- Expert Views
Natixis: US dollar continues to hold firm, pound stronger
7 September 2016 • Source: Nordine Naam, Senior Forex Analyst, Natixis
Last week, the US dollar extended its rise in the wake of Federal Reserve chair, Janet Yellen’s statement at the Jackson Hole Symposium, as well as statements from fellow Federal Open Market Committee (FOMC) members favouring further monetary tightening. The dollar’s rally continued in the wake of positive macroeconomic indicators, including consumer confidence figures and new home sales.
That said, it has not all been good news, given August’s Employment Situation Report provided disappointment to the market. Indeed, job creations were lower than expected, but still sufficient to absorb the labour market’s new entrants. Above all, a weak increase in the average hourly wage of 2.4% year-on-year (YOY) from 2.7% in July, suggests that inflationary risk relating to wage growth remains limited. With this in mind, calls to raise to Fed Funds rate as early as this month have been thwarted, with the consensus suggesting a hike in December is most likely.
In the short-term, we expect the US dollar to remain stable, especially since economic growth should improve. Next week, watch out for the outcome of the Beige Book – the anecdotal report on the US’ current economic conditions – and the US Services PMI – the gauge for non-manufacturing sectors’ performance.
EUR: EUR/USD heading towards 1.104
The EUR/USD corrected last week, as the greenback was bolstered by a raft of FOMC statements supporting a key interest rates hike in the coming months. Meanwhile, the euro was hampered by signs of deterioration in the European Commission’s August surveys, as well as the weak flash estimate, which put headline inflation at 0.2% YOY (when a consensus had predicted 0.3%), and core inflation at 0.8% YOY (down from 0.9% in July).
In this respect, the fragile eurozone may cause the European Central Bank (ECB) to extend its asset purchase programme beyond March 2017. That said, the ECB is unlikely to announce a position at its meeting on 8th September. Instead, it is expected that Mario Draghi will be cautious due to the pressures overhanging the eurozone. In this context, we remain bearish on the EUR/USD, which we see heading towards 1.104.
GBP: temporarily stronger
Following an improvement in UK macroeconomic indicators, sterling extended its rebound. Indeed, the composite PMI recovered back above 50 to 53.3 in August, while both the GfK confidence index and retail sales figures continue to bolster the market. In turn, short positions on the sterling have reduced.
With economic indicators currently pointing towards a resilient UK economy in the short-term, coupled with the absence of any long-term evidence of Brexit’s negative effects, any market movements have been to the pound’s benefit.
However, it is inconceivable that sterling will continue this flurry above 1.35 against the USD. In the mid-term, we remain pessimistic on the UK economy as it will take time for the negative repercussions of a Brexit to take hold. For instance, the current account deficit will deepen due to the rising import prices after sterling’s initial post-referendum weakness. Of course, financing the current account deficit will become increasingly difficult which, in turn, will put immense pressure on sterling, while property prices will weaken further in the mid-term following the bank rate cut.
This week, sterling’s short-term rally will continue due to a raft of positive indicators, including industrial production and property prices, while the services PMI has already shown promising sector growth. As these indicators could prop up the currency for the time being, Natixis has cut its long position on the EUR/GBP because there is the possibility the pair will correct in the immediate future due to the UK economy’s resilience.
We propose holding back for the time being, ready to move back into the EUR/GBP, but probably not before the pair tests 0.83.
JPY: USD/JPY on course towards 105
The USD/JPY appreciated sharply to 104 on the back of the US dollar’s rally, following numerous hawkish statements from FOMC members hinting that a rate hike in the coming months appears likely. Meanwhile, the Japanese yen weakened on the back of heightening expectations that further measures will be announced by the Bank of Japan (BoJ) during its next meeting on 21st September. In the short-term, there is a risk that the USD/JPY will test 105.
AUD/USD heading towards 0.775
The Australian dollar weakened in the face of the US dollar’s rebound, fuelled by prospects of a hike in the Fed Funds rate, but also due to various disappointing indicators closer to home. For instance, the Australian economy suffered a sharp decline in the AIG manufacturing survey (attributed to falling commodity prices), retail sales flat-lined in August, while investment declined further – which will anchor both growth and inflation.
In this context, the Australian dollar appears overvalued, which risks depressing the non-mining sector and driving inflation down further, which could provoke a further interest rate cut by the Reserve Bank of Australia (RBA). That said, such a move during the 9th September meeting would be premature, even though Q2 2016 GDP figures (expected this week) will most likely display slowing growth (from 1.1% in Q1 towards 0.5% in Q2). Given the US dollar’s bout of stability, the AUD/USD should temporarily appreciate towards 0.775, bearing in mind we remain bearish on the AUD/USD in the mid-term.
EUR/NOK to eyes 9.44
Norway appears to be within the grasp of stagflation, with flat-lining Q2 GDP (after reaching 1.0% in Q1), and inflation at 4.4% YOY in July. What’s more, August’s manufacturing PMI slumped to 50.8 (down from 54.2 in July), suggesting growth will be weak in Q3. With this in mind, Norges Bank is facing a dilemma in terms of its next move. While the central bank has continually prioritised economic growth (by cutting the key policy rate), inflation is running well above its official target – which is a cause for concern.
Under such conditions, keep an eye on both the industrial production data (after the sharp fall in July) and for this week’s inflation data. There is a strong probability these indicators will disappoint the Norges Bank, which will penalise the Norwegian krone, particularly if Brent prices hold on low at around US$45/bbl. If this scenario unfolds, the EUR/NOK could clamber to 9.44.
USD/CAD heading towards 1.33 target
Last week, the USD/CAD appreciated on the back of the stronger US dollar, and in response to some poor macroeconomic indicators from Canada – in particular, a GDP contraction of 1.6% in Q2 (after an increase of 2.5% in Q1).
Given the manufacturing PMI’s slight correction in August, it seems that GDP will only improve marginally during Q3. The Canadian dollar has also been threatened by the crude oil price downturn, as Brent pulls back below US$46/bbl. In light of these conditions, the Canadian currency will remain downbeat in the run-up to the Bank of Canada’s (BoC) meeting on 7th September.
Although we expect the central bank to maintain the status quo this week, it is likely the meeting’s tone will be more accommodating, particularly if employment continues to deteriorate. Under these conditions, the USD/CAD could begin to test 1.33.
EUR/SEK heading towards 9.67
The Swedish krona struggled last week, in reaction to inadequate macroeconomic indicators, in particular manufacturing PMI and retail sales. Although inflation was higher than expected in July at 1.1% YOY, it remains below target. Coupled with sluggish economic growth, this has roused deflationary pressures, causing the krona to weaken sharply – lifting the EUR/SEK to 9.55 in the run-up to the next Riksbank meeting.
We doubt the Swedish central bank will announce further measures, which may weigh heavy on the krona. As such, the EUR/SEK could appreciate towards 9.67.