- Expert Views
Natixis: Short-term volatility ahead
10 November 2016 • Source: Nordine Naam, Senior Forex Analyst, Natixis
Last week, after briefly testing 99, the DXY dollar index corrected towards 97. Although the sharpest corrections were experienced against G10 currencies, the U.S. dollar held steady against emerging currencies – and even appreciated against the Mexican peso. Such market movement reflected the now president-elect, Donald Trump’s late surge against Democratic candidate, Hillary Clinton, following the latest WikiLeaks revelations, which prompted the Federal Bureau of Investigation (FBI) to reopen its inquiry into the Clinton email scandal.
While Clinton was cleared, the furore ensured that the race to the White House became much tighter, with focus shifting towards the significant numbers of undecided voters – particularly in the swing states of Florida, North Carolina and Nevada. Meanwhile, Trump’s reinvigorated campaign triggered the selling of more risky assets, although not quite enough to stimulate a US dollar rebound – a phenomenon that has occurred in the markets’ previous spells of uncertainty.
On the back of Trump’s successful campaign, we expect the US equity markets to fall further – causing the US dollar to temporarily rebound given its safe haven currency status. But, we believe it will correct in the weeks following, as the U.S. economy may begin to display signs of stagflation.
GBP: further short-term volatility ahead
Last week saw sterling rebound as high as 1.2494 against the US dollar, as investors squared their short positions on the back of promising sentiments emanating from the Bank of England’s (BoE) October meeting. Indeed, the BoE appears to have adopted a neutral (rather than dovish) stance following higher UK inflation figures and better-than-expected macroeconomic indicators, including Q3 GDP growth and October’s PMI figures.
What’s more, the UK high court’s ruling that Brexit must be approved via a parliamentary vote – which will likely modify both the terms of a Brexit and the timetable for invoking Article 50 – bolstered the pound’s performance. Although MPs are unlikely to block Brexit in the division lobbies, it is now likely that Article 50 will not be invoked in March 2017 as Prime Minister, Theresa May, had originally intended.
In the short-term, GBP/USD could rise towards 1.264, especially if the possibility of a UK snap general election heightens, but investors ought to be aware that further GBP/USD volatility can be expected on the horizon.
CHF: EUR/CHF stable around 1.08
Since the start of November, EUR/CHF has broken below its unofficial 1.08 floor rate – setting a 1.075 low. The Swiss franc has benefitted recently from a risk-averse market, particularly on the back of Trump’s surge in the opinion polls prior to the election, Brexit uncertainty and Italy’s constitutional referendum in December.
Despite the Swiss National Bank (SNB) stressing its belief that the franc is overvalued, the Swiss economy is on the mend, evident from both the KOF survey and PMI’s improvements during October. And following increased market pressure, the SNB appears less committed to persistent currency market intervention, given its reserves currently stand at a CHF628bn high.
In the long-term, the central bank’s foreign exchange market interventions are unsustainable due to their overarching consequences but, in the short-term, we expect EUR/CHF to hold at around 1.08. Indeed, market pressure on the SNB to steer clear from further intervention will only continue, particularly if the European Central Bank (ECB) announces an extension to its quantitative easing (QE) programme until September 2017.
EUR/SEK likely to test 10
Following the Riksbank’s last meeting, the Swedish krona’s descent has accelerated in recent weeks, after it agreed the -0.5% repo rate will be held for a further six months until 2018. The Riksbank also refused to rule out cutting interest rates further or, the possibility of extending its asset purchase programme in order to counteract both weak inflation and any further ECB measures.
Under such conditions, EUR/SEK’s rise towards almost 10 has been welcomed by the Riksbank as a potential stimulant for both inflation and GDP growth. In the weeks ahead, expect EUR/SEK to test 10 on occasion, particularly if the ECB announces a QE extension in December.
Sell NZD/USD above 0.7380
Last week, the NZD/USD recovered above 0.73 due to Trump’s improved polling performance. Indeed, the New Zealand dollar has also been buoyed by both improving employment data and Chinese GDP growth.
Despite these upturns, the Reserve Bank of New Zealand (RBNZ) is still cautious about weak domestic growth and inflation, which could led to a further key policy rate cut by 25bp to 1.75% in the mid-term. All things considered, we recommend selling NZD/USD above 0.7380.