Forex Outlook

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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USA 

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.

Jan. 22, 2017 (Commerzbank AG) – Ronald Trump?

Donald Trump will today be sworn in as the 45th President of the United States. The style and substance of US politics are set to undergo what is probably the biggest change since Ronald Reagan took office in 1981. However, Trump is unlikely to have the resounding success that Reagan enjoyed; he is starting his term as President in a very different economic situation. Nevertheless, his administration may be viewed as a success if an economic recovery is established across the board and the promised deregulation really does follow.

Further topics:

Turkey: Risk of chaos without higher interest rates

The economy on its knees and a currency under huge selling pressure point to a Turkish economy in trouble. The central bank is still shying away from higher interest rates as political pressure mounts, but they are unavoidable if the lira is to be supported.

Outlook for the week of 23 to 27 January

  • Economic data: US GDP figures for the fourth quarter due to be released in the week ahead ought to show that economic growth was again solid, albeit unspectacular, at around 2%. In the euro area, sentiment indicators should have peaked.
  • Bond market: Although the ECB meeting is behind us, investors may still act hesitantly in the wake of Trump’s inauguration as US president.
  • FX market: The USD will remain torn between the Trump view that the dollar is too strong and the Fed view that interest rates will rise further. The Fed is likely to retain the upper hand for now, pushing up the USD. The Brexit debate will also continue simmering next week. However, the latest pound appreciation is unlikely to be sustainable.
  • Equity market: Clearer statements on the nature of Brexit have lent tailwind to the German equity market and the British pound. We still believe that the upcoming Brexit will have very little impact on German companies initially, even those with a high share of sales in the UK.
  • Commodity market: The price of a barrel of Brent oil should continue to hover around 55 USD for now as the OPEC monitoring committee expresses satisfaction that promised production cuts are being adhered to.

Jan. 15, 2017 (Commerzbank AG) – Global economy – Sentiment better, problems over?

Brighter sentiment indicators around the world indicate that the global economy shifted up a gear at the end of 2016. But for how long? We are sceptical about prospects in China and the US; in China, structural problems are soon expected to rise up the agenda, while in the US already-high capacity utilization rates should prevent a further growth acceleration. In the euro zone too, the economy is unlikely to sustain the higher pace that emerged in recent months. That said, the gradual rise in lending shows that the stimulus from very expansionary ECB monetary policy is having a positive impact. Euro zone growth in the next two years may therefore exceed current expectations.

Further topics:

Forecast changes: stronger growth

At our monthly forecast meeting, we revised up our euro zone, German and US GDP growth forecasts. One factor behind this is the faster pace emerging for the winter half year.

ECB meeting: ECB should stay true to its line

After the December decision to extend the bond buying programme to the end of 2017, the ECB Council will adopt a waiting stance at its meeting on Thursday. It will make it clear that despite recent positive data, the Council is not planning to enter the exit phase.

Outlook for the week of 15 to 20 January

  • Economic data: In the US, we expect to see December industrial production post the largest monthly gain since May 2010, as “hard” data reflects recent sentiment indicators. Chinese GDP likely expanded strongly again in Q4 (6.7% y/y).
  • Bond market: We look for the Bund curve to steepen again and reiterate our call to reduce peripherals exposure amid the current spread tightening move.
  • FX market: Dollar investors will to wait until Mr Trump is inaugurated before they can hope to get in-depth details on his economic programme which suggests the dollar will not benefit from any tailwinds for now.
  • Equity market: 2017 EPS forecasts in European markets have enjoyed positive upward revisions of late although US markets have been less fortunate due to the recent dollar rally.
  • Commodity market: Brent oil should continue to hover around 55 USD next week although we believe this is unjustifiable in the medium term as US supply rises.

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.

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.