Natixis: USD bout of stability continues
Posted: 14 September 2016 | Nordine Naam, Forex Analyst, Natixis | No comments yet
With a mix of positive and negative data, dovish and hawkish stances and speeches, it’s a surprise the US dollar is remaining stable…
Last week saw USD correct against all G10 currencies in reaction to the sharp deterioration of the both manufacturing and services PMI figures, and also following August’s disappointing Employment Situation Report. Indeed, such poor macroeconomic indicators have raised questions over the US economy’s Q3 recovery – especially following sluggish growth in 2016H1 – as the Citigroup Economic Surprise Index (an indicator of economic news and investor confidence) has also corrected since August.
Despite both ISM surveys suggesting a decline in economic activity, several Federal Open Market Committee (FOMC) members have called for the Federal Reserve (the Fed) to begin a course of monetary cycle normalisation. The PMI figures aside, some FOMC members believe the economic outlook remains promising, with record-high job offers supporting a robust recovery for the US’ labour market.
For instance, Eric Rosengren, President, Boston Federal Reserve, stated that a “gradual tightening” of interest rates would be preferable to a scenario where the Fed would be forced to ramp up rates aggressively following a sharp rise in inflation. Elsewhere, hawkish Jeffrey Lacker, Richmond Fed’s President, said there was a strong case for raising rates this month, while the more neutral John Williams, President, Federal Reserve Bank of San Francisco, expects the Fed to take action before the year-end. Following the growing expectations of Fed action before 2017, the DXY dollar recovered above 95.4 at the end of last week. We also expect the US dollar to remain firm in the run-up to the next FOMC meeting on 21st September.
EUR: EUR/USD still on course towards 1.104
Although a flurry of excitement preceded last week’s European Central Bank (ECB) meeting, very few newsworthy announcements were made. The market had anticipated the central bank to announce an extension to the asset purchase programme beyond March 2017, but the ECB’s President, Mario Draghi, indicated that this was not currently being in discussion. This news deflated the bond markets, causing the euro to rebound briefly above 1.13 – but on Friday last week, the pair pulled back towards 1.12 on the news that a Fed Funds rate hike on 21st September could come to fruition.
In the short-term, we remain bearish on the EUR/USD with a price target of 1.104, even though questions are still being asked about whether the ECB should extend this quantitative easing (QE) programme. However, with feeble growth projections for 2017, we expected a programme extension in December.
This week, watch out for September’s ZEW (Centre for European Economic Research) indices. It will be interesting to note whether this indicator reflects the sombre assessment of the German Institute for Economic Research – which cut the German economy’s growth projection for 2017 from 1.4% to 1.0% – as there are growing concerns around Brexit-related trouble hitting German exporters.
GBP: GBP/USD stable between 1.30 and 1.33
Sterling’s brief rally – following improved business survey results in recent weeks – has halted on the news that July’s manufacturing output saw a 0.9% month-on-month (MoM) decline. That said, while sterling corrected against the US dollar, it appreciated against most other currencies.
This week, sterling is unlikely to fall further as the market is not only short of the currency, but investors are hopeful of a few pleasant surprises in the next raft of macroeconomic indicators. In particular, watch out for both the upcoming retail sales and employment figures. In the short-term, we expect the GBP/USD to remain camped between 1.30 and 1.33
JPY: USD/JPY expected to be stable around 102
The USD/JPY has been highly volatile recently. In light of the US dollar’s rebound, the pair managed to recover towards 103 last week – although this was not helped by corrections across the equity markets.
It is unlikely that the yen will suffer another sharp depreciation against the US dollar in the run-up to the Bank of Japan’s (BoJ) next monetary policy meeting on 21st September, despite speculation that the BoJ will spring into action during this outing. In the short-term, the yen’s performance remains dependent on two factors; first, a BoJ announcement regarding monetary policy changes and, second, the US dollar’s value. Under these conditions, we expect the USD/JPY to stabilise at around 102 in the week ahead.
CAD: USD/CAD heading towards 1.33
Commodity currencies corrected sharply at the end of last week in the face of both the US dollar’s rebound and a slump in commodity prices, including Brent. In this context, the USD/CAD recovered back above 1.30 despite Canada’s economy being momentarily buoyed by positive employment results in August’s Labour Survey – the first encouraging sign out of Canada for several months.
While both growth and inflation remain weak, the Bank of Canada (BoC) has expressed concern over the economy’s health, which is likely to heighten expectations of a cut to key monetary policy rates in the coming months. With this in mind, we see the USD/CAD firming towards 1.33 in the weeks ahead.
AUD and NZD: under pressure
The AUD/USD corrected sharply after the Australian Bureau of Statistics (ABS) announced a 4.2% MoM decrease in July’s housing finance figures. This week, we expect the pair’s performance to depend on the US dollar’s movements, as well as any news concerning the Fed’s intentions this month. With this in mind, the AUD/USD may rebound in the weeks ahead on two conditions; expectations of a Fed Funds rate hike in September subside, and any signs of improvement in Australia’s employment figures and business surveys. On the other hand, we predict the AUD/USD may correct towards 0.745 (or even 0.733) if the Fed decides to hike rates in September.
Elsewhere, the NZD/USD also corrected at the end of last week, although the outlook remains positive for both currencies on the condition that the Fed does not ramp up rates in September. In the short-term, it is likely the New Zealand dollar will remain under pressure before ascending as the Reserve Bank of New Zealand (RBNZ) appears committed to its monetary tightening policies. Indeed, should the RBNZ reverse its plans, investors may fear that the country’s property bubble could be disturbed.
This week, we have one eye on New Zealand’s Q2 GDP figures, for which the consensus expects growth to improve to 1.1% (from 0.7% in Q1). All things considered, however, we prefer to hold back on both the AUD and NZD, given our questions about the Fed’s intentions this month remain unanswered.