FX Week. USD resilient despite weak data. EUR focus on Draghi, as well as on Greece. Weekly currency movement vs USD (%)

Transcription

1 FX Week Last week was dominated by pessimism from global policymakers and uncertainty about oil. Given this backdrop it is a bit surprising that the USD actually recovered a little, even as US economic data was also weaker than expected. The IMF downgraded its global growth outlook to 3.2% from 3.4% in its 2016 World Economic Outlook Update and warned that the risks of weaker growth are becoming more tangible. The Communique from G20 Finance Ministers and Central Bankers also talked of downside risks and uncertainties to the global outlook. More positively, however, Chinese economic growth only slowed a little in Q1 (to 6.7% from 6.8% y/y in Q4) and more recent data for March actually signaled an upturn in activity thanks to recent stimulus measures. The prospect of stimulus measures remaining in place globally should help underpin risk appetite overall in the coming week, and in this context the week s focus will be on the outcome of the Doha oil producer meeting, its impact on oil prices and the subsequent reactions in asset markets. Weekly 17 April 2016 USD resilient despite weak data The USD recovered some ground against the JPY after its big falls of the previous week, and was broadly steady against a basket of currencies. This was despite weaker than expected US retail sales (-0.3%), industrial production (-0.6%) and CPI inflation data in March (0.9% y/y, down from 1.0% previously). Understandably Fed officials were a little more dovish when they spoke and there is now no expectation of any change in monetary policy at the next FOMC meeting in just over a week s time, with most of the focus for a hike being on the June meeting. The coming week will see a heavy round of US corporate earnings figures and from the economic data perspective the housing sector will dominate with housing starts and existing home sales due to be reported. Overall the USD s tone is not expected to be especially strong, but it will probably take its lead from events and issues elsewhere. EUR focus on Draghi, as well as on Greece Tim Fox Chief Economist timothyf@emiratesnbd.com Mohammed Al-Tajir Research Analyst mohammedtaj@emiratesnbd.com One such event will be the ECB meeting on Thursday, although the central bank has indicated that no further stimulus measures are likely for the time being with the focus now on implementation of the March measures. No doubt Mario Draghi will be asked to clarify his position about whether further easing steps might be possible, as his comments last month were largely responsible for the EUR s sudden sharp move higher to around current levels. Flash Eurozone PMI data are expected to confirm the divergence in economic performance within the Euro area, with Germany doing better than the rest. The same is expected to be revealed in a relatively stronger German ZEW index. Weekly currency movement vs USD (%) EUR GBP 0.52 CHF JPY CAD 1.32 AUD 2.24 NZD Source: Bloomberg, Emirates NBD Research

2 Eurogroup and Ecofin meetings are also due to take place in the coming week with the focus largely falling on Greece as the latest bailout talks drag on. The IMF and European policymakers are negotiating over whether to release the second installment of its EUR86bn bailout, with Greece reluctant to commit to more austerity and the EU pushing for completion of previous ones. The IMF, however, sees the bailout program as not credible without debt relief, leaving hopes of a deal being reached by 22 April still in the air. GBP hemmed in by Brexit debate There may also be some discussion at the European meetings about Brexit and the implications for the EU if the UK decides to leave. The UK s EU referendum campaign got underway formally last week, and the coming days are likely to be dominated by an increasingly lively and colorful debate. Warnings about downside risks to UK growth were plentiful last week, from the IMF as well as from the Bank of England. This issue probably overshadowed the surprising upturn in inflation which rose to a cycle high of 0.5% y/y in March, up from 0.3% y/y in February. Likewise, UK labour market data, retail sales and government borrowing figures in the coming week will also likely take second place to the oscillating opinion polls, although so far the polls appear relatively even, with a substantial proportion of undecided voters still to make up their minds. That being the case the pound is likely to remain relatively hemmed in at least until there appears to be a substantial breakout by one side or the other. USD/JPY recovers ground The JPY gave back a little ground last week after its strong gains of the previous one, with improved Chinese economic data helping risk sentiment overall. The impact of the Japanese earthquakes is probably still to be properly felt, although it is unlikely if they will make much of a difference to the policy setting process. Policy makers will already be aware that investors are turning away from Japan, and of the need to do more to stimulate growth amidst disillusionment with Abenomics. Finance minister Aso warned last week that the one-sided, speculative market in the yen would be dealt with, leading to hopes that the BoJ will make a bigger commitment to negative interest rates at the approaching April 27th-28th policy meeting. The earthquake will probably also demand more fiscal action but with a public debt ratio of approaching 250% of GDP there appears limited room on this front. CHF retreats against all other majors as intervention risks remain Last week, the Swiss Franc weakened against all the other majors, as risk appetite returned to the markets. In addition, the currency was weighed down by data released on the 14 th of April which showed that Producer and Import prices had decreased in March by 4.7% on an annual basis. With SNB Chief Jordan and other members of the SNB continuing to affirm that the currency is significantly overvalued and that the bank is ready, willing and able to intervene in the market and limit the currency s strength, we maintain the expectation that the medium term risks to the CHF remain to the downside. Confidence in CAD as oil climbs and BOC holds The CAD had a positive performance last week, with USDCAD falling 1.28% to The CAD benefited from the BOC holding rates at 0.5% and from Page 2

3 hydrocarbon prices outperforming (ICE Brent Crude finishing the week 9.31% higher at USD 43.10/b). Investor confidence can be demonstrated by the CFTC positions on the CAD being net bullish at 2.4K, the highest level since May While we expect the main determinant of CAD price action to be related to hydrocarbon market performance next week, there is also some data that can influence sentiment on the currency. Inflation data on Friday 22 nd is expected to show Consumer Prices increased by 1.2% in March on an annual basis, while retail data on the same date is expected to show a monthly decline of 0.8% in February. Aussie outperforms as RBA holds and China posts firm data The AUD gained on all other majors last week, spurred on by a recovery in commodity prices after its largest trading partner posted firm economic data. Growth concerns over China were placed to the side after the world s second largest economy posted firmer than expected industrial production data (6.8% compared with expectations of 5.9% growth) and Q GDP growth of 6.7% on an annual basis. Domestic data also contributed to the upwards pressure after economic data released on the 14 th of April showed that unemployment had fallen to 5.7%. In spite of this, we expect future softness for the AUD in the medium term as the RBA is likely to attempt to talk down the currency, whose strength is a threat to the nation s growth rate. No doubt, the markets will be looking to the RBA April meeting minutes on Tuesday 19 th of April for further cues on monetary policy, as a further rate cut cannot be ruled out. NZD benefits from Chinese data. Like its neighbor, the Kiwi also benefitted from positive Chinese data and gained on all the other currencies with the exception of AUD. Over the course of the week, NZDUSD rose by 0.36% to However, we expect the gains from here to be limited and the risks are likely to be to the downside in the medium term. Q Consumer Price data due on Tuesday 18 th April is expected to show flat growth of 0.1% on a quarterly basis, which may renew market expectations of a further rate cut from the RBNZ. NOK and SEK remain range bound despite supporting fundamental drivers. Despite firmer than expected Consumer Prices and a rally in oil prices, the NOK was unable to gain much ground against the other currencies and remained mostly range bound. With no economic data due for release in Norway next week, we expect the major driver for the Krone to be hydrocarbon performance especially in the wake of the Doha oil producers meeting.. Sweden also reported better than expected growth in consumer prices, but like its North European counterpart, the currency remained trapped in its range. This week, speculators on the Krona will be looking towards the Risksbank Interest Rate decision on Thursday 21 st April. In a poll of 19 analysts surveyed by Bloomberg, all 19 expect the bank to hold rates at -0.5%. Page 3

4 FX Forecasts FX Forecasts - Major Forwards Spot M 3M 6M 12M 3M 6M 12M EUR/USD USD/JPY USD/CHF GBP/USD AUD/USD USD/CAD EUR/GBP EUR/JPY EUR/CHF NZD/USD FX Forecasts - Emerging Forwards Spot M 3M 6M 12M 3M 6M 12M USD/SAR* USD/AED* USD/KWD USD/OMR* USD/BHD* USD/QAR* USD/EGP USD/INR USD/CNY Source: Bloomberg, Emirates NBD Research *Denotes USD peg Page 4

5 Major Currency Pairs and Interest Rates Interest Rate Differentials - EUR Interest Rate Differentials - GBP German 2yr yield - US 2yr yield FX (rhs) GBP 2yr yield - US 2yr yield FX (rhs) Interest Rate Differentials JPY Interest Rate Differentials - CHF Apr-15 Nov-14 Jul-15 Feb-15 Oct-15 May-15 Jan-16 Aug-15 Apr-16 US 2yr yield - - JPY 2yr yield FX FX (rhs) US 2yr yield - CHF 2yr yield FX (rhs) Interest Rate Differentials - CAD Interest Rate Differentials - AUD US 2yr yield - CAD 2yr yield FX (rhs) AUD 2yr yield - US 2 yr yield FX (rhs) Source: Bloomberg, Emirates NBD Research Page 5

6 Major Currency Positions CFTC Speculative Positions - EUR CFTC Speculative Positions - GBP CFTC Speculative Positions - JPY CFTC Speculative Positions - CHF CFTC Speculative Positions - CAD CFTC Speculative Positions - AUD Source: Bloomberg, Emirates NBD Research Page 6

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