Natixis: USD continues to strengthen across October

Posted: 19 October 2016 | Nordine Naam, Senior Forex Analyst, Natixis | No comments yet

USD has continued to strengthen since the start of October, as chances of a Fed rate hike improve and a Trump presidency becomes less likely.

Natixis: USD continues to strengthen across OctoberUSD has been continuing its rally since the start of October, helped by both Republican candidate, Donald Trump’s sliding position in the US presidential election polls and the prospect of a Fed Funds rate hike in December. Meanwhile, the Chinese yuan’s bout of weakness as well as the increasing likelihood of a hard Brexit and sterling’s “flash crash” have bolstered the greenback’s performance.

In our view, these factors will continue to boost the US dollar in the short-mid-term. This week, for example, a series of speeches made by the Federal Open Market Committee (FOMC) have heightened expectations that the Federal Reserve (the Fed) plan to raise Fed Fund rates. Indeed, we believe that the Fed will raise rates in December, which will, in turn, spur monetary tightening throughout 2017.

However, it is also plausible that the greenback’s rally may be momentarily halted over the next few weeks. Indeed, October is marked by the Q3 reporting season – a period characterised by high volatility – which could hold the dollar’s ascent briefly.

EUR: EUR/USD heading towards 1.09

In the run-up to this week’s European Central Bank (ECB) meeting, the EUR/USD has corrected towards our 1.09 target. During the meeting, it is expected that ECB president, Mario Draghi, will deny rumours that the ECB’s quantitative easing (QE) programme will be tapered, which will weigh on the EUR/USD.

In fact, we believe the ECB will extend the asset purchase programme until September 2018 before tapering, although an announcement to this effect will be delayed until December. Certainly, weak core inflation (i.e. excluding energy) of 0.8% will preclude any tapering for the time being.

The EUR/USD’s performance is also likely to be impaired by forthcoming political events. The outcomes of both the Italian referendum on 4 December and France and Germany’s general elections next year will affect the performance of EUR/USD.

GBP: GPB/ USD to pull back towards 1.18

The GPB/USD can be expected to extend its correction given growing likelihood of a hard Brexit and, in turn, a slowdown in UK economic growth. As a result, we have revised our target for the GBP/USD from 1.22 to 1.18.

In the short-term, we do not expect any improvement on the revised target. Indeed, UK Prime Minister, Theresa May, appears reluctant to ease her stance on immigration, while European leaders oppose any compromises in an attempt to discourage other member states from following the UK’s lead. With the potential for another referendum on Scottish independence, it appears that the pound’s instability may worsen. Moreover, sterling’s slide will only complicate the task of the Bank of England (BoE) in guaranteeing price stability.

JPY: USD/JPY on course towards 105

The USD/JPY has already broken above our 104 target – a clear indication of the greenback’s recent strengthening. However, the looming US presidential election, coupled with the Q3 reporting season, make it unlikely that the USD/JPY will break out above 105 in the coming weeks.

CAD: USD/CAD heading for 1.33

We expect the Canadian dollar to remain downbeat until the Organisation of the Petroleum Exporting Countries (OPEC) meets on 30 November. It is expected that OPEC will ratify the tentative agreement to reduce its production to 32.5 barrels per day (b/d).

The results of the US presidential election could also impact the performance of the Canadian dollar. Donald Trump’s desire to scrap the North American Free Trade Agreement (NAFTA) would damage an already frail Canadian economy, bearing in mind 2016Q2’s weak GDP figures.

In this respect, the upcoming Bank of Canada (BoC) meeting will be watched closely by the market. It is likely the Governor’s statement will be dovish, allowing the USD/CAD to temporarily recover towards 1.33.

NZD: NZD/ USD on course towards 0.70

In the short-term, the NZD/USD is on course towards 0.70. As 2016Q3 inflation is expected to be weak at 0.1% year-on-year (YoY), the market may expect the Reserve Bank of New Zealand (RBNZ) to cut interest rates. This will, however, weigh heavily on the New Zealand dollar’s performance given the dilemma that the central bank now faces. While it has preferred a dovish stance recently, the low interest rate environment is fuelling a property bubble that will need to be addressed.

In the mid-to-long term, the NZD/USD is likely to pass below 0.70. If the Fed raises Fed Fund rates in December, this is likely to strengthen the greenback against its New Zealand counterpart. In our view, the RBNZ is waiting on the Fed to move before making any decisions.

SEK: EUR/SEK heading towards 9.80

The Swedish krona corrected sharply last week. The EUR/SEK stands at 9.71, above the 9.20-9.60 range within which it had been trading since 2014. The krona’s slide was in reaction to the weaker-than-expected inflation figures for September of 0.9% YoY (when the consensus was for 1.2%).

Given both currencies usually behave similarly, the pound’s slide is punishing the krona. As the UK lean towards a hard Brexit, the krona’s slide has been accentuated. Under these conditions we predict the EUR/SEK will test 9.80 in the coming weeks.

ZAR, THD and CNY all put under pressure

Both the South African Rand and the Thai Baht have recovered quickly from politically-driven falls in their value, as investors seek higher yields.

Nevertheless, with the US dollar set to strengthen, it is likely that both the USD/AR and the USD/THD will appreciate. Meanwhile, the US dollar’s ascent has also caused the USD/CNY to rise towards 6.73. In the coming months, we expect the pair to extend its rise towards 6.80.

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