Forex Outlook

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.

Aug. 17, 2016 (Commerzbank AG) – Will it be Trump?

According to the latest polls Donald Trump’s approval rating has fallen behind that of Hillary Clinton. But analysis of the US electoral system indicates that Mr Trump does stand a chance. Indeed, the presidential election will be decided in some fiercely contested states where the outcomes cannot be predicted with certainty. Less well known candidates may pull crucial votes away from Mr Trump or Mrs Clinton – a factor which cost Democratic contender Al Gore victory in 2000. We also demonstrate why Mr Trump cannot be compared to former Republican US president Ronald Reagan, who at the beginning of the 1980’s rescued the US from a severe economic crisis.

Further topics:

Spain: Breakthrough or third round? The odds that Spain will be able to form a government are on the rise, seven weeks after the second election. Ciudadanos has signalled its conditional willingness to support Rajoy, which puts the onus on the socialists to co-operate. However, a third election within a year remains a possibility.

Outlook for the week of 15 to 19 August 2016

Economic data: In the US, the renewed decline in oil prices will have depressed the July inflation rate. In Germany, the ZEW index has likely recovered which would suggest that the uncertainty among analysts following the Brexit vote did not last very long.

Bond market: The hunt for yield will remain the major theme on European bond markets in the coming week. Bunds should remain in their narrow trading ranges for the time being, with the persistent scarcity discussion offsetting the notable decline in €QE purchases.

FX market: With major central banks silent at the moment, the market is looking at economic data for clues about the Fed’s further interest rate path.

Equity market: The persistent decline in long-term bond yields has both positive and negative side effects. We maintain our strategy of turning bullish on the DAX only during periods when the VDAX is at 25 to 30 and not chase rallies at current levels.

Commodity market: With oil markets likely to lack “major news” next week, the US Department of Energy weekly report should receive increased attention. Any decline in oil inventories will likely drive oil prices higher, especially since speculative net long positions have been significantly reduced.

Aug. 6, 2016 (Commerzbank AG) – Germany – Housing market tensions on the rise

The housing boom in Germany is looking increasingly like a bubble as house prices steadily decouple from the fundamental factors. The driving force is very expansionary ECB monetary policy, which is unlikely to change much in the foreseeable future. That said, mortgage interest rates will probably not drop much further and experience from the US shows that the risk of a sharp correction increases in the medium term against the backdrop of rising prices. In addition the clear increase in construction orders points to higher residential investment. As a result, housing shortages should abate in a number of regions.

Outlook for the week of 8 to 12 August 2016

  • Economic data: Next week the focus will be on US retail sales for July. These should highlight that US consumers are still driving economic growth. In Germany, the release of Q2 GDP should show that the economy expanded at a much slower rate than in the first three months of the year. Page 7
  • Bond market: The impetus from the data and supply will slow markedly next week but markets may remain choppy. ECB QE purchases look set to slow markedly in August as the buffer from front-loading is significantly larger than last year. This should limit the downside in yields near-term while the underlying scarcity still favours SSAs over sovereigns. Page 10
  • FX market: The US dollar has dropped significantly after the disappointing US GDP figures. A solid US labour market report today is unlikely to be enough to reverse this trend; the Fed will probably only increase interest rates further after a long series of decent US data. Page 11
  • Equity market: Flattening yield curves dent the outlook for global equity markets, with the banking sector suffering in particular. But flat yield curves are not a recessionary indicator due to the fact they are distorted by the unprecedented asset buying by central banks. Page 12
  • Commodity market: Oil prices should stabilise next week as weekly US data and the longer-term outlook of energy agencies should dampen fears of further substantial oversupply. The gold price should move sideways, as should most agricultural prices. Page 13

July 31, 2016 (Commerzbank AG) – What’s left of the Brexit shock?

Many economists have sharply lowered their forecasts for Germany and the euro zone after the British vote to leave the EU, being afraid of an uncertainty shock. But there is scant evidence so far of any uncertainty shock in the rest of the EU. Of course, weaker economic growth in the UK, as an important trading partner, will be felt in Germany and across the euro zone but the effect is likely to be much weaker than many forecasts presently assume. We outline the indicators which investors should look out for in the weeks ahead.

Further topics:

BoE Preview: Action stations

After the reduction in banks’ countercyclical capital buffer earlier this month, the MPC is expected to follow up with a cut in Bank Rate and we look for a reduction of 25 bps next week, taking it to 0.25%. But more QE might have to wait. Page 5

Outlook for the week of 1 to 5 August 2016

  • Economic data: The US employment report for July, due out next week, should support the Fed’s stance of leaning cautiously towards higher rates – which should also be vindicated by the release of PMI data. In Germany, orders likely continued their sideways trend. Page 8
  • Bond market: The focus next week will shift to the BoE. The most bullish of easing expectations are unlikely to be fully met but any potential disappointment should not have large negative spillovers into Bunds and US Treasuries. US Treasuries face fundamental headwinds from the ISM index and the labour market report for July. Page 11
  • FX market: After the Fed and BoJ decision the Bank of England meeting will move the FX market next week. A 25bp rate cut is very much expected. Page 12
  • Equity market: The German (nominal) export boom is over as the impact of the marked euro depreciation through to mid-2015 has faded. Corporate earnings growth should remain relatively moderate, which adds to the drag on the German equity market. Page 13
  • Commodity market: Commodity prices are moving in different directions. While gold and platinum prices are climbing, oil prices have been falling for weeks due to higher inventories and US production trends. By contrast gold is being driven by the bond market, which in turn is driving platinum metals which are also benefiting from decent car sales. Page 14

July 24, 2016 (Commerzbank AG) – Understanding the Fed: Four lessons for investors

The Fed will not increase interest rates next week. But after the toing and froing in recent communications, the course ahead is not that clear. We illustrate what lessons are to be learned from the Fed’s tactics. Firstly, we should not read too much into the FOMC statement. Secondly, public remarks by most regional Fed presidents can be safely ignored, the decisive figures are the board members. Third, it all depends on the data and fourth, the Fed only raises interest rates when markets are calm. We still expect a rate hike towards the end of the year.

Further topics:

Turkey: The economy after the attempted coup

Political uncertainty after the failed coup attempt will have economic consequences, and we have further reduced our growth forecasts. Page 5

Outlook for the week of 25 to 29 July 2016

  • Economic data: The euro zone economy probably expanded in Q2 at a considerably slower pace than in the first three months of this year. This will not please the ECB, nor will the renewed decline of the core inflation rate in July. The US economy, in contrast, regained momentum in Q2 after the weak winter half-year. Page 8
  • Bond market: With Fed rate hike speculation having returned and the ECB poised to reassess its QE programme in September, this leaves the long-end of the Bund curve vulnerable. We see scope for the latest steepening of the yield curve to extend. Page 11
  • FX market: In the coming week, the Fed and the Bank of Japan will convene for their policy meetings. These will essentially determine further developments in USD and JPY exchange rates. Page 12
  • Equity market: Even those DAX companies which have considerable UK exposure have seen a sharp price recovery following the Brexit decision. With negative Brexit effects only expected on a medium- to long-term perspective, if at all, the DAX should continue fluctuating around the 10,000 mark in the near-term. Page 13
  • Commodity market: In the absence of new data and ever decreasing activity among market participants in mid-summer, commodity prices are likely to move sideways. Gold prices will continue to be impacted by greater risk appetite among investors. Page 14

July 10, 2016 (Commerzbank AG) – Italy’s banking system with its many non-performing loans is moving into market focus again. Investor bail-in is just as unlikely as broad-based state aid. Instead, Italy will probably continue to muddle along. Other countries in the euro zone are also shying away from a big clean-up of their balance sheets, which will further dampen the economy and entice the ECB towards a loose monetary policy. What is more, Italy’s avoidance of EU restructuring rules is symptomatic of how EU rules are being handled.

Outlook for the week of 11 to 15 July 2016

  • Economic data: A wide range of US economic indicators are due out next week. We expect the data to confirm the picture of moderate expansion with a slight rise in inflation pressure. Euro zone manufacturing is likely to have fallen considerably in May, confirming that strong economic growth in the first quarter was an outlier.
  • Bond market: The UK referendum is the catalyst uncovering several deficiencies in the EU policy setup, which have fuelled a pronounced leg of global risk aversion. UK property funds and Italian banks are in the spotlight and the flight to quality pushes an increasing share of German Bunds beyond the boundaries of QE purchases.
  • FX market: Last week we discussed the negative implications of the Brexit referendum for the pound. This week we look at the currencies that benefit from the continuing flight to “safe havens”: the yen and the Swiss franc.
  • Equity market: Corporate acquisitions year-to-date are down markedly from – an albeit strong – 2015. This is above all due to equity market weakness, whose sustained recovery was the key factor driving M&A activities in the past.
  • Commodity market: Oil prices should continue to hover around the $50 per barrel mark with the energy agencies likely to confirm a largely balanced market. Base metal prices, on the other hand, are at risk of falling because of disappointing Chinese economic data.

July 2, 2016 (Commerzbank AG) – The holiday-shortened trading week may have a slow start but it looks poised for a busy finish as the markets eye the U.S. Non-farm Payrolls data on Friday, July 8 for signs of improvement after the previous report’s dismal job creation numbers.

What Brexit means for our forecast

The Brexit was of course the main topic at our monthly forecast meeting. We believe that there will be an amicable agreement ultimately between the EU and the UK. The high uncertainty on the global financial markets at present should gradually decrease in the coming weeks. Consequently, economic growth in the euro zone will barely be negatively affected. The Fed, focused on still volatile financial markets, is unlikely to increase its key interest rate already in the summer but only towards the end of the year. We have confirmed our forecast for EUR/USD and the DAX.

Further topics

  • Brexit: The key questions under international law From a legal perspective, the exit of a country from the EU is new territory. We attempt to give a (provisional) answer to some important questions.
  • Bank of Japan: Out of ammunition? The inflation rate in Japan dropped back below zero recently, after three years of ultra-expansionary monetary policy. We analyse what options might be left to the BoJ.

Outlook for the week of 4 to 8 July 2016

  • Economic data: Following the very weak US employment report for May, the June data due out next week should turn out better, though they are unlikely to return to the levels of 200k+ seen at the beginning of the year.
  • Bond market: Bunds seem well supported under most scenarios so that yields should not rise in the week ahead.
  • FX market: The consequences of the Brexit referendum are keeping the British currency under pressure.
  • Equity market: The DAX has support from three shock absorbers, allowing a sideways movement during the summer despite Brexit woes.
  • Commodity market: Speculative financial investors in oil and gold could reduce their high long positions, putting pressure on prices.



June 26, 2016 (Commerzbank AG) Brexit – what now?

The UK has voted to leave the EU. We discuss possible implications. Markets already reacted strongly today, but not panicky. They could recover again in the medium term, as in our view an amicable divorce with a continued British membership in the single market is the more likely scenario. We also show that the negative impact on the UK real economy will be smaller than in past crises. Nor will the EU emerge unscathed, because Brexit will encourage parties across the continent which are critical of the EU.

Outlook for the week of 26 June to 1 July 2016

  • Economic data: The ISM index for US manufacturing looks set to have slightly decreased in June, yet staying above 50. In the euro zone, the inflation rate will presumably leave negative territory on a lasting basis in June.

The UK has voted by a surprisingly wide margin to leave the EU. We discuss possible implications. Markets already reacted strongly today, but not panicky. They could recover again in the medium term, as in our view an amicable divorce with a continued British membership in the single market is the more likely scenario. We also show that the negative impact on the UK real economy will be smaller than in past crises. Nor will the
EU emerge unscathed, because Brexit will encourage parties across the continent which are critical of the EU.

Surprisingly clear victory for EU opponents

After a highly emotional campaign, the British electorate voted to leave the EU. According to the official outcome, 51.9% were for Brexit, 48.1% for Remain. Opinion polls did not give a clear picture, but the pound’s rally in recent days indicated that the expected the UK to stay in.

Strong but not panicky market response today

Because the market has been taken by surprise, sterling has already lost considerable ground. The euro and Scandinavian currencies likewise came under pressure. The typical “safe haven” currencies – Yen and Swiss Franc – strengthened. However, the FX market has not yet shifted
into panic mode. EUR-GBP is not markedly higher than it had been in April, EUR-USD is trading above the March levels. The percentage change of sterling does not yet match the scale of the Swiss Franc’s move after the SNB shock on 15 January 2015. Therefore, markets are by non means “disorderly”. Thus, they are not in a state which might bring central banks around to agree on FX interventions. Several G7 central banks are against interventions in any case, be it as a matter of principle or out of self-interest. And those which might contemplate interventions will not pull enough of a punch on their own. Equity markets reacted strongly, but – like the FX markets – not panicky. The Nikkei lost roughly 8%, US futures are currently down around 4%.

Nature of split decisive in medium term

What happens in the medium term after the inevitable market slump today will largely depend on how the UK and the EU part company. According to Article 50 of the EU Treaty, there is a period of two years for the split to be negotiated, and this period can be extended by mutual agreement. The main concern for the UK economy during these negotiations will be to retain access to the EU single market after it has left the EU. The UK could argue that non-EU countries such as Norway, Iceland and Liechtenstein are also given this access, although the UK would then have to accept the rules of the single market (including free movement of labour) and would also have to pay contributions to the EU budget. Before the referendum, the EU view was that if the UK left the EU, it could not stay in the single market, as a deterrent to possible copy-cats. However, in our view the EU still has a strong interest in a clean break:

Exports to UK important:

47% of British exports go to the rest of the EU, whereas only 7% of Continental EU exports go to the UK. The UK is thus still the EU’s number two trade partner, after the US and ahead of China (see chart 1). The EU therefore has a strong interest in avoiding duties on goods traded with the UK and keeping it in the single market. Such duties would after all seriously disrupt cross-border production chains established over
a period of decades. In addition, EU companies would have to prove that their products complied with UK standards.

Avoiding market turbulence:

If the divorce proves acrimonious, we could see upsets on the financial markets. The EU could limit the fall-out if it signalled willingness to reach an amicable agreement.

Its own image:

The EU has a major image problem. More and more voters regard it as undemocratic. If it plays the jilted bride after Brexit and refuses the UK access to the single market, it wouldn’t only be EU critics who would object to that the UK’s democratic decision has been respected. And this is something the EU really can’t afford. If signs of a clean break gradually emerge, sterling and the equity markets should recover again in the medium term.




June 18, 2016 (Commerzbank AG) – The EU referendum vote is still very open but EU supporters are already sounding shrill warnings, signalling that the EU may deny the UK access to the single market after a Brexit decision. Nevertheless, we believe a tidy divorce is more likely than a messy one. After all, the EU also has an interest in avoiding an escalation. A long-term sustained sterling depreciation, beyond the inevitable weakness on the day after a Brexit decision, is only likely in the event of a messy divorce.

Further topics:

Spain: Back to square one!

On 26 June, Spanish voters will elect a new parliament, for the second time since December. According to polls the only noteworthy change compared to the December outcome will probably be that Podemos – together with a new ally – is likely to move ahead of the Socialists. This will hardly make it any easier to form a new government, implying that another round of lengthy negotiations is to be expected.

Outlook for the week of 20 to 24 June 2016

  • Economic data: Sentiment indicators for the euro zone have been moving sideways for over two years and little is likely to change in June. In the US, durable goods orders probably increased again on the back of aircraft orders.
  • Bond market: Intensifying Brexit jitters coupled with mounting scarcity fears are challenging investors, with 10y Bund yields reaching their preliminary destination at around 0%, but volatility may escalate during the second half of next week.
  • FX market: The upcoming Brexit referendum is dominating FX markets. Should it occur, this will spur market volatility. And JPY should be in high demand as a safe haven.
  • Equity market: The ongoing consolidation of the German equity market opens up opportunities for selective buying. We prefer companies with relatively low P/B ratios versus their historic average as well as stronger earnings momentum.
  • Commodity market: Risk aversion remains high and cyclical commodities should thus remain under pressure. Oil will probably hover below USD 50 per barrel but gold should continue profiting and climb to new highs for the year.