Forex Outlook

July 9, 2017 (Commerzbank AG) – Will Draghi’s taper bluff succeed?

The ECB will soon have to reduce its bond purchases even though its policy goals have not really been attained. To avoid this being regarded as weakness, the ECB is increasingly likely to highlight the improving economy. And chances are it will be successful with this bluff.

Forecast changes: Stronger growth in the Eurozone

On our monthly forecast meeting we raised our growth forecast for the Eurozone. We now expect an increase of real GDP by 2% in 2017 (up from 1.8%). Other forecasts were mostly confirmed.

Outlook for the week of 10 to 14 July 2017

  • Economic data: For the Fed, the fact that inflation is not rising remains a major concern. Progress towards the inflation target will remain slow. In the euro zone, industrial production looks set to have stagnated in May, despite buoyant sentiment.
  • Bond market: While pending data releases out of major economies will impact markets late next week, Yellen’s testimony before the Congress at mid-week could kick off more upward pressure on long-term sovereign bond yields.
  • FX market: ECB President Draghi is making use of the more optimistic economic outlook to signal an exit from the ultra-expansionary monetary policy. In fact ECB rate hikes will only start supporting the euro towards the end of next year, however.
  • Equity market: Led by speculation over an ECB exit from its expansionary policy, volatility in the German equity market temporarily rose last week. This reversal in monetary policy should weigh on debt-ridden stocks, in particular, and the rate-sensitive real estate sector is likely to also come under pressure.
  • Commodity market: The three energy agencies will probably point to a more gradual reduction of the high oil stocks. But following the recent production numbers, this will barely move oil prices.


USA 

July 3, 2017 (Commerzbank AG) – FX options market in the doldrums

The FX options market is experiencing the summer doldrums even though EUR/USD has moved sharply upwards in recent days. Exchange rate options are trading on the basis of their lowest implied volatility since 2014. In our view, FX volatility will only show any sustained pickup once inflation expectations rise and central bank monetary policy switches away from its current passive setting.

Falling oil prices: OPEC’s strategy put to the test

Oil is now as cheap as it was before production cuts started in November 2016. Prices could fall even more in the short term if the markets decide to test the resolve of OPEC and the US shale oil industry. But with demand in Q3 likely to exceed supply, prices should pick up again. We maintain our year-end Brent forecast of $48 per barrel

Outlook for the week of 3 to 7 July 2017

  • Economic data: US employment in June looks set to have risen visibly after the May calendar effects unwind, although payroll gains are likely to slow due to demographic reasons over the medium-term.
  • Bond market: Markets are likely to remain jumpy following the latest volatility tantrum in euro benchmark rates and a raft of big US data releases. We believe 10y Bund yields will test the upper boundary of a sideways range centred on 0.5% with risks skewed for a break to the upside
  • FX market: The euro is gaining sharply in the wake of an unintentionally hawkish speech by ECB President Mario Draghi. But the EUR-USD exchange rate is also supported by a Fed which appears to have recently become rather cautious.
  • Equity market: Germany should see ongoing M&A activity in the coming months, supported in part by the positive equity market trend.
  • Commodity market: With US output rising again, oil prices seem set to fall next week. Gold could show further weakness next week and weak US car sales may trigger the price correction we are expecting for palladium.

June 17, 2017 (Commerzbank AG) – Euro zone: Recovery illusion

The ECB’s billions are increasingly filtering through to the real economy, thus putting the euro zone on track for several years of decent growth in the range 1½% to 2%. In many quarters this will be seen as a restoration of economic health. Anti-establishment political forces are losing ground, giving way to renewed proposals for further EU integration like those championed by France’s new president, and financial markets will show their approval. But after a period of decent growth, lasting perhaps two or three years, which suffices to reduce the degree of excess productive capacity, the spotlight will again fall on the economic weaknesses resulting from crisis-management policies designed to preserve the status quo rather than take the economy forward.

Outlook for the week of 18 to 23 June 2017

  • Economic data: The PMIs in the euro zone are expected to have declined in June. In the US, purchases of single-family homes have probably recovered following their April dip.
  • Bond market: With the Fed’s rate decision out of the way, USD interest rate swaps and also US Treasuries are in for some respite. In the euro area, the balance of directional risks in Bunds is to the downside rather than still lower 10y yields
  • FX market: Fed has maintained its view that the key rate will be raised a further four times until year-end 2018 whereas the market is pricing in far fewer rate hikes.
  • Equity market: For the coming summer months several bear trends suggest a DAX consolidation is on the cards.
  • Commodity market: We anticipate a temporary recovery in oil prices, possibly as early as next week, though the longer-term trend is downwards.

May 27, 2017 (Commerzbank AG) – President Trump – Was that it?

Donald Trump’s presidency has been far from smooth so far. Following the most recent scandals, there has even been discussion of a risk that he could be impeached. Even in the likely event that Trump weathers these crises, it is unlikely that significant new economic measures will be implemented during his presidency. Markets will thus have to abandon any hopes of moves in this direction.

Further topics:

Euro zone: Negative depo rate has a positive impact on lending

The ECB sees no reason to hike rates before its bond-buying programme comes to an end, though if negative interest rates threatened the monetary policy transmission, it might revise its opinion. But we consider this an unlikely scenario. According to the bank lending survey, commercial banks believe that the negative deposit facility rate, while somewhat weighing on their net interest income, has a moderate positive effect on lending volumes.

Outlook for the week of 29 to 2 June 2017

  • Economic data: Core CPI inflation in the euro zone is expected to fall back below 1% in May as the distortionary effects of Easter drop out of the calculations, whilst the headline rate is expected to fall even more sharply from 1.9% to 1.4%. We expect to see another decent labour market report out of the USA.
  • Bond market: Bund yields are expected to remain volatile, while ten-year yields are unlikely to top recent highs. The trading range since the autumn will remain intact, at least until the ECB meeting in early June.
  • FX market: 
  • Equity market: Although the economy is still growing strongly, corporate restructuring remains the order of the day.
  • Commodity market: When the oil producing countries extended their production cuts by nine months, the market responded with a drop in prices. But they are unlikely to fall much further, as compliance with production quotas remains high.

May 13, 2017 (Commerzbank AG) – Brexit negotiations – The EU, the wannabe giant

The EU’s position in the Brexit negotiations is not as strong as it currently seems. Indeed, in the event of no deal on Brexit, it also has a lot at stake. For instance, Germany exported more to the UK than to China in 2016. Moreover, if no deal is concluded the EU would struggle to collect the huge outstanding claims to which it believes it is entitled, and many EU countries fear the prospect of an intensification of tax competition from the UK. In the end, the two parties are likely to strike a free-trade deal. Until then, however, the pound looks set to come under sustained pressure.

Further topics:

OPEC does not learn from its mistakes

Although implemented in disciplined fashion, the effect of OPEC production cuts has evaporated due to the rapid recovery in US oil production. Although OPEC obviously only has limited influence on prices the production curbs are likely to be extended, which may temporarily prices but is unlikely to be successful in the longer-term.

Outlook for the week of 15 to 19 May 2017

  • Economic data: After the US economy barely grew in the first quarter, April data are likely to inspire hope that the economy may regain traction in the second quarter. The German ZEW index is likely to keep moving sideways in no man’s land.
  • Bond market:Forthcoming weeks will be crucial for the European bond market, with various markets trading close to critical levels following France-driven repricing. Bunds look set to remain under selling pressure. Further upside in French bonds seems exhausted.
  • FX market: EUR-CHF is trading at its highest since October raising the question of whether the SNB will be able to stop intervening to weaken its own currency? Near-term, downside risks seem to have declined but this may prove deceptive in the medium-term.
  • Equity market: US implicit volatility has fallen to a 24-year low. This kind of ‘complacent’ investor sentiment is typical of an ageing bull market. But it is not an immediate sell signal since bear markets are usually prompted by restrictive monetary policies adding to investor complacency. This combination is not yet evident.
  • Commodity market:The price of Brent oil should hover around USD 50 next week. Although US oil production is recovering quickly, there are also first signs of a reduction in inventories.

May 6, 2017 (Commerzbank AG) – Emerging markets lose their growth advantage

It has become accepted as the norm today that low-income countries (“emerging markets”) grow more rapidly than high-income countries (“developed markets”). But whilst this has been the case over the past 17 years due to the impetus from globalisation, this factor has ground to a halt, leaving emerging markets without a natural growth advantage. Thus, in the absence of cyclical factors such as rising commodity prices which could provide a tailwind (currently not the case), EM growth is unlikely to substantially outstrip that of developed markets.

Further topics:

France: Macron will win the run-off

On Sunday, the French electorate will likely vote for Emmanuel Macron as their president. Although his reform plans will be made more difficult by an absence of a parliamentary majority following the June elections, he should still have considerable influence.

Forecast meeting: Fed – Why we are not following the market

We continue to believe the Fed will raise rates five more times by the end of next year. For one thing, weak US Q1 growth should prove an outlier, and a tight labour market points to faster wage growth. But unlike the Fed, the ECB will raise key rates later than the market expects.

Outlook for the week of 8 to 12 May 2017

  • Economic data: German Q1 GDP growth looks set to have been strong at 0.7% and should remain healthy in Q2. US retail sales look set to have inched up visibly in April.
  • Bond market: Investors are likely soon to refocus on economic data, central bank issues and supply. We look for 10y Bund yields to hold towards the upper end of their current sideways range for now.
  • FX market: A tail risk that Marine Le Pen will win the French presidential election remains priced into the options market and weighs on the euro for now. Sterling has come under pressure as markets realise that Brexit negotiations will not be easy.
  • Equity market: The promising dividend backdrop is a cornerstone of our expectation that the current eight-year DAX bull market will continue into 2018 or even 2019.
  • Commodity market: The price of Brent oil should stabilise at around 50 USD, even though the EIA is likely to lift its forecast for US oil production.

Apr. 29, 2017 (Commerzbank AG) – 100 days of Trump – and the next 1361?

President Trump has not done too well in his first hundred days. Market enthusiasm in the first few weeks is therefore slowly turning to disillusionment. That said, it is too soon to write off his presidency already. A substantial tax cut will come, but later and on a smaller scale than expected. The trade war feared by some will not happen, but protectionism will remain on the agenda and could especially affect Germany.

Further topics:

Fed to shrug off Q1 and remain on course

After raising rates in March, the Fed will remain on hold at its meeting next week, leaving the target range for the federal funds rate at 0.75%-1.00%. It will probably dismiss both the slowdown in growth in Q1 and the surprisingly low inflation in March as statistical outliers. The US central bank remains on course for monetary policy normalisation and will likely raise rates twice more in 2017.

Outlook for the week of 1 to 5 May 2017

  • Economic data: In the US, the surge of sentiment indicators is probably over, but they still seem to be at relatively high levels. The April employment report should turn out much better than the March figures. In the euro zone, the economy probably grew in Q1 by 0.5% versus the previous quarter.
  • Bond market: With electoral risks in France subsiding, the Fed’s policy upcoming decisions will be in markets’ focus. Even though the next funds rate move is not expected in May, the FOMC will re-iterate its hawkish stance. Bund yields should trade in a well-established 0.20-0.50% range.
  • FX market: Next week’s FOMC meeting is unlikely to provide much impetus for the dollar.
  • Equity market: Stretched equity valuations suggest that selective stock picking is becoming ever more important. We retain a preference for companies willing to restructure, with a high US market share and earnings showing a positive reaction to a stronger US dollar.
  • Commodity market: Oil prices look set to recover in the week ahead. Solid sentiment indicators ought to point to robust oil demand, whilst declining US oil inventories look set to signal that supply is tightening.

Apr. 21, 2017 (Commerzbank AG) – France – Macron is no saviour

On Sunday, the French will decide which two candidates to send into the presidential election run-off on 7 May. If Emmanuel Macron turns out to be the new French president, we are likely to hear a big sigh of relief from the markets and many European capitals. But Mr. Macron is not a deep-rooted reformer. He will not tackle the decisive obstacles to higher employment. And at a European level, the debate over the appropriate response to the euro zone crisis will continue even if he wins.

Further topics:

ECB Council meeting: Steady hand until June, at least

As doubts should continue within the ECB Council that inflation will rise towards 2% in a sustained manner, the central bank ought to stick to its steady-hand policy for now and point to its projections in June. Moreover, the ECB looks set to adhere to its forward guidance.

Outlook for the week of 24 to 28 April 2017

  • Economic data: The fact that the Easter holidays fell in April this year rather than in March, will result in a roller-coaster ride for the euro zone core inflation rate. After declining to 0.7% in March, it will likely rise to 1.0% in April, only to fall back to 0.9% in May. In the US, the economy probably got off to another poor start to the year.
  • Bond market: Going forward to next week, rates trends in the wake of French presidential elections may prove bumpy after the first round, especially if Le Pen were to do better than suggested by current polls.
  • FX market: The elections in France are likely to dominate movements in EUR exchange rates. Against this backdrop, the ECB meeting is likely to take a back seat. At the same time, the recent weakness of the economy and inflation in the US are weighing on the US-dollar.
  • Equity market: The uncertain outlook for auto stocks remains a key headwind for the DAX. If auto stocks traded at their P/Es of April 2015 the DAX would already be at 12,900.
  • Commodity market: First OPEC production estimates for April should indicate that discipline in adhering to the agreed production cuts is still high which ought to support the oil price.

Apr. 16, 2017 (Commerzbank AG) – Euro area – Sentiment still upbeat, but what does this mean?

Due to the Easter holidays, the current edition of Week in Focus is a shortened version. The next regular edition will be published on Friday, April 21.

We wish all our readers happy Easter!

Preview – The week of 17 to 21 April 2017

The purchasing managers‘ indices (PMIs) ought to have maintained their high levels in April. So far, however, upbeat business sentiment has not been confirmed by a corresponding increase in “hard” data.

We nonetheless stick to our view that a “sentiment bubble” is unlikely and therefore believe that production will rise in the months ahead.

In China, the economy should again have expanded by 6.8% in the first quarter.

Apr. 9, 2017 (Commerzbank AG) – Why wages are rising so slowly

In the US and in Germany we are almost at full employment but wage growth still remains low. We examine the possible causes of this unusual situation. Key factors include the weaker negotiating position of employees against a backdrop of globalisation; the disappointing productivity trend and low inflation expectations. These forces which act as a brake on wages will at best diminish very gradually. This is especially true for the euro zone where the ECB will not hike rates any time soon.

Further topics:

Forecast meeting: Brief euro high

Stronger leading indicators will make it easier for the ECB to sell a “tapering” of bond purchases. But modest core inflation and ECB rates on hold suggest that although EUR/USD could rise to 1.12 by autumn, this is unlikely to be sustained and EUR/USD would then fall back again.

Outlook for the week of 10 to 14 April 2017

  • Economic data: While US consumers are in high spirits, they probably showed some buying restraint in March. In the euro zone, industrial production in February will reveal whether the economy actually moved up a gear at the beginning of the year.
  • Bond market: Amid a short trading week, Bund yields and EGB spreads are running into a liquidity drought though markets could be rattled by a whopping (net) supply at mid-week. EGB spreads should retain their erratic pattern through the week.
  • FX market: In the short term, the dollar will probably gain some ground against the euro amid positive US labour market data and concerns about possible US protectionist measures. However, the euro should maintain the upper hand in the coming months.
  • Equity market: A number of factors suggest that we could be set for a favourable Q1 reporting season. As a result, analysts ought to be more optimistic about the earnings expectations of many companies within the DAX and MDAX.
  • Commodity market: Brent should be able to hang on to its latest gains, as both IEA and OPEC are expected to confirm that the burden of production cuts is more evenly distributed. The IEA is also expected to indicate that the OECD countries have not yet cut inventories, but that this is merely a question of time.