Forex Outlook

Oct. 22, 2016 (Commerzbank AG) – Renminbi – Could it crash again?

Recently, the USD-CNY exchange rate has broken through the important 6.70 mark. Could the renminbi crash again? We demonstrate that the CNY is still a managed currency. The policy is to minimise fluctuations against the CFETS currency basket. If the US dollar tends to gain versus all currencies as of late, the PBoC cannot at the same time have its currency appreciate against the dollar. In the light of this finding, recent CNY weakness relative to the US dollar was conformist.

Further topics:

  • USA far exceeds Maastricht deficit ceiling Uncle Sam has loosened his belt. In the just-ended fiscal year 2016, the deficit rose by nearly $150bn. The consolidation course has thus ended even before any change of government in January and the possible realisation of expensive election promises which may follow.

Outlook for the week of 24 October to 28 October 2016

  • Economic data: The US economy has revived in Q3 and we look for GDP to grow at an annualised rate of 2.4%. In the euro zone, sentiment indicators will show that the economy continues growing at a moderate pace.
  • Bond market: Although the ECB’s recent inactivity should give way to far-reaching measures in December, the growing debate about reflation in the US and UK is extending to the euro rates market and underscores the tendency towards a steeper Bund curve.
  • FX market: No fresh impetus should be expected from the EUR front next week. The currency market is focusing on the economic situation in the USA as well as interest rate decisions in Norway and Sweden.
  • Equity market: The Q3 reporting season is gradually gaining momentum. So far, earnings have surprised positively overall, despite individual exceptions such as GEA. An ongoing stabilisation in earnings expectations should continue to support German equities.
  • Commodity market: The oil price rise since end-September is to a large extent speculatively driven. In response to the higher oil prices, the number of oil rigs has increased in the US. Oil prices therefore have correction potential.


Oct. 15, 2016 (Commerzbank AG) – The risks from ECB tapering

The ECB is not about to scale down its bond purchases over the next few months, as was widely feared following a news agency report in the middle of last week. But by the end of 2017 the Bank is likely to run out of government bonds suitable for purchase and will have to stop buying. We assess what other measures the ECB could take to prevent a reoccurrence of the government debt crisis.

Further topics:

  • ECB council meeting: warm-up for December We do not expect any new decisions from the ECB governing council until the meeting in early December. Next Thursday, discussions are thus likely only to focus on the direction the council will take. One issue is likely to be the profitability of banks; another will be the latest results of the “Survey of Professional Forecasters”.

Outlook for the week of 17 October to 21 October 2016

  • Economic data: We look for next week’s Chinese Q3 GDP release to show an unchanged annual growth rate of 6.7%. In the US, markets will focus on the September indicators that are likely to show the economy gained momentum in Q3.
  • Bond market: Next week’s ECB meeting will produce little insight on how it intends to overhaul its asset purchases programme. With no clear signs expected until December, we look for 10-year Bunds to trade close to the upper bound of the post-Brexit range.
  • FX market: The market has increasing doubts about an amicable agreement between the UK and the EU which will keep the pound under pressure in the short term. Meanwhile, the US dollar has only limited upside potential.
  • Equity market: German equity volatility is likely to remain high next year. Issues such as restructuring and M&A, interest rate sensitivity, a still weak euro and company dividend policies should largely determine price movements.
  • Commodity market: Oil can be expected to lose further ground, given the doubts about OPEC’s announced production cuts. At the same time, an increase in drilling points to a rapid recovery in US oil output.

Oct. 8, 2016 (Commerzbank AG) – The end of an era

For almost two years, world trade has been stagnating. Besides the weak global economy and very low increases in investment, this has also been driven by political factors; the impetus from previous world trade liberalisation agreements is diminishing and protectionist measures are increasing. This trend is likely to continue and world trade should thus continue to expand at a slower pace. This is dampening global economic growth and Germany is likely to be one of the biggest losers. In the long term, inflation rates are also set to rise again, which should increase tensions within EMU.

Further topics:

  • ECB: Tapering not on the agenda for a good while yet In the last few days, markets have begun to speculate about whether an end to the ECB’s asset purchase programme is approaching. This was triggered by a news agency report, although on closer look this did not contain anything new. We still believe the ECB is likely to extend its buying programme beyond March 2017, and the latest market reaction should have strengthened its intentions.

Outlook for the week of 10 October to 14 October 2016

  • Economic data: The focus in the US next week will be September retail sales. We expect a clear rise, though this will partly be due to higher fuel prices. German economic expectations should have brightened after the surprisingly positive ifo business climate.
  • Bond market: Euro area rates markets are rattled by the untimely tapering talk with regard to €QE. As a result, market sentiment has turned sour and is unlikely to recover any time soon, as investors will be chewing over what Fed policymakers have to say in the wake of more US data due for release today.
  • FX market: The US presidential election may well become the key driver of USD exchange rates. Events that are normally important, such as today’s release of the US employment report, would lose their relevance to the FX market if market participants begin to assume that the outcome of the election will have a crucial influence on the Fed’s actions.
  • Equity market: Despite some risks ahead, we enter the fourth quarter with a dose of optimism and expect the DAX to rise to 11,200.
  • Commodity market: The rally on the oil market should soon run out of steam. The three energy agencies are likely to confirm that without lower OPEC production, supply will exceed demand for even longer than previously expected.

Oct. 1, 2016 (Commerzbank AG) – The Trump risk: “Speak loudly, and carry a big stick”

Despite his rather weak performance in the first TV debate, Donald Trump is lagging only slightly behind Hillary Clinton in the polls. But how many of his radical plans could he implement? In his pet subject, “foreign trade”, he could take many decisions on his own as president. But when it comes to taxes or the appointment of important officials, he would have to rely on the approval of Congress, which in many cases should put a brake on his efforts. In any case, considerably higher deficits should be expected. Therefore, the “Trump” risk should increasingly move into the markets’ focus in the coming weeks and at least cause volatility to rise.

Further topics:

  • Target2 balances closer to record level: Target2 claims in the eurozone have risen by about 400 billion euros. Italian liabilities have marked a new all-time high.
  • Meeting of oil producers – much ado about nothing At the oil producers’ meeting in Algiers next week, there is unlikely to be a voluntary limit on production. We have lowered our price forecast accordingly.

Outlook for the week of 1 to 7 October 2016

  • Economic data: The Fed’s target of full employment has almost been achieved, something likely to be confirmed by the US employment report for September. In Germany, industrial production should have more than compensated for the clear minus in July.
  • Bond market: The Bund future reached a fresh record high this week. We see downside risks prevailing next week, as a solid US labour market report should force investors to price in more of the Fed’s guidance regarding a rate hike in December. We look for wider intra-EMU spreads between large peripherals and Bunds and prefer Italy over Spain.
  • FX market: The market still harbours strong doubts about the Fed raising interest rates soon. Even a higher chance of victory for Hillary Clinton in the US presidential elections offers only little support to the US dollar amid low interest expectations.
  • Equity market: The closer we get to the year-end, the more are dividend stocks moving into the investors’ focus again. But what should not be forgotten is that the level of a share’s dividend yield alone has only limited informative value.
  • Commodity market: OPEC’s surprising change of tack should buoy oil prices near-term. But it will be difficult to implement the announced production cuts. We see the risk of a price correction medium-term. In the markets for base metals, this week looks set to be quiet given the “Golden Week” in China, especially with sentiment indicators in the major sales markets giving little reason for euphoria. Palladium, however, should exhibit relative strength thanks to good US auto sales figures.

Sept. 24, 2016 (Commerzbank AG) – China’s state-owned enterprises – Ways out of zombification?

China’s state-owned enterprises are on a borrowing binge and are depriving private companies of resources. We take a closer look on SOEs and show that central and local government will not loosen their control of these companies significantly for economic reasons alone. Far-reaching reforms of the sector are not to be expected with the result that growth-inhibiting sclerosis is likely to strengthen.

Further topics:

  • Forecast changes: ECB to cut depo rate later On our regular monthly forecast meeting we slightly adjusted the ECB forecast. We now expect the ECB to cut the deposit interest only in March 2017 and not already at the end of 2016. After all, it will take longer until the ECB will revise its projection of rising core inflation down. Thus, the euro is set to appreciate more slowly.
  • Meeting of oil producers – much ado about nothing At the oil producers’ meeting in Algiers next week, there is unlikely to be a voluntary limit on production. We have lowered our price forecast accordingly.

Outlook for the week of 26 to 30 September 2016

  • Economic data: The euro zone’s headline inflation rate is about to gradually increase. In the US, core inflation is slowly drawing nearer to target.
  • Bond market: We expect 10y Bund yields to test the lower boundaries of their well-established sideways range while volatility is grinding lower again.
  • FX market: The central bank decisions of the last few days have led to something of a reshuffle. We have revised several of our exchange rate forecasts.
  • Equity market: We expect the DAX to outperform the S&P 500 as, among other things, auto sales should remain robust and the Brexit vote should have only limited impact on German GDP growth.
  • Commodity market: Oil prices should drop if, as we expect, the meeting of leading oil producers fails to produce any results. Metal prices can be expected to tread water next week.

September 17, 2016 (Commerzbank AG) – Fed – Too late again?

The Fed is likely to sit tight again at its meeting next week, but will hike rates only in December. Next year, it will also act very slowly, risking a bout of asset price inflation. In fact, private households’ assets in relation to their incomes are as high as during the times of the real estate bubble.

Further topics:

  • BoJ: Turning even more negative? While we do not expect any change in monetary policy, in the medium-term another rate cut seems likely. With the BoJ already holding more than one third of Japanese government bonds, increasing bond purchases has its limits.

Outlook for the week of 19 to 23 September 2016

  • Economic data: Euro zone PMIs should have hardly changed versus August indicating that the euro zone economy will pick up only moderately in the final quarter of 2016.
  • Bond market: The spike in bond yields should be a unique opportunity to buy 10y Bunds at a positive yield. Regarding near-term market sentiment, next week’s Bank of Japan policy meeting could be more important than the Fed.
  • FX market: The BoJ is likely to dash hopes of further significant monetary policy easing, thus adding to the downward pressure on USD-JPY. As regards USD exchange rates, the Fed’s long-term forecasts will be crucial.
  • Equity market: We expect the Fed to increase interest rates by 75bp by end-2017, which should be particularly negative for the share prices of German companies with strong interest rate sensitivity due to their higher debt levels.
  • Commodity market: As long as hopes of production caps remain alive ahead of the meeting of oil producers in Algiers in the week after next, the price is unlikely to slide below USD45. The gold price may receive some impetus from higher demand from Asia.

September 10, 2016 (Commerzbank AG) – Secular stagnation?

Many economists believe that poor economic growth is due to structurally weak demand and label it ‘secular stagnation’. Hence, they call for easy monetary and fiscal policy. We illustrate, however, that the sluggish recovery is above all due to slower population growth and hesitant balance-sheet adjustment. This is true, above all, of the euro zone whose economic problems are at risk of becoming chronic, implying that the ECB will be tempted to stick to an easy monetary stance for many more years.

Further topics:

  • Brexit: Where do we stand now? Eleven weeks after the UK Brexit vote we provide an update of the debate.
  • USA: Strong growth in the third quarter While US sentiment indicators have deteriorated of late, the economy is likely to grow by more than 3% in the third quarter.
  • India: Modi has finally delivered

India: Modi has finally delivered

Now that the Upper House has approved a uniform national GST, prime minister Modi has realised his first major reform.

Outlook for the week of 12 September to 16 September 2016

• Economic data: US economic data for August are unlikely to be as good as most July indicators.

• Bond market: Ten-year Bund yields are likely to remain in their tight sideways range of 0.0% to -0.1%.

• FX market: As the market remains sceptical regarding a rapid Fed rate hiking cycle, the upside potential for the dollar remains limited for the time being.

• Equity market: Earnings expectations of German companies are likely to keep rising only slowly in the quarters ahead.

• Commodity market: Speculation about production ceilings at the meeting of major oil producing countries are currently standing in the way of a fall in oil prices.

September 4, 2016 (Commerzbank AG) – ECB Council meeting: Dr Draghi to extend the therapy

Eleven weeks after the Brexit referendum, the ECB should by now have gathered enough information for a reassessment of the situation. It may well lower its projections for growth and core inflation somewhat. In this case, it is also quite possible that the council will decide next week to extend its bond buying programme beyond March 2017. It would then presumably also ease the current restriction which requires it to buy only those bonds with yields above the deposit rate.

Further topics:

Fed: When hawks cackle …

Fed leaders have recently demonstrated that they stand united and key policymakers are trying to keep the option of a rate hike open for September. However, data will remain decisive and today’s employment report should play an important role, but we maintain that December is the most likely time for the next rate hike.

Outlook for the week of 5 to 9 September 2016

• Economic data: German manufacturing is likely to have started the third quarter with a decline in output, and orders in July are unlikely to signal any improvement on the horizon. In the USA, the non-manufacturing PMI probably dipped in August but should continue to signal solid growth in the service sector.

• Bond market: Unless there is a big positive surprise in today’s US payrolls, 10y Bund yields will likely keep trading in a tight -0.1%-0% band, although next week’s ECB QE update may test the upper yield boundary.

• FX market: The US employment report is the key event for FX markets in the days ahead. But given market scepticism regarding the Fed’s medium-term strategy, the dollar is unlikely to react much, even if the report surprises to the upside.

• Equity market: German companies continue to feel the pinch from weaker global growth. In order to maintain or further raise their earnings margins, they can be expected to continue with additional restructuring and to consider take-overs and joint ventures. Investors are advised to overweight companies with stronger earnings momentum.

• Commodity market: Oil prices should retreat a little next week as fresh forecasts by the US Energy Information Administration are likely to fuel concern about renewed market oversupply, although downside is likely to be limited by the upcoming meeting of oil producers at the end of the month

August 27, 2016 (Commerzbank AG) – Merkel: “Yes, we can!” – one year on

A year ago, on 31 August 2015, German Chancellor Merkel made her now famous remark regarding the refugee crisis, which in English compares to President Obama’s “Yes, we can”. On the anniversary of her proclamation, we are analysing the economic impact of the large numbers of refugees. How many have actually reached Germany, and how many family members can be expected to follow? How is integration on the labour market progressing, and what does it mean for Germany’s long-term growth prospects?

Further topics:

US: Investment spending to pick up? US private investments have been falling for three consecutive quarters. However, companies will soon have to start replenishing their inventories, while the dramatic slump in oil investments appears to have bottomed out. Moreover, the residential construction outlook remains favourable.

Outlook for the week of 29 August to 2 September 2016

Economic data: Following two extraordinarily sound US labour market reports, we are looking for slightly weaker – but still solid – data in August.

Bond market: The downtrend in peripheral spreads may pause near-term with next week’s confidence votes in Spain possibly paving the way for more long-end supply, budget and rating jitters on the rise in Portugal and the important referendum in Italy looming in October.

FX market: Both Fed Chair Janet Yellen and BoJ Governor Haruhiko Kuroda are likely to disappoint the markets and thus increase the downward pressure on USD-JPY.

Equity market: In the short-term, the quite optimistic DAX sentiment is a point in favour of stagnating rather than rising share prices.

Commodity market: In our view, only in the gold market is there a good chance of rising prices next week.

August 19, 2016 (Commerzbank AG) – ECB, China, Fed: Where are the risks?

At our monthly forecast meeting we discussed our ECB forecast in some depth. After all, ECB members are beginning to talk about the negative fall-out for banks from their interest-rate policy. Nevertheless, we still envisage a further cut in the deposit rate towards the end of the year, whereby the ECB will no doubt exempt the banks from penalties to some extent. We also reiterated our cautious view of China. One of the main problems here is that Chinese state-owned enterprises are continuing to markedly raise their investment, despite a slump in earnings. Regarding the US, we have lowered our growth forecast for 2016 from 1.8% to 1.5% – yet another reason why the Fed will probably only raise rates towards the end of the year.

Outlook for the week of 22 to 26 August 2016

Economic data: Next week’s forthcoming euro zone PMIs as well as the German ifo business climate should keep moving sideways. Back in July, sentiment indicators showed no reaction to the Brexit vote either.

Bond market: Investors may ponder on any possible surprises by Yellen’s speech due next Friday. Until then, 10y Bund yields look cornered in a tight 0% to -10% band.

FX market: At the end of next week, the central bank elites will convene for their annual meeting in Jackson Hole, Wyoming. Yet we do not expect any USD-positive signals for now and have adjusted some forecasts.

Equity market: Reported Q2 earnings of DAX and MDAX companies surprised on the positive side by and large. This ongoing stabilisation should provide fundamental support to the recovery of the German equity market.

Commodity market: The oil market rally should run out of breath next week. After all, supply currently seems more ample again.