the Australian dollar dips below 0.70

Whereas Chinese equity markets and commodity markets stabilised somewhat, the Australian dollar was again under heavy pressure. It dipped temporary below our year-end target of 0.70 versus the US dollar. Weak domestic data and weak sentiment mainly contributed to its weakness. For a start, GDP for Q2 came in below market consensus at 0.2% qoq and, 2.0% yoy. In addition, retail sales sharply undershot market expectations with a decline of 0.1% mom (0.4% was expected). Moreover, the Reserve Bank of Australia left interest rates unchanged at 2.0%. We expect a rate cut later in 2015. We expect the Australian dollar to remain under pressure versus the US dollar. Our targets for the end of 2015 and 2016 are 0.70 and 0.64 respectively.

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