The week in FX: A listless market
Nordine Naam, Natixis’ Senior Forex Analyst, provides an overview of the week’s FX movements, highlighting reasons behind a perceived listless market.
Last week the US dollar’s recovery, which has been underway since the start of September and seen appreciation by 3.5%, came to a standstill. On the macroeconomic front, the news flow was rather threadbare. The reform of the US tax system was the market mover last week, with the Senate releasing its proposals – which are somewhat different to those of the House of Representatives – to cut corporation tax sometime in 2018. Certainly, these differences are likely to make for a lengthier resolution process, lessening the probability of an agreement being reached by the year-end, as initially anticipated.
However, there will be a more gushing news flow this week, with the release of October’s consumer price index (second estimate) and retail sales – both of which are expected to confirm the vigour of US consumption. News concerning the tax reform and appointments at the head of the Federal Reserve (the Fed) – notably the choice of the next Vice Chairman – will need to be monitored. Under these conditions, one can expect the US dollar to remain stable, with a slight upward bias.
EUR: EUR/USD stable around 1.16
The EUR/USD took advantage of the US dollar’s bout of weakness to recover back above 1.16, with volatility subsiding as the pair remained range bound between 1.156 and 1.166. The inability of Catalan separatists to present a united front has weakened their probability of success at the upcoming regional elections on the 21 December. However, the risk of a period of prolonged political uncertainty has lessened.
This week, the first estimates of Q3 GDP and the October Consumer Price Index should be confirmed. There will also be speeches by several members of the European Central Bank’s (ECB) Governing Council, but these are unlikely to be market movers as the roadmap announced by the central bank at the start of the month does not need any particular clarification. Under these conditions, the Euro should remain stable, with the EUR/USD hovering around 1.16 in the short term. Nevertheless, at mid-term the correction should extend to 1.14.
GBP: bearish bias for the USD/GBP
In response to confusion at the local political level – two cabinet ministers resigned this past week, and another two were mired in controversy – sterling firmed slightly, with the GBP/USD stabilising around 1.315 before correcting this Monday morning towards 1.3090. In addition, Theresa May outlined plans to set the UK’s EU departure date as 29 March 2019. For Labour, this leaving date does not give sufficient time to finalise what are considered to be arduous negotiations. Indeed, it seems the Prime Minister’s position regarding the Brexit bill (€20bn proposed by the UK, €60bn-€100bn demanded by the EU) could be mollified. Once this issue has been resolved, negotiations over the transition period and future trade relations can commence. The issue of the Irish border is also likely to be a pressing matter.
In addition, watch out for the next batch of figures concerning inflation – potentially impacting expectations of a hike in the bank rate, despite the Bank of England (BoE) being rather dovish – as well as retail sales and unemployment, which could shed more light on the state of the British economy. In this context, sterling can be expected to continue to chart a rather jagged course, with the GBP/USD fluctuating between 1.305 and 1.325 – but only if the economy proves resilient and inflation remains firm. If not, a breakout below the support at 1.305 cannot be ruled out.
CNH: USD/CNH expected to be stable around 6.65
Donald Trump’s Asian trip has helped strengthen relations between the US and China, with their two leaders appearing to be on very friendly terms. At the same time, Trump continued to make the case for more balanced trade exchanges, notably by lifting restrictions on foreign investments in local businesses. Upon Trump’s departure, the Chinese authorities gave assurances that there would be an easing of these restrictions. However, Trump’s negotiating clout is lessening as China’s role in resolving the North Korean crisis grows. Furthermore, the trajectory of the Chinese yuan is almost exclusively dictated by the strength of the US dollar. This correlation is unlikely to be brought into question, as all the protagonists are favourable to a depreciation of the yuan. This cannot be followed through, however, as it would risk dampening relations between the two superpowers. In light of our outlook for the greenback, the USD/CNH can be expected to remain stable around 6.65.
ZAR: USD/ZAR heading towards 14.5
While the economic outlook clouded over – with 0.7% growth instead of the 1.3% initially expected – the South African rand has extended its correction, triggered by the political instability (the second cabinet reshuffle in seven months following allegations of corruption at high levels of government). The mid-term budget was revised to reveal a more important-than-expected deficit (4.3% of GDP compared with the 3.1% anticipated before). One reason the currency has continued to weaken is that S&P and Moody’s are due to complete their review of South Africa’s sovereign rating on 24 November, when the rating of the local debt will very probably be downgraded.
Furthermore, the African National Congress (ANC) national conference in December – which is due to elect Jacob Zuma’s successor – could be a stormy affair as he has endorsed his former wife, Nkosazana Dlamini-Zuma. This could continue to stoke political uncertainty, in turn undermining the government. Under these conditions, a rebound of the South African rand looks difficult by the end of the year, with prospects being more likely that the USD/ZAR will break above 14.5 in coming weeks.