Forex Outlook

Jan. 1, 2017 (Commerzbank AG) – Euro zone: Inflation rate leaps above 1%

The euro zone rate of inflation is likely to leap from 0.6% in November to 1.1% in December. Although this is exclusively due to energy price movements, the higher inflation rate should further drive up inflation expectations, to the ECB’s delight. Something the ECB may be less pleased about is the fact that the core rate will stick to 0.8%. In the USA, we are looking for another rise in the ISM index, in line with the global recovery in the manufacturing sector, as well as another solid employment report.

USA: Solid data to confirm the recovery

Given the more favourable results in the regional manufacturing surveys we expect the manufacturing ISM index to increase to 54.7 in December (consensus 53,7). Back in November, the index had already moved up considerably, from 51.9 to 53.2. As regards the US labour market, we are looking for a solid December report. We expect payrolls to increase by 180 thousand, which would be in line with the current trend (consensus 175 thousand). Following its strong decline in November, the rate of unemployment appears to be in for a minor counter-movement. As regards average hourly wages, where the monthly changes are significantly distorted by calendar effects, we are looking for a marked increase of 0.3% after previous months’ drop. Wage pressures remain on the increase.


USA 

Dec. 24, 2016 (Commerzbank AG) – China grapples with capital flight

China is still battling a major exodus of capital. As we expected, the government has responded by reversing recent steps to deregulate capital movements. Since the beginning of this month, companies face the prospect of no longer being able to transfer dividend payments abroad. These measures may help to apply the brakes in the short term, but in the longer term they will deter potential investors. In the medium term, further capital controls seem more likely than a return to the cautious deregulation of recent years.

Further topics:

Gold: better times ahead

Recent pressure on the gold price is likely to become less significant over the course of next year. Indeed, ultra-loose global monetary policy, which results in low real interest rates, and great political uncertainty are likely to provide a tailwind for gold prices. We expect gold to rise to 1,300 USD per troy ounce by the end of 2017.

Outlook for the week of 19 to 30 December 2016

  • Economic data: We look for a further rise in the German Ifo business climate index in December, which would be a further signal that the German economy has picked up more momentum at the end of the year.
  • Bond market: The latest Fed rate hike may prove a good opportunity to increase duration. In the euro zone, 10y benchmark yields will follow an erratic path in the current low liquidity environment.
  • FX market: The markets are taking the Fed at face value when it suggests that rates are likely to rise more sharply. The market will therefore probably react asymmetrically: good data should help the dollar more than poor data will harm it.
  • Equity market: DAX dividends in FY2016 are expected to rise by 5% versus the previous year, which is a key bullish signal for German equities.
  • Commodity market: The price of Brent oil is likely to remain virtually unchanged until year-end as only January will tell whether OPEC will in fact reduce its supply. Base metal markets, too, are likely to extend their current-year gains into the New Year.

Dec. 17, 2016 (Commerzbank AG) – Gold: better times ahead

Recent pressure on the gold price is likely to become less significant over the course of next year. Indeed, ultra-loose global monetary policy, which results in low real interest rates, and great political uncertainty are likely to provide a tailwind for gold prices. We expect gold to rise to 1,300 USD per troy ounce by the end of 2017.

Outlook for the week of 19 to 30 December 2016

  • Economic data: We look for a further rise in the German Ifo business climate index in December, which would be a further signal that the German economy has picked up more momentum at the end of the year.
  • Bond market: The latest Fed rate hike may prove a good opportunity to increase duration. In the euro zone, 10y benchmark yields will follow an erratic path in the current low liquidity environment.
  • FX market: The markets are taking the Fed at face value when it suggests that rates are likely to rise more sharply. The market will therefore probably react asymmetrically: good data should help the dollar more than poor data will harm it.
  • Equity market: DAX dividends in FY2016 are expected to rise by 5% versus the previous year, which is a key bullish signal for German equities.
  • Commodity market: The price of Brent oil is likely to remain virtually unchanged until year-end as only January will tell whether OPEC will in fact reduce its supply. Base metal markets, too, are likely to extend their current-year gains into the New Year.

Dec. 11, 2016 (Commerzbank AG) – Trump-o-meter – what will Trump deliver?

A Fed rate hike next week appears to be a done deal. It is however less obvious how Donald Trump’s policies will impact the US economy. We have developed a “Trump-o-meter” designed to demonstrate how far US economic prospects may improve or deteriorate as a result of the proposed policy measures, and will update it on a regular basis.

Further topics:

ECB: The beginning of the end of QE?

The ECB is extending its bond purchases by nine months, but reducing the monthly purchase volume from €80bn to €60bn. This is the start of the enforced exit from bond purchases. However, the ECB will no doubt maintain a lax policy stance via other means. The underlying causes of the government debt crisis have not after all been resolved, and the euro zone outlook remains uncertain.

Outlook for the week of 12 to 16 December 2016

  • Economic data: The euro zone economy seems to be growing somewhat more quickly in the final quarter of 2016 compared to the summer half-year, profiting from stronger global demand in particular.
  • Bond market: Trading patterns in Bunds and peripheral spreads should become increasingly erratic as the low liquidity season kicks in and with the final tier-one risk event still pending in the shape of the FOMC decision.
  • FX market: The movement of CNY exchange rates in the recent past is often interpreted as reflecting the renminbi’s weakness. This is the wrong way of looking at it. However, this does not mean that unsecured CNY positions are without risk.
  • Equity market: The German equity market should show higher volatility again at times in 2017. Investors should remain focused on themes such as restructuring and M&A, interest sensitivity, continued weakness of the euro and dividend policy.
  • Commodity market:Oil prices should settle above $50 a barrel in the wake of the OPEC agreement to cut output.

Dec. 3, 2016 (Commerzbank AG) – ECB Council meeting: Dr Draghi to extend the therapy

At next week’s meeting, the ECB Council will likely decide to extend the bond purchasing programme (QE), probably by six months. This would make it necessary to lift the issuer limit (33%), but this is difficult for legal reasons. We outline a possible solution.

Outlook for the week of 28 November to 2 December 2016

  • Economic data: It is likely that German industry got off to a good start in Q4 and we look for solid October figures for orders and production.
  • Bond market: We expect 10y Bund yields to remain within their recent trading range, despite the Italian referendum and upcoming ECB decision.
  • FX market:If the Italian electorate says ‘No’ in Sunday’s referendum, there will be downside risks for the euro, especially given the danger of renewed political instability.
  • Equity market: Thanks to the powerful tailwind from monetary indicators we expect the DAX to rise to 11,700 by the end of 2017.
  • Commodity market:Oil prices should settle above $50 a barrel in the wake of the OPEC agreement to cut output.

Nov. 26, 2016 (Commerzbank AG) – OPEC meeting in Vienna – more ado about nothing

At next week’s OPEC meeting in Vienna, the oil producers will probably agree on output cuts. But it is questionable whether these will be implemented. We assume that the battle for market shares will continue unabated and the oil market will remain oversupplied. The oil price should therefore see only small gains in the coming year.

Outlook for the week of 28 November to 2 December 2016

  • Economic data: Next week’s forthcoming US economic data are likely to confirm that the Fed’s targets are coming closer within reach, substantiating expectations of a December Fed hike.
  • Bond market: The significant decoupling between Bund and US Treasury yields should persist driven by a diverging fundamental outlook and a shortage of Bunds. Furthermore, political risks ahead of the Italian referendum should continue to support Bunds.
  • FX market: The US dollar has risen further this week. Since the US presidential election, the USD index (DXY) has gained more than 3.5%. At the moment, there is much to suggest from a fundamental perspective that the dollar will be able to sustain its current level.
  • Equity market: Expected DAX EPS 2017 growth appears too high against a backdrop of numerous adverse trends. We look for 2017 EPS downgrades of 5% in the coming quarters.
  • Commodity market: By finalising the production cut, OPEC will likely assuage concerns about massive near-term market oversupply. With many speculators having short positions, the oil price would then be likely to rise. But we remain sceptical regarding the medium-term outlook.

Nov. 20, 2016 (Commerzbank AG) – Trumpflation – are the markets right?

Following Donald Trump’s election triumph, share prices, the dollar and even market-traded inflation expectations rose sharply. But are the markets right to take such a view? At our monthly forecast meeting, we merely made a cosmetic adjustment to our US picture. Core inflation can be expected to continue rising moderately – though more on account of near-full employment, and less on account of Trump. In the euro zone, with its high level of unemployment, core inflation seems set to hold at only 1%. In early December, the ECB will no doubt extend its bond purchase programme, and the expected resultant shortage of bonds will force it to raise the prospect of tapering purchases by mid-2017.

Outlook for the week of 21 to 25 November 2016

  • Economic data: In the euro zone, important sentiment indicators have recently signaled a somewhat higher growth rate for the final quarter of 2016. This view will come under further scrutiny next week with the release of PMI and German Ifo data.
  • Bond market: The situation remains tense on global bond markets. As investors are likely to remain nervous we expect heightened volatility, with the risk of further widening spreads and Bunds to benefit from rising risk aversion.
  • FX market: Higher inflation expectations after the US presidential election are fanning expectations of a Fed rate hiking cycle. This is lending support to the US dollar which could become a self-reinforcing process. We expect more rapid USD appreciation.
  • Equity market: The German Q3 reporting season was broadly in line with expectations, and with fewer analysts likely to revise down their earnings estimates, this is helping the market to stabilise.
  • Commodity market: Oil prices are likely to tread water until the OPEC meeting at the end of this month, with hopes of production cuts offsetting news about excess supply. Base metals markets are likely to continue correcting downwards, although gold should benefit from rising Asian buying interest.

Nov. 12, 2016 (Commerzbank AG) – The European Trumps

Increasing numbers of people are turning against the political establishment, not only in the US but also in the EU. In Italy, the Five Star Movement could produce the next prime minister if the referendum on Senate reform on 4 December were to fail. In the Netherlands, Geert Wilders’ PVV is expected to emerge as the strongest party in the next post-election parliament. The advance of this anti-establishment movement is creating a climate in which politicians are less able to introduce reforms, and the ECB continues to clear up the mess on the monetary front.

Further topics:

US forecast: Is everything different after Trump’s victory?

During the election campaign, Donald Trump frequently advanced radical positions, particularly in relation to foreign trade. Do the economic and key interest rate forecasts for the US need to be adjusted following his election victory? A sober analysis reveals upside and downside risks. There is unlikely to be any rapid impact on the economy. We are therefore sticking to our forecasts for the time being.

Outlook for the week of 14 to 18 November 2016

  • Economic data: German GDP growth in Q3 is expected to post a quarterly rate of 0.2% versus the previous quarter, which would be the slowest rate since last year. In the US, the inflation rate is gradually approaching the 2% mark.
  • Bond market: Bond markets have shown a muted response to Trump’s election victory but there are upside risks for yields. We recommend keeping duration risks low for the time being.
  • FX market: The anticipated FX market turmoil did not materialise either. Currency markets are ignoring political uncertainty, initially focusing on fundamental issues, which suggests that USD sentiment is likely to remain positive for now.
  • Equity market: The DAX has robust valuation support during the current period of persistent political uncertainty with a fair DAX trading range between 10,000 and 11,500. But the rise of anti-establishment politics is a key mid-term headwind for equities.
  • Commodity market: Oil should move sideways until OPEC meets at the end of the month, as pressure mounts for supply cuts. Copper remains vulnerable to profit taking after the recent rapid rally. Although gold has not rallied it has medium-term potential to do so.

Nov. 6, 2016 (Commerzbank AG) – Has inflation returned?

The end of the oil price slump has raised global inflation rates in recent months. This raises a question of whether underlying inflation pressure will now also pick up again. One factor suggesting this is near-full employment in the USA, whilst the unemployment rate in the euro zone is now also falling at a similarly sharp pace to that observed in the USA following the end of the recession. However, the level of unemployment in the periphery countries is still so high that euro zone wage growth is unlikely to accelerate, unlike in the USA.

The Day After: What will happen after the US election?

Next Tuesday, Americans will elect a new president. Hillary Clinton’s lead seems to have shrunk recently, and the race is thus more open again. We analyze how markets would react to a Clinton or Trump victory. The latter should weigh on the dollar. From the perspective of the equity market, a President Clinton, combined with a Republican majority in Congress, would be the best case scenario.

Outlook for the week of 7 to 11 November 2016

  • Economic data: After much brighter sentiment indicators, the German “hard data” are due next week. Industrial production probably took a tumble in September due to seasonal effects but orders data are expected to be better.
  • Bond market: Volatility in major benchmark futures should rise with the outcome of the US presidential election looking an ever closer call. A Clinton victory would put the currently fragile equilibrium in 10y Bund yields to the test while a Trump victory should result in a fairly bullish upward move.
  • FX market: This month, the market is likely to pay little attention to the otherwise widely followed US labour market report, as the presidential election dominates. A Trump victory would be the less favourable option for the dollar and could prevent the Fed from hiking its key interest rate in December.
  • Equity market: Whilst a Trump presidential victory would negatively impact on the DAX, three global factors can be expected to provide support.
  • Commodity market: Oil prices are unlikely to react to the latest forecasts compiled by the energy agencies, and in the run-up to OPEC’s meeting at the end of the month, investors will adopt a wait-and-see stance. Gold seems set to lose some ground if Hillary Clinton is elected US president.

Oct. 29, 2016 (Commerzbank AG) – When will the US job market heat up?

The Fed will in all likelihood leave rates unchanged at next week’s meeting. The unemployment rate has not declined over the past year, following an expansion of the labour force. As our analysis shows, however, the pool of available labour will soon be drained. Thus, the labour market will tighten next year and wage pressure is set to increase which should necessitate a gradual normalization of monetary policy.

Outlook for the week of 31 October to 4 November 2016

  • Economic data: The US labour market likely edged closer towards the Fed’s full employment target in October. By contrast, euro zone economic growth is expected to have remained very moderate in the third quarter.
  • Bond market: While there are good reasons for more bearish rates trends in Bunds and US Treasuries, this is unlikely to materialise in the near-term. With redemptions running above new issuances from euro area sovereigns, 10y yields are running into considerable technical resistance at post-Brexit levels.
  • FX market: Both the US dollar and the British pound have only limited appreciation potential in view of the meetings of the Fed and the BoE in the coming week. The market is likely to continue to view a rate hike by the Fed with scepticism. Meanwhile, the uncertain outlook for the UK as Brexit looms, remains a significant burden for sterling exchange rates.
  • Equity market: Share prices of many German companies have recovered significantly following the post-Brexit referendum collapse. This is mainly because Brexit effects are only likely to be visible after a long delay.
  • Commodity market: The price of oil is likely to continue falling as OPEC output in October will probably have far exceeded the announced production target. Gold seems likely to tread water, as a Fed rate hike before the US Presidential election is highly improbable.