Forex Outlook

Apr. 1, 2017 (Commerzbank AG) – Euro zone – boost from the East

Corporate sentiment in the euro zone has improved massively in recent months, probably due mainly to demand from Asia picking up again. The main thrust seems to be coming from China. Despite that country’s continuing structural problems, the boost from the East should continue for the time being, and thus prevent a marked drop in sentiment indicators. However, since high private-sector debt levels are still weighing on domestic demand in the euro zone, there is probably only limited upward scope for Ifo and other indicators.

Further topics:

Turkey: Stable lira is a sham

The Turkish lira has stabilized since the beginning of the year, but there is no reason to sound the all-clear for the lira. It has benefited from improved sentiment against emerging markets currencies of late which has driven other EM currencies markedly up.

Outlook for the week of 3 to 7 April 2017

  • Economic data: Yet again, March will probably have seen no change in the US in the gap between the upbeat mood throughout the economy and no more than average hard data. The employment report should continue to trace a positive though not overwhelming development.
  • Bond market: With speculation on early ECB rate hikes subsiding, Bunds look well underpinned going into next week.
  • FX market: The sharp rise in EUR-USD should be over for now. Not only sentiment but hard data as well are arguing for downside potential.
  • Equity market: US monetary indicators such as the strong M1 money growth and the relatively steep US$ yield curve indicate that the S&P 500 bull might run further.
  • Commodity market: The price of Brent is unlikely to change much in the week ahead, distinctly above the 50 USD mark.


USA 

Mar. 25, 2017 (Tempus Inc.) – ECB – Will they, or won’t they?

There are signs in the euro zone that monetary policy may soon be changing course. Even the doves on the ECB Council are talking of possibly raising rates more rapidly than previously envisaged once bond purchases come to an end. This could happen if the economy and inflation fare better than the ECB is currently predicting. However, there are strong counter arguments against this optimistic scenario. Inflation, for example, will probably fall more rapidly over the coming months than the ECB is assuming.

Outlook for the week of 27 to 31 March 2017

  • Economic data: The core inflation rate in the euro zone is likely to have fallen from 0.9% to 0.7% in March, though a (temporary) surge to 1.0% is likely in April. This is all down to the timing of the Easter holidays, which fall in April this year against March in 2016.
  • Bond market: Government bond yields are edging lower again as markets put reflation expectations from Trump’s stimulus plans to the test. Ten year Bund yields look likely to push the floor of the recent trading range lower. Elsewhere, the Corporate Schuldschein segment should continue its growth.
  • FX market: US and euro zone politics recently provided tailwinds to EUR-USD. However, amid ongoing political risks in the euro zone, the further euro upside should be limited. As the UK announces its Brexit intentions, GBP should also come under renewed pressure.
  • Equity market: Amid the still-very positive overall conditions, German companies should make further acquisitions this year. This will push goodwill on DAX company balance sheets still higher. Under gloomier general economic conditions, write-downs might become necessary, which could painfully reduce the equity capital of some companies.
  • Commodity market: Brent is likely to fluctuate around USD 50 per barrel next week. While we are likely to see signs that OPEC also cut production in March as agreed, the likely further rise in US inventories will show that supply remains ample, arguing against a price recovery.

Mar. 18, 2017 (Commerzbank AG) – Le Pen – What if?

According to the polls, Marine Le Pen has little chance of becoming the next French president. But uncertainty is high and many investors want to know what would happen if Le Pen were to win. Might she call an EU referendum? Would there be a flight of capital? Would Draghi and Merkel rush to help? Would EMU survive in the long term without France? In the short term, a Le Pen victory could, to say the least, produce chaos.

Further topics:

Brexit: The way is (un)clear

The legislation necessary to give the prime minister the authority to trigger Article 50 has now cleared parliament. But formal notification may only be delivered in the week of 27 March following the threat of another Scottish independence referendum and serious Brexit negotiations may not take place until June.

Outlook for the week of 20 to 24 March 2017

  • Economic data: Sentiment in the euro zone economy is running far ahead of the hard data and the longer this situation lasts, the more intensely the markets may discuss an exit from the ECB’s ultra-expansionary monetary policy.
  • Bond market: With the Dutch election and the latest Fed policy rates now behind us, investors’ focus will be on macro data releases, EGB supply and what Fed policymakers have to say through the week.
  • FX market: Currency markets look set to be in for a quiet week and the market will therefore likely focus on the fallout of the ECB and Fed policy. Political concern is likely to rise up the agenda, implying that the euro should lose ground against the USD.
  • Equity market: With 23 DAX companies announcing a rise in dividends last year, total payouts are likely to have risen by 8.8% y/y to a new all-time high of €31.8bn. A dividend yield of 2.6% is still relatively attractive compared to fixed income yields, which remains a key supporting factor for DAX investors.
  • Commodity market: The first exports and stocks data for non-OECD countries since the OPEC production cut are being eagerly awaited although oil prices should trend sideways until the next release of production data.

March 11, 2017 (Commerzbank AG) – How much will the Fed tighten the reins?

The Fed is expected to hike interest rates next week – something virtually no-one envisaged at the start of the year, even though the central bank did hint in December at three moves in 2017. Since, in contrast with earlier years, the US economy seems set to proceed largely as the Fed expects this year, we expect the bank to stick to its timetable. Consequently, we envisage three rate hikes each in 2017 and 2018, somewhat more than the market is currently expecting.

Further topics:

Netherlands: no nail-biting affair for the euro

Next Wednesday, the Dutch electorate goes to the polls. Whilst the PVV of eurosceptic Geert Wilders should do better than in autumn 2012, it is unlikely to become part of the government.

Outlook for the week of 13 March to 17 March 2017

  • Economic data: The “hard” US economic data due out next week will once again probably not be able to keep pace with the recent strong rise in survey-based indicators.
  • Bond market: Despite a number of favourable trends, 10-yerar Bund yields are likely to trade fairly soft in the week ahead.
  • FX market: The FX market is in for a busy week: Besides a number of central bank decisions, the parliamentary elections in the Netherlands and the meeting of G20 finance ministers are on the agenda.
  • Equity market: Eight years ago the current DAX bull market started, and we look for continued gains into a ninth year, if not quite at the same pace as of late.
  • Commodity market: We do not expect the recent weakness of oil prices to portend a sharper decline, although we look for weakness to persist in the medium-term.

Mar. 4, 2017 (Commerzbank AG) – Euro zone – Is inflation about to strike back?

The rise in the euro zone inflation rate to 2.0% in February was solely due to higher energy and food prices. But the signs are growing that underlying price pressure is set to rise. The unemployment rate has steadily fallen and inflation expectations have noticeably picked up of late. However, as wages have risen modestly so far, the core inflation rate is only set to rise gradually in 2018. The ECB is unlikely to change its course for a long time yet.

Further topics:

Forecast meeting: What will the Fed and the ECB do?

Our monthly forecast meeting focused on central banks. Now that even the doves within the Fed are calling for an imminent rate hike, we expect rates to be adjusted as early as mid-March. As regards the ECB, we now envisage a slower reduction of bond purchases than previously.

ECB Council meeting: wait and see

At the press conference, we expect ECB president Draghi to confirm that the bond purchase programme will continue as planned in its entirety. However, the Council is likely to refrain from offering any further long-term tenders for the time being.

Outlook for the week of 6 March to 10 March 2017

  • Economic data: The US employment report for February is likely to show that the US economy is still creating new jobs and wage pressure is slowly increasing.
  • Bond market: Central banks will move into focus next week. There are mounting signs of a Fed rate hike as soon as mid-March, which will keep the upward pressure on ten-year Bund yields alive.
  • FX market: Although the Fed is set to raise interest rates at a slightly quicker pace than we previously expected, we maintain our forecast of only moderate USD appreciation this year.
  • Equity market: Most of the company results released so far have turned out convincing, with MDAX companies outperforming their DAX peers. A stable earnings environment should continue to support the German equity market.
  • Commodity market: The price of Brent oil fluctuating around USD 55, and the five-year outlook from the International Energy Agency is unlikely to lead to any big changes in the market view on oil.

Feb. 25, 2017 (Commerzbank AG) – Germany – Housing overpriced but boom continues

House prices in Germany keep on rising. According to our new model, they are now overpriced by around 10%. Only a marked rise in interest rates would be likely to end this boom and such a move is nowhere in sight. House prices should therefore continue to climb for the time being. This does not pose a great danger for the economy at present as the building sector is not yet over-inflated and the rise in private debt has been limited so far. However, the longer the boom lasts, the greater the risk that major imbalances will emerge whose correction would hit the German economy hard.

Outlook for the week of 27 February to 3 March 2017

  • Economic data: Euro zone inflation in February may well see a two before the decimal point for the first time in four years. While this could drive inflation expectations further up, it is likely that the inflation rate will soon fall again as underlying inflation pressure remains weak.
  • Bond market: The long-end of the curve is increasingly impacted by the Bundesbank’s sizeable €QE purchases in the one-year maturity sector. Moreover, investors remain nervous regarding political risks in France and Italy, while ample redemptions need to be reinvested. We therefore continue to expect Bund yields to trend downward amid a steeper curve.
  • FX market: Strong support in polls for the eurosceptic French presidential candidate Marine Le Pen continues to weigh on the euro. Speculation that strong US inflation will prompt higher rates continues to support the USD.
  • Equity market: High DAX valuations, notably inflated P/B ratios, have increased the importance of selective stock-picking. We favour companies with credible restructuring plans; that have a high share of sales in the USA and whose earnings react positively to a stronger dollar.
  • Commodity market: In the week ahead, the price of a barrel of Brent oil should remain range-bound around USD 55. Survey-based estimates of OPEC production are expected to confirm that the agreed output cuts have been largely implemented. Further support should come from upbeat sentiment indicators.

Feb. 18, 2017 (Commerzbank AG) – Emerging weaknesses

The catch-up process evident in many emerging markets now appears to have come to an end. Per capita GDP is no longer growing more rapidly than in developed markets, and this is set to continue as globalisation trends lose momentum and reform policy in many emerging markets becomes bogged down. In addition, rising US interest rates means that the decade of cheap money across the EM space is coming to an end.

Netherlands: How wild will it get with Wilders?

Geert Wilders’ anti-European PVV is expected to become the strongest single party in the general election on 15 March and will thus play a dominant role in Dutch politics. A “Nexit”, however, is an unlikely scenario.

Outlook for the week of 20 to 24 February 2017

  • Economic data: The euro zone PMIs should indicate that the region’s growth pace is unlikely to change in the first few months of this year. In the USA, the upward trend in residential construction continues.
  • Bond market: Political risks in the euro zone are likely to keep Bunds well underpinned through next week.
  • FX market: EUR-USD is expected to continue fluctuating strongly in the coming days, with the release of the FOMC meeting minutes likely to ensure a slight uptrend in the USD.
  • Equity market: The steep US yield curve and powerful global M1 money growth indicate that the equity bull market will continue into a ninth year.
  • Commodity market: The price of Brent oil is expected to hover around 55 USD next week. While gold remains in demand as a safe haven, soybean prices should come under pressure.

Feb. 11, 2017 (Commerzbank AG) – Euro zone – Le Pen knocking at the gates

If Marine le Pen had her way, France would follow the UK example and leave the EU which would probably mean the end of monetary union. Even though the latest polls suggest that she is unlikely to become the next French President, investors are growing increasingly nervous. Moreover, political developments elsewhere could seriously unsettle the euro zone. Together with weak core inflation, this will means that the ECB will be unable to abandon its ultra-expansionary policy for some time yet. Page 2.

Outlook for the week of 12 to 17 February 2017

  • Economic data: “Hard” US economic data up for release in the week ahead are unlikely to reflect the upsurge in survey-based indicators. In Germany, the economy looks set to have expanded strongly in the fourth quarter of 2016.
  • Bond market: French sovereign bonds (OATs) are showing an idiosyncratic spread pattern as Le Pen factor looms large on the horizon. In Bunds, the current risk-off sentiment is pushing short to mid-dated swap spreads to multi-year highs but we do not envisage any sustained correction.
  • FX market: Speculation that France may exit EMU is weighing on the euro and has raised implied EUR volatility. At the same time, the market is underestimating the risk to sterling, though it could appreciate further near-term on the back of rate hike speculation.
  • Equity market: Experience suggests that it would have been a mistake for equity investors to react to political risk events over the last two years. We stick to our view that investors should only become bullish during periods with a VDAX at 25 and a VIX at 20.
  • Commodity market: Brent oil should remain quite close to 55 USD per barrel next week. Higher shale oil production is probably already priced in and OPEC members are expected to (still) hold to the agreed production cuts.

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Jan. 5, 2017 (Commerzbank AG) – The risk of a trade war

President Trump wants to put an end to the allegedly unfair treatment of the US economy in global trade and reduce the foreign trade deficit. However, the Republicans’ destination-based cash flow tax is too complicated, and broadly-based import tariffs directed against China would be hazardous given that China can retaliate. In our baseline scenario, this culminates in trade policy skirmishes without breaking into a full-blown trade war, even though the risk of an escalating trade dispute has increased recently. Trump apparently sees international trade as a zero-sum game and is therefore likely to act tough to gain advantages for the US.

Outlook for the week of 6 to 10 February 2017

  • Economic data: December data from the German manufacturing sector are likely to come in on the weaker side due to distortions resulting from the timing of the Christmas holidays. However, this should not be interpreted as a sign of renewed weakness, since business sentiment has remained healthy until recently.
  • Bond market: Euro area bond markets are at a crucial crossroads as the renewed focus on elections and US policy risks compound the pressure from rising inflation. Some headwinds will fade over the coming weeks, but this should only make an impact once 10y Bund yields have climbed above the pivotal 0.50% mark.
  • FX market: The US government is talking the dollar down. Although it is not certain that it will be successful over the medium-term, this departure from traditions practiced for decades suggests that the recent USD weakness will continue near-term.
  • Equity market: Despite individual exceptions, the Q4 2016 results and 2017 outlooks released in the current reporting season have been convincing so far. Consequently, analysts are likely to make fewer downside revisions to their 2017 earnings expectations, which should provide additional support to the German equity market.
  • Commodity market: Oil will not be able to hang to its recent gains for long as it becomes evident that the supply-side shortfall in the wake of production cuts is not as great as first assumed. On the base metal markets, lower Chinese copper imports in January are likely to hit sentiment whilst gold continues to respond to dollar fluctuations.

Jan. 28, 2017 (Commerzbank AG) – Trouble ahead between Trump and Fed?

The Fed plans to raise interest rates, whereas President Trump wants stronger growth. Thus, a conflict is looming between the Administration and the Fed. However, Janet Yellen and her deputy Stanley Fischer are both likely to step down by mid-2018, and Trump is unlikely to nominate a Republican hardliner such as John Taylor to succeed Yellen. A more likely choice would be a pragmatist from his own circle. Such a choice would support our view that monetary tightening will only proceed cautiously.

Further topics:

Brexit: Struggling to take back control

Prime Minister May highlighted that the government remains committed to triggering Article 50 by March and is prepared to leave the Single Market. But in contrast to her previous statements, parliament will be allowed a vote before Article 50 is initiated and she has conceded that further detail of the plans will have to be set out in a white paper.

Outlook for the week of 30 January to 3 February 2017

  • Economic data: The inflation rate in the euro zone should have risen sharply again in January to 1.4%, and in Germany possibly as high as 2%. Even if the core inflation rate in the euro zone is set to remain below 1%, it could fuel speculation about a turnaround in ECB monetary policy. In the USA, the labour market continues to run smoothly.
  • Bond market: Prior to any more sustained market stabilisation, Bunds will have to ride out a storm of high profile risk events and macro data releases.
  • FX market: The currency market is waiting for the Fed to release the statement of its monetary meeting next week. But even if the Fed were to stick to its upbeat view of the economic outlook, this is unlikely to support the USD.
  • Equity market: Bearish investors have been depressing the P/E valuation of DAX auto stocks and are no longer willing to hold exposure to the DAX auto sector. In our view, this stance is too pessimistic.
  • Commodity market: The price of Brent threatens to slide back below 55 USD again next week. On the base metals markets, trading volumes remain limited, on account of the Chinese New Year, but encouraging PMIs should keep the mood buoyant.