- Expert Views
Will Yellen’s testimony lead to further recovery of the US dollar?
14 February 2017 • Source: Nordine Naam, Natixis
Despite a lack of major news out of the US, the US dollar recovered somewhat last week. Looking ahead, the US macroeconomic situation remains upbeat – the last Employment Situation Report (ESR) revealed 227,000 jobs created in January – spelling positive news for the US dollar. What’s more, concerns over the 2.5% increase in real hourly earnings in January (from 2.9% in December) leading to an acceleration in prices have been offset by the fact that the economy has just about reached full employment. Initial weekly jobless claims also declined to a 44-year low of 234,000 in the first week of February.
Of course, the US dollar also benefitted from the bout of weakness experienced by other leading currencies – including the euro and sterling – both of which are becoming increasingly politically risky. Added to this, the surge in euroscepticism in the Eurozone has led to a rise in risk premiums priced into French and peripheral sovereign debts.
After criticising Mexico, China, Japan and Germany recently, last week saw a pause in Donald Trump’s rhetoric – it was reported that the President is unsure on whether a strong or weak US dollar is best for the US economy. However, this is not to say that there won’t be more tweets lauding protectionism which are negative for the US dollar. Against this backdrop, one might wager that the US dollar’s correction since the start of the year is nearly over, especially now that the president has turned his attention to his economic programme.
For the first time this year, Donald Trump broached the matter of his economic programme by stating that he would be making an announcement in the next two to three weeks. This was, of course, welcome news to a market that was growing increasingly impatient. What’s more, the announcement bolstered the US equity market – the S&P 500 reached an all-time high – even though it is unlikely that Trump will be able to carry out his entire programme. Nonetheless, the Republicans seem prepared to run part of it through Congress.
On a final note, the greenback benefited from Federal Open Market Committee (FOMC) member, Patrick Harper, suggesting that we might see an interest rate hike as early as next month. This week, watch out for the publication of the consumer price index (CPI) – expected to further increase to 2.4% in January – and, especially, Janet Yellen’s semi-annual monetary policy testimony before the Senate Banking Committee on March 15. What’s more, the Fed Chair is again expected to emphasise the inflation risks, along with the need to normalise key policy rates and the Federal Reserve’s balance sheet. In this context, the US dollar should remain upbeat and see the dollar index (DXY) testing the 102 level.
EUR/USD towards 1.048
After a high of 1.082 – due to the surge in political risk in France, Netherlands, Italy and Greece – the EUR/USD ended up correcting below 1.07. Both peripheral and French debts have struggled in particular. In this respect, 3-month Risk Reversals 25D highlights the French risk, with a sharp fall of the EUR/USD anticipated over a 3-month horizon.
Furthermore, in response to Trump’s attacks on Germany (and indirectly at the Central Bank) who he accused of manipulating the exchange rate for the Euro, Mario Draghi has come out in defence of the position taken by the European Central Bank (ECB) by reiterating the need for the APP to run its full course.
Sell the pound on any rebound
After the House of Commons passed the bill authorising the government to trigger Article 50 of the Lisbon Treaty, the 1-month implied volatility for the EUR/GBP has continued to rise – reaching 10.50%. The bill will now go before the House of Lords in coming weeks.
Currently, British gross domestic product (GDP) growth remains solid. However, uncertainties over the upcoming negotiations with the EU remain significant – further amplified by the surge in euroscepticism at a time when there will be a number of key elections.
For these reasons, we are cautious in regards to the growth outlook for the UK over the medium term; with the risk that stagflation will take hold. This week, watch out for the consumer price index (CPI) –expected to show a 1.9% increase in January – and the employment data. We remain cautious on sterling, as we see the GBP/USD correcting towards 1.18 in coming months, while we expect the EUR/GBP to fluctuate between 0.848 and 0.86 in the very near term.
Weaker yen in the short term
The USD/JPY returned to above 113 after the rebound in the dollar. The USD/JPY benefitted from the decline in risk aversion and the rise in US long-term interest rates that followed President Trump’s announcements on tax measures. In the short term, the USD/JPY should return towards 115.3 and the EUR/JPY towards 123.3.
NZD/USD rather towards 0.70
At its monetary meeting, the Reserve Bank of New Zealand (RBNZ) clearly dampened its currency by calling for a weaker New Zealand dollar due to its overvaluation. Despite rising inflation, it is planning to keep its key interest rates unchanged until 2019. The tone of its press release reflects the possibility of a cut in the cash rate, which at 1.75% is still very high compared with the other G10 countries. In the short term, the NZD/USD should rapidly test the 0.71 level and then 0.70, while the EUR/NZD should stabilise around 1.48 in the very short term.