FX Week USD rallies strongly, meets our forecasts The USD staged a significant rally at the end of last week, hitting our one-month forecasts of EUR and closing in on JPY122. The starting point were the comments from ECB President Draghi in which he gave a broad hint to expect further monetary easing at the December Council meeting, causing the EUR to lose ground. This was followed up by a surprise rate cut by the PBOC in China, which encouraged a broader USD recovery to take hold. The Fed is unlikely to change monetary policy at the FOMC in the coming week, but it is still too early to rule one out in December which many in the market have done. This should allow for the USD s recovery to build should the US data, as we expect, continue to improve in coming weeks. Weekly 25 October 215 Draghi alludes to December easing, weakening the EUR The EUR lost ground on Thursday as ECB President Draghi said that the ECB would reexamine the degree of stimulus at the December meeting, which markets have read as a sign that the ECB is laying the ground for additional measures at the last meeting this year. Draghi stressed that the ECB will fully implement its monthly purchases and that QE will last until inflation adjusts toward goal and repeated that QE can be adjusted. He said there was a rich discussion on the potential measures the ECB could take and that the relevant committees have been tasked to examine the pros and cons of the individual measures. China cuts rates Tim Fox Chief Economist +971 4 23 78 timothyf@emiratesnbd.com The EUR dropped to 1.11 in the aftermath of the ECB statement from 1.13 earlier in the day, and then weakened again after the Chinese PBOC decided to cut interest rates on Friday. China's PBoC cut benchmark lending and deposit rates by 25 basis points, to 4.35% and 1.5%, respectively. The Bank also cut bank reserve requirements by.5%. Also, the Bank eliminated its ceiling on deposit rates, the latest step in its ongoing goal of freeing up interest rates. The move is the sixth rate reduction since the current cycle began in November of 214. Following on from China s Q3 GDP better than expected reading of 6.9%, the message was a strong one, showing that the Chinese authorities will continue to act to promote recovery in the economy. The combined effect of the ECB s statement and the PBOC cuts was to see USD strength broaden, with other currencies weakening significantly, and taking EUR/USD to. Mohammed Ali Al-Tajir Analyst +971 4 69 35 mohammedtaj@emiratesnbd.com (% Change against USD in last 5 days) EUR -2.91 GBP -.8 CHF -2.57 JPY -1.65 CAD -1.9 AUD NZD -.81 -.66 www.emiratesnbdresearch.com -3. -3. -2. -2. -1. - -..
FOMC to stay on hold in October but keep December options open The coming week sees the FOMC meet in the US on Wednesday, but there are no realistic expectations that the Fed will choose this moment to tighten monetary policy. Employment growth slowed sharply in September and Q3 GDP due this week is expected to show the US economy slowing to around 1.5% on an annualized basis. The same cannot be said of the December meeting though, as there is still enough economic data in coming weeks that could give the Fed the assurance it is looking for before tightening. This week s meeting will be important, however, as the statement may reveal the extent to which the December FOMC will be a live meeting with a real debate and a realistic chance of a move. Such a message would further support the USD given the way the markets have almost totally discounted the chance of a December rate lift-off. Other data releases from the US include durable goods orders which are expected to be weak and consumer confidence which is expected to be firm. From the Eurozone there will also be the first preliminary readings of Q3 economic growth, on a country by country basis, while the German IFO survey and Eurozone CPI and unemployment data will also be seen. The small improvement in the region s October PMI data (the composite index rose to 54. from 53.6) was welcome, but does not change the impression of the overall sluggish Eurozone growth. This combined with flat to negative inflation and high unemployment will keep the EUR trading heavily as markets look forward to the December ECB meeting. GBP s relative outperformance even as it slips In the UK the highlight will also be Q3 GDP. Estimates for this may also have been raised on the back of stronger than expected September retail sales which rose to 1.7% from a revised -.7% in August. However, this improvement could not prevent GBP from being dragged down by the stronger USD. Nonetheless, its relative performance was better than most other currencies, including the EUR, CHF and JPY, resulting in GBP crosses doing well. This trend should continue in coming days, especially if UK GDP does surprise positively, with.7 against the EUR (our 1-month forecast) coming back into view. Over to the Bank of Japan A lot of focus will now fall on the BOJ which will meet Friday, following China's surprise rate cut last Friday. In the context of more poor economic data from Japan last week, with exports falling to just.6% in September, we think there is a good chance that the BOJ will vote to increase the annual pace of expansion of the monetary base from the current JPY8 trillion. There will also be a lot of end-month economic data for the JPY to contend with, with industrial production, unemployment and CPI all due out. However, as these are mainly expected to remain weak they will offer the justification the BOJ needs to make a policy change. The upshot for the JPY is that it should remain weak, with our end-year forecast being for it to reach 124. Commodity currencies hang in better than most The RBNZ also meets in the coming week, but as noted last week the odds of a rate cut are quite slim in view of recent CPI data. Commodity currencies were again some of the better performing currencies last week, although they could not totally withstand the downdraft caused by the stronger USD. At the margin they were seen to benefit from better than expected Chinese data, as well as from the steps taken by the PBOC to shore up growth. So despite commodities falling back, in line with the firm USD, their performance was better than might normally be the case. This might not last, however, as lower interest rates are likely to follow eventually, with even the hints from the Bank of Canada being that rates might be reduced from their current.5% in view of its downgraded growth outlook. The CAD may also be weakened further by the new government s intention to run budget deficits in order to support economic recovery. Page 2
FX Forecasts FX Forecasts - Major Forwards Spot 23.1 1M 3M 6M 12M 3M 6M 12M EUR/USD 18 1.9 1.7 1.2 37 6 1.1119 USD/JPY 121.47 122. 124. 127. 13. 121.26 121.1 12.33 USD/CHF.9786.98 1.4 1.8.9753.9713.9621 GBP/USD 1.5314 1.53 1.5285 1.5 1.58 1.537 1.533 1.5298 AUD/USD.7216.7.68.66.6.7182.7153.713 USD/CAD 1.3166 1.33 1.3 1.37 1.4 1.3173 1.3179 1.318 EUR/GBP.7194.7.7.6774.6456.721.7227.7268 EUR/JPY 133.84 134.2 133.92 133.35 132.6 133.84 133.84 133.84 EUR/CHF 1.782 1.835 1.8 1.92 16 1.764 1.743 1.699 NZD/USD.6753.66.63.59.56.679.6669.6596 FX Forecasts - Emerging Forwards Spot 23.1 1M 3M 6M 12M 3M 6M 12M USD/SAR* 3.7499 3.75 3.75 3.75 3.75 3.75 3.7594 3.7823 USD/AED* 3.673 3.67 3.67 3.67 3.67 3.6751 3.6777 3.685 USD/KWD.324.29.29.29.3.394.3177.332 USD/OMR*.38.38.38.38.38.3933.43.4425 USD/BHD*.3772.376.376.376.376.3794.3862.422 USD/QAR* 3.644 3.64 3.64 3.64 3.64 3.6454 3.6474 3.6529 USD/EGP 8.325 7.9 8. 8.1 8.3 8.9725 9.6225 1.4475 USD/INR 64.829 65. 64. 65. 63. 64.838 64.849 64.869 USD/CNY 6.36 6.4 6. 6.55 6.6 - - - *Denotes USD peg Page 3
Major Currency Pairs and Interest Rates Interest Rate Differentials - EUR Interest Rate Differentials - GBP. 1.4.2 1.75 -.2 -.4 1.35 1.3. 1.7 1.65 -.6 1.2 1.6 -.8-1. -.2 1.55 1. -1.2 -.4 1.45 German 2yr yield - US 2yr yield GBP 2yr yield - US 2yr yield Interest Rate Differentials JPY Interest Rate Differentials - CHF.9 13. 1.8.8.7.6..4.3.2.1 125. 12. 115. 11. 15.. 1.5 1.3 1..8.5.3..95.9.85 US 2yr yield - JPY 2yr yield US 2yr yield - CHF 2yr yield Interest Rate Differentials - CAD Interest Rate Differentials - AUD.4 1.35 3.. -.4 -.8 1.3 1.2 2.5 2. 1.5.95.9.85.8.75.7-1.2 1..65 US 2yr yield - CAD 2yr yield AUD 2yr yield - US 2 yr yield Page 4
Major Currency Positions CFTC Speculative Positions - EUR 1 1. 1.45 1.4 1.35 1.3-1.2-1 -2-2 Oct-15 CFTC Speculative Positions - GBP 1.75 75 1.7 25 1.65 1.6-25 1.55-75 1. - 1.45 Oct-15 CFTC Speculative Positions - JPY CFTC Speculative Positions - CHF 8 9.75 3 25.85-2 11-7 -12 12-25.95-17 13 Oct-15 Oct-15 CFTC Speculative Positions - CAD 1-1.2 1.3-1 Oct-15 CFTC Speculative Positions - AUD 1 125.95 75.9.85 25.8-25.75.7-75.65 Oct-15 Page 5
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