Forex Outlook

Dec. 10, 2017 (Goldman Sachs FX Research Team) - Our traders are biased to fade NFP related USD moves on both sides and remain long GBP. Looking at GBP we had some good news on the Brexit front with a deal reached overnight, however, markets were seemingly disappointed with the vagueness in the language (likely necessary to keep all parties onboard) which has led to a selloff in cable as New York’s walked in.

-          EUR: USD demand over the week has been noted most particularly in EURUSD as we traded towards 1.1720 support overnight. Ahead of payrolls we do not like chasing EURUSD lower through 1.1720 on a strong report , but would sell a rally on a weaker number, barring flat wage growth, towards 1.1780, 1.1810.  on a break below 1.1700, we expect EURUSD to be well support near 1.1665.

-          CAD: Views are mostly the same in CAD after Wednesday’s position squeeze triggered by a still-dovish BoC on the margin. Much of the idiosyncratic CAD weakness has  played out in the desk’s view as we look for the upcoming data calendar for guidance from here.  Broader dollar price action will likely dictate price action over the coming sessions with NFP today and the FOMC announcement next week being the main catalysts to look out for. USDCAD remains a buy on dips over the short  term technically and given that the recent USD demand across the FX complex is showing little signs of abating – a duration selloff over the past 24 hours adding to the most recent leg. 1.2820 then 1.2785 the levels to watch below with resistance at the cycle highs at 1.2910/30.

-          SEK: SEK is in play. There’s been a well flagged seasonal characteristic that EURSEK goes higher a few days after PPM (Annual payment by The Swedish Pension Agency to various mutual funds. A large share of savings is invested in foreign assets. This disbursement puts downward pressure on SEK). Some estimates put this to be SEK 39-40bn this year of which ~60% is expected to be invested abroad. If we assume half of that is hedged, then the flow effect would be around 12bn. Looking at the last 5 years, we find that this flow effect extends for about 5-6 days afterwards. Payment this year is expected to be on Monday Dec 11th, hence we are biased to be long EURSEK here. Support comes in at 9.89, and resistance at 10 and 10.09.



Dec. 3, 2017 (by Ozerov/Suwanapruti at Goldman Sachs Research) - As we wind down 2017, analysts at GS Research see the potential for stronger global growth in 2018 that could boost emerging market currencies and could create USD, SGD and JPY short opportunities against the BRL, INR, and IDR.

“One of our core macro views for next year is for the strong and synchronous global expansion to continue, surprising consensus expectations to the upside. Healthy global growth and trade generally favours emerging market assets — and EM currencies often push beyond ‘fair value’. Two of our Top Trade recommendations capture the currency implications of stronger global and EM growth using baskets in two regions: Asia and Latin America. Top Trade #6 (long INR, IDR, KRW vs. short SGD and JPY) aims to benefit from the ‘equity-centricity’ of Asian currencies, and some country-specific catalysts in India, Indonesia and South Korea. Funding out of SGD and JPY should help mitigate rate risk given the elevated sensitivity of JPY to increases in global interest rates. Top Trade #7 (long BRL, CLP, PEN vs. short USD) is predicated on the expected upside in metals prices, undervalued currencies and still early innings in the Latin America growth recovery.”


European Economics Analyst: When regions fail

“At the international level, Europe’s productivity performance has disappointed. Consider the evolution of average output per worker since 1990. The United States started higher and grew faster. At the national level, there is evidence of catch-up convergence among countries within Europe. Less productive countries have tended to exhibit faster post-war productivity growth than their more productive peers. But the degree of dispersion in productivity across European countries has increased over the past decade, despite having fallen for fifty years in the run-up to EMU. At the sub-national level, there is some evidence of productivity divergence between regions within countries. In France and Sweden, for example, regions in which labour productivity was low in 2000 tended to exhibit slower productivity growth between 2000 and 2015 than regions in which labour productivity was high.”


US Economics Analyst: Losing My Deduction

“The Tax Cuts and Jobs Act (TCJA) now making its way through Congress is likely to restrict the federal deductibility of state and local taxes. We now expect a repeal of the federal deductibility of state and local (S&L) income taxes as well as a $10k cap on the property tax deduction. Under current law, the ability to deduct taxes paid from taxable income lowers the effective S&L tax rate. While eliminating this deduction would raise substantial federal revenues, the sharper regional differences in effective tax rates would also make it harder for S&L governments to raise income and property taxes.”

Aug. 6, 2017 (Commerzbank AG) -

In the short term, the euro should continue to
trend stronger, due to the political chaos in
the US and the ECB passing off a reduction
of bond purchases as a success in
September. EUR/USD will not probably be
able to decrease before the market prices in
more aggressive Fed rate hikes towards the
beginning of 2018.

• Regarding Brexit negotiations, our working
assumption is that ultimately there will be an
amicable agreement. However, uncertainty
will remain high for a long period so that
sterling will not recover for the time being.

• CNY seems set to further depreciate against
the dollar over the coming quarters.

                  3.8.2017     Q3 17   Q4 17   Q1 18   Q2 18   Q3 18

EUR/USD     1.18            1.22       1.19       1.16        1.14        1.15
USD/JPY       110             110         112        115         110        108
EUR/CHF     1.15            1.17        1.16       1.14        1.12       1.13
EUR/GBP     0.90          0.90      0.91       0.90      0.89      0.91
AUD/USD     0.79          0.80      0.80      0.81       0.82      0.83
USD/CAD      1.26          1.27        1.27       1.26       1.25       1.24
USD/CNY      6.72         6.68       6.76       6.83       6.84      6.83

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.

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.