swiss franc

Aug. 21, 2018 (Western Union Business Solutions) – Reports that President Trump is not happy about the Federal Reserve raising interest rates hit the U.S. dollar which sank to eight-week lows. The dollar was broadly weaker Tuesday, having hit 6- and 8-week lows against the Swiss franc and yen and its lowest in nearly two weeks against the euro, sterling and Canadian dollar. The growth-bent U.S. president has reportedly taken exception with the Fed raising borrowing rates, something it’s expected to do for a sixth time under Mr. Trump’s watch in September. The dollar slipped on the president’s remarks as it called into question the Fed’s independence from political influence and gained added traction from dollar positioning having reached elevated levels of late. Yet pushing the dollar down for long could be a tough task with safer bets in vogue on worries about trade wars and Turkey’s economic crisis. Mr. Trump’s jab at the Fed puts heightened focus on a speech Friday by Fed chairman Jerome Powell.

GBP

Sterling shot nearly two cents above 14-month lows after the dollar fell prey to remarks from President Trump reportedly being displeased with the nation’s central bank raising interest rates, a move that he sees as an impediment to the U.S. economy achieving a faster cruising speed. Gains for the pound could be the short-lived variety given the headwind on the currency from how Britain is yet to strike a trade deal with the EU to keep from crashing out of the bloc come March.

USD

The U.S. dollar index flirted with two-week lows, as it fell victim to presidential criticism about the Fed raising interest rates. The remarks from President Trump came amid a lull in the economic calendar and at a time when market positioning was a bit stretched on the dollar, exacerbating its decline. Mr. Trump’s remarks put heightened focus on Fed Chairman Jerome Powell’s speech Friday at 10 a.m. ET at the central bank’s summer symposium in Jackson hole, Wyo. Should the Fed chairman signal full steam ahead for a rate hike in September it could help keep the dollar biased higher.

EUR

The euro got squeezed to its highest in nearly two weeks against the dollar which took on the chin remarks from President Trump that he reportedly isn’t happy about the Fed raising interest rates, moves that he sees as impeding his bid to shift the world’s biggest economy into a high gear. While the euro capitalized on the dollar’s retreat, gains could prove tough to sustain for long amid worries about Turkey’s economic crisis spreading to European banks.

YEN

The yen surrendered gains against the dollar that overnight had lifted it to 8-week peaks. The dust has started to settle after President Trump seemingly took a swipe at the Fed for raising rates, a blow that hit the dollar squarely on the chin. Still, the yen remains camped toward the upper end of its range as Mr. Trump’s call for lower rates exerted downward pressure on U.S. Treasury yields, capping upside in USDJPY.

CAD

Canada’s dollar romped to its highest in almost two weeks, boosted by rallying oil markets, up 1% to above $67, and President Trump’s displeasure about the Fed raising rates which he sees as standing in the way of meaningfully faster U.S. growth. Meanwhile, the prospect of higher lending rates north of the border has been a source of strength for the Canadian dollar. A parade of bullish Canadian data of late has lowered the bar for a rate hike from 1.50% as soon as September.

 


USA 

 

August 20, 2018 (Western Union Business Solutions) – An events-laden week started on a weak note for the greenback which ticked lower, but still keeping within reach of last week’s mid-2017 highs. The dollar eked out declines versus most of its top peers like the euro, yen and Canadian dollar. The market for now is giving the benefit of the doubt to U.S.-China trade talks that are set to resume in Washington starting Wednesday. The market is hopeful that the U.S.-China talks might be a stepping stone to an eventual breakthrough in trade relations between the world’s biggest economies. Central banks will take center stage Thursday through the weekend when the Federal Reserve hosts its annual symposium in Jackson Hole, Wyo. The Fed’s late summer summit could hint at the outlook for U.S. monetary policy, a key driver of the dollar’s months-long uptrend. The precarious shape of finances in Turkey and Italy remain in the spotlight, keeping underlying sentiment shaky and the greenback mostly in vogue.

Euro struggles to hold a gain

 

The euro followed the path of least resistance lower as Turkey continued to dominate the spotlight. The big source of downside risk for the euro is the degree to which European banks are exposed to Turkish assets. Meanwhile, elevated debt levels in Italy are another source of negativity for the euro with the coalition government in Rome expected to unveil a new budget and spending plans in the months ahead. Europe’s economic calendar features preliminary PMI surveys from top economy Germany on Thursday followed by revised German Q2 growth on Friday.

 

Sterling keeps above 14-month trough

 

Sterling was mostly flat at the outset of a new week with upside still restrained by uncertainty over whether Britain will reach a deal on trade with the EU before its departure from the bloc in March. Sterling currently finds itself perched a bit above 14-month lows hit last week, helped at the margin by an encouraging set of U.K. numbers last week on unemployment, inflation and retail spending that supported the narrative of gradual rate hikes across the pond.

 

Loonie pares Friday rally

 

Canada’s dollar favored its back foot after a data-inspired rally Friday. Oil prices wavered to begin the week, last down 0.3% to below $66. The loonie enjoyed a bit of a knee-jerk bounce Friday after headline inflation proved the strongest in 7 years, up 3% in July. It’s not surprising to see the loonie surrender some of its gains given the fact that core inflation remains largely contained around the Bank of Canada’s 2% goal. Still, moves to the downside in the loonie could prove limited on the view that the BOC could raise rates for a third time this year by October.

 

Fed to make headlines, potential waves, this week

 

America’s dollar index started the week with a gain, which kept it in close range of 14-month highs hit last week. The buck should have no shortage of drivers this week with U.S.-China trade talks set to resume Wednesday after a months-long recess. The big item on the dollar’s calendar is the Fed’s late summer symposium of global central bankers that begins Thursday and runs through the weekend. Markets will be all ears for fresh policy signals from Chairman Jay Powell. A tone that plays up the strong U.S. economy and plays down overseas uncertainties like Turkey would help to keep both U.S. interest rates and the greenback biased higher.

 

 

 

By Joe Manimbo, Senior Market Analyst

Mar. 17, 2018 (Allthingsforex.com) – The USD managed to post gains against the CHF after the Swiss National Bank decided to leave rates unchanged at the record low -0.75% and promised to “remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration.” In other words, expect the ultra-accommodative monetary policy to remain unchanged for quite some time and that the central bank is ready to ease further or to intervene should market and economic conditions warrant such actions.

As a result, the USD targeted last week’s resistance at 0.9535 and even managed to overshoot it by 12 pips to 0.9547. The readers familiar with The Quarters Theory would already know that such move should not yet be considered as a decisive breakout. However, if we continue to see more attempts at the 0.9550 area in the week ahead, we might eventually witness an actual breakout that could extend the USD rally towards the next Large Quarter Point at 0.9750. Of course, this is all provided there are no news from Washington or elsewhere in the world that spook investor sentiment and trigger a flight to safety, strengthening the CHF.

For those who care to read the official monetary policy statement as published by the SNB, please see below:

Monetary policy assessment of 15 March 2018

Swiss National Bank leaves expansionary monetary policy unchanged

The Swiss National Bank (SNB) is maintaining its expansionary monetary policy, with the aim of stabilising price developments and supporting economic activity. Interest on sight deposits at the SNB is to remain at –0.75% and the target range for the three-month Libor is unchanged at between –1.25% and –0.25%. The SNB will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration.

Since the last monetary policy assessment in December, the Swiss franc has appreciated slightly overall on the back of the weaker US dollar. The Swiss franc remains highly valued. The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential. This keeps the attractiveness of Swiss franc investments low and eases pressure on the currency.

The SNB’s conditional inflation forecast has shifted slightly downwards as a result of the somewhat stronger Swiss franc. The forecast for the current year has decreased marginally to 0.6%, from 0.7% in the previous quarter. For 2019, the SNB now expects inflation of 0.9%, compared to 1.1% last quarter. For 2020, it anticipates an inflation rate of 1.9%. The conditional inflation forecast is based on the assumption that the three-month Libor remains at –0.75% over the entire forecast horizon.

The international economic environment is currently favourable. In the fourth quarter of 2017, the global economy continued to exhibit solid, broad-based growth. International trade remained dynamic. Employment registered a further increase in the advanced economies, which is also bolstering domestic demand.

The SNB expects global economic growth to remain above potential in the coming quarters. Given the robust economic situation, the US Federal Reserve plans to continue its gradual normalisation of monetary policy. In the euro area and Japan, by contrast, monetary policy is likely to remain highly expansionary.

In Switzerland, GDP grew in the fourth quarter at an annualised 2.4%. This growth was again primarily driven by manufacturing, but most other industries also made a positive contribution. In the wake of this development, capacity utilisation in the economy as a whole improved further. The unemployment rate declined again slightly through to February. The SNB continues to expect GDP growth of around 2% for 2018 and a further gradual decrease in unemployment.

Imbalances on the mortgage and real estate markets persist. While growth in mortgage lending remained relatively low in 2017, prices for single-family houses and owner-occupied apartments began to rise more rapidly again. Residential investment property prices also rose, albeit at a somewhat slower pace. Owing to the strong growth in recent years, this segment in particular is subject to the risk of a price correction over the medium term. The SNB will continue to monitor developments on the mortgage and real estate markets closely, and will regularly reassess the need for an adjustment of the countercyclical capital buffer.”

 

 

 

Mar. 16, 2018 (Western Union Business Solutions) - The U.S. dollar was back on the defensive Friday after logging its first winning session in 5 days Thursday. The buck was modestly weaker versus the euro and sterling, down less than 0.2%, while it slipped more than 0.6% against the safe haven yen. The otherwise weaker greenback maintained a gain against Canada, keeping the U.S. unit near mid-2017 highs. White House woes have the dollar in the doghouse. More personnel changes are expected from the White House, keeping political uncertainty elevated. Should the president soon fire national security adviser H.R. McMaster, it would mark the loss of another moderate voice following the firing of the secretary of state, Rex Tillerson, and the resignation of chief economic adviser Gary Cohn. Other weights on the dollar include worries over U.S. trade policy and moderating economic optimism with consumer spending in a slump. Market attention remains on Washington where the Fed meets next week.

EUR

The euro strengthened on the back of the weaker greenback Friday but otherwise kept on a leash after another dovish salvo from Mario Draghi this week. The central bank president sounded the dovish alarms again by affirming that the ECB would be “patient, persistent and prudent” about paring back stimulus with inflation remaining stubbornly low. Underscoring anemic inflation, consumer prices unexpectedly got revised downward to a 1.1% increase in February, a wrong turn from the ECB’s just below 2% goal.

CAD

Canada’s dollar maintained a defensive posture after sinking to fresh 8-month lows this week. Trade friction between the U.S. and Canada has weighed, along with receding expectations for the Bank of Canada to raise interest rates in the months ahead following weaker readings on the economy. President Trump this week took exception with what he characterized as a U.S. trade deficit with Canada. The loonie has a heightened sensitivity to trade matters given Canada’s export-oriented economy.

GBP

Sterling firmed Friday, boosted by the weaker dollar and reports of progress between Britain and Brussels on granting the former a transitional deal to help smooth its exit from the 28-country bloc next year. Next week looms large for the pound with U.K. reports Tuesday on inflation and Wednesday on unemployment. If that’s not enough, retail sales and a Bank of England interest rate decision highlight Thursday trade. The BOE is not expected to raise rates but it could hint at the likelihood of action in the spring.

USD

The dollar was hit by political and economic crosswinds that had the U.S. unit on its back foot. Dollar sentiment is suffering from the perception of the White House shifting in a more hawkish direction with respect to trade that has concerns on the rise about a potential global trade war. Meanwhile, expectations for U.S. first quarter growth have moderated after data this week showed the American consumer in a three-month slump. Consequently, the Fed next week, while it’ expected to raise interest rates by 25 basis points to roughly 1.6%, might be inclined to temper any hawkish message and stop short of signaling a fourth rate hike this year.

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. 8, 2017 (Tempus Inc.) - The U.S. Dollar improved once again this week based on positive global market sentiment and the passing of a two-week agreement that avoids a government shutdown.

USD

The outlook of congressional consensus on a spending bill remains a concern, but investors welcomed the relief. Per the Bloomberg Dollar Spot Index, the “buck” has gained for a fifth consecutive day, its best appreciating streak since March.

Non-Farm Payroll figures revealed an expansion of 228K jobs, exceeding expectations of 195K. Nevertheless, the overall bag of data this morning came in mixed as Average Hourly Earnings managed to grow by just 0.2% instead of the estimated 0.3%. Wage growth is imperative for an optimistic economic outlook and revised October numbers surprised with a contraction. Unemployment stayed put at 4.1%. The greenback is seesawing as markets react.

EUR

The Euro is trading in lower ranges as good news overnight for the U.S. hurt the shared currency. Equity markets rallying also diminished the Euro’s role as a safe-haven.

Additionally, Industrial Production numbers in Germany came in much lower than predicted with 0.9% growth when economists calculated 1.4%. It is likely the currency will stay quite sensitive to changes in other regions with data already a negative factor leading towards depreciation last seen in over two weeks.

GBP

The Pound saw a lot of up-then-down action overnight with a Brexit breakthrough which now points to advancements in the historic negotiations. Prime Minister Theresa May achieved a deal with European Union officials that puts to rest concerns over an Irish border, a final bill, and the protection of rights of EU citizens within Britain. Basically, the PM decided the best route to end deadlock in talks was to follow a path towards a very soft Brexit.

“Leave” campaign political heads seemed highly dissatisfied while stock markets flourished. It seems like the domestic political instability remains a downside risk for Sterling as well as the unknowns regarding a future with less access to European markets. Progress in talks originally boosted GBP, but the doubts and uncertainties that cloud the situation prevented further gains.

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.”

Dec. 1, 2017 (Tempus Inc.) - The U.S. Dollar has been swinging within tight ranges and closed the week in similar fashion as markets awaited the chance of tax reform legislation passing the Senate.

USD

Senator Bob Corker of Tennessee is said to be an obstacle towards voting and maintaining confidence of necessary support. Any headlines that provide guidance into proceedings will drive markets one way or the other.

Additionally, market participants are paying attention to news of a potential exit by Secretary of State Rex Tillerson, who is said to be threading on thin ice with the White House. In terms of data, manufacturing gauges like PMI and New Orders will be released at 9:45AM while Construction Spending at 10AM. We think positivity could help recover some of this week’s losses.

EUR

The Euro is trending in favorable ranges as focus remained on U.S. political developments. However, this may change in upcoming weeks as Chancellor Angela Merkel continues to run into problems as she negotiates building a coalition. Nevertheless, the balance for the shared currency came in as news of slightly than expected Manufacturing Purchasing Managers Index figures.

Economics are keeping the Euro afloat, but the potential unstable situation in the largest economy of the Euro-bloc is cause for concern. Italy also faces the prospect of new anti-establishment leadership going into 2018.

CAD

The Canadian Dollar improved by over 1.0% meriting appreciation on the basis of solid Gross Domestic Product Growth during the month of September. Data showed a 0.2% expansion over the estimated 0.1%, bringing the yearly average to 3.3%, a level that satisfies the Bank of Canada’s outlook. Oil prices also being on the way up as winter sets in and OPEC extends production cuts could result in further gains before the year ends.

Nov. 24, 2017 (Tempus Inc.) - The greenback has been unable to shrug off its turkey-induced malaise this morning, falling versus most of its major peers. The Bloomberg Dollar Spot Index is set for its third weekly loss, its longest losing streak since July. The Index is down 1.6% so far in the month of November.

There is no major data set for release today. We expect trading conditions to be light and likely boring, especially when European traders head out for the weekend.

EUR

The Euro looks to build on its gains from yesterday’s session. The common currency received a boost following strong German GDP yesterday which showed the economy expanded 0.8% in the third quarter.

The good news continued for Europe’s largest economy. A separate report showed that business optimism climbed to a record high. In addition, the largest German opposition party indicated it is willing to form and back an administration led by Angela Merkel.

The Euro is at its strongest level in 6 weeks versus the U.S. dollar.

GBP

The British pound was modestly stronger against the U.S. dollar, mostly on greenback weakness. News was light out of the United Kingdom, but a comment by a Bank of England official has been creating headlines. Silvano Tenreyro reiterated recent BoE sentiment by saying that two more interest rate hikes will probably be needed to get inflation back to target.

However, Brexit will be the real determinant of where policy goes next. The comments again highlight how the central bank is being hamstrung from political uncertainty.

Nov. 24, 2017 (by Zach Pandl & KT Trivedi, Goldman Sachs) - The Goldman Sachs co-heads of FX Research Zach Pandl & KT Trivedi outline their views as we head into year end. In short: they believe that EUR weakness can continue and UK political risks may still weigh on GBP while NZD pessimism is overdone. Here is their latest research note:

1. Counter-trend Euro weakness can continue a bit longer. Over the past two months, EUR/USD has declined about 3.5%, from a high of just over 1.20 to 1.16 today. We see three main drivers behind the move: (1) open-ended bond purchases by the ECB, which look likely to continue longer than investors had expected, (2) the nomination of Governor Powell for Fed Chair, a candidate likely supportive of continued funds rate increases, in contrast to expectations in late summer that the White House would opt for a more dovish choice, and (3) further progress in the US Congress on tax reform. While the first two catalysts have played out, we expect that Congressional Republicans will continue to move the tax reform ball down the legislative field over the next month. Moreover, investor positioning still appears long EUR. In futures, for example, aggregate USD positioning has swung from a short of $20bn in late September to a short of $4bn as of last week. However, much of this move was against currencies other than the Euro: futures length in EUR has declined by just $3bn over this period, and net length of +$10bn remains close to multi-year highs. Over the medium term, the Euro probably has more upside than downside, but we think the near-term trajectory is still lower, and are sticking with our year-end target of 1.15.

 

2. A sharper bout of political pressure in MXN, ZAR and TRY than we anticipated. The drawdown in FX and local rates in these high-yielding markets over the past few weeks has been sharper than the bumpier ride we expected, even taking into account the well-flagged risks from a core-rates selloff. In effect, idiosyncratic political risks have returned with a vengeance in each case, overshadowing any improving macro developments: renewed noises of a US pull-out of NAFTA, in turn giving further impetus to local populism, has pushed $/MXN back above 19; the continued divisions within the ruling ANC and the resultant fiscal slippage and potential for rating downgrades have sent $/ZAR back above 14; and $/TRY is above 3.80 as tensions between Turkey and the US, as well as Germany, show few signs of de-escalating quickly. At these levels, each of these currencies is significantly undervalued again on our GSDEER and GSFEER metrics (roughly by more than 15%), and this is reflected in our constructive 12-month forecasts. But unlocking that value typically requires a long investment horizon and some resolution, or at least de-escalation, in these political risks. The upcoming ANC party election in December is at least a concrete binary or potentially ternary event that could provide some clarity on political and economic direction in South Africa, whereas in the other two cases, we are unlikely to have much clarity until well into next year.

 

3. But, over the longer run, macro adjustments supporting EM FX continue and the risk-reward looks attractive for the BRL. The broader case for EM FX is still solid in our view – most EMs have significantly improved external balances and cyclical macro fundamentals, and this is an asset class with undemanding valuations, a generous level of real carry and exposure to the synchronised growth recovery across the EM world. Even in the three economies – South Africa, Mexico and Turkey – that have lagged other EM high-yielders in correcting external imbalances and raising real rates to bring inflation under control, some adjustments, warts and all, have been taking place. In South Africa, core inflation peaked at the start of the year, and the subsequent declines allowed the SARB to cut rates for the first time in July since 2012. In Mexico as well, core inflation looks to have peaked in August, and the non-oil trade balance is in surplus. Turkey has seen a much more moderate correction of its external imbalance relative to Mexico and South Africa, and still has core inflation moving higher, although our economists expect it to peak in the next couple of months. But the tension between improving macro and political uncertainty is most acute in the BRL as the currency has sold off on the back of falling expectations of pension reform. While that is clearly a setback for the fiscal picture, the external balance and inflation profile in Brazil are unquestionably better – in 2017Q2 Brazil recorded its first current account surplus since 2007Q2 and core inflation was comfortably below the 4.5% target. So, with $/BRL back above 3.25, the risk-reward of owning BRL looks attractive as long as there is at least some prospect of modest progress on fiscal reform.

 

4. Bank recapitalisation an additional positive argument for INR. Just as this latest bout of pressure on EM FX was getting underway, we argued that INR and IDR were good candidates to fade any selloff even if the eventual upside was more limited because the fundamental backdrop was still solid, and the revealed aversion of the RBI and BI to large spikes in the respective currencies and ample reserves meant that the bumpier path in these currencies would be less bumpy than other high-yielding alternatives (see EM FX viewsPressure now, value beyond, 29 Sept 2017). Since then, the announced bank recapitalisation in India has bolstered the supportive case for the INR further. Whereas much of the market focus has been on the negative fiscal implications of the recapitalisation effort, our economists have highlighted that the impact on economic growth from a re-energised public sector bank credit impulse could easily exceed a few percentage points. With that type of growth upside, flows into Indian equities and the INR should remain well-supported in the medium term, and we see risks to our 3-month $/INR forecast of 64 tilted towards further INR strength. In the case of IDR, the heavy positioning of foreign investors in local bonds is often a source of vulnerability, but as Danny Suwanaprutihas argued, if Indonesia is included in the Global Aggregate Index, which looks likely, it could catalyse further capital inflow in 2018.

 

5. PEN: A positive carry mid-yielder for volatile times in EM FX. We have described CLP and PEN as the hare and the tortoise of Andean FX. Both are attractive currencies among EM mid-yielders with supportive macro fundamentals. But, whereas CLP has rallied hard in recent months (even taking into account the recent selloff), the PEN has lagged. From current levels CLP is becoming a less obvious “value” story. Still, there is potential for positive surprises in the cyclical picture and a market-friendly outcome in the upcoming elections could be a positive catalyst. So there is some scope for modest spot appreciation, although with copper prices already having risen so much, the move towards our 12-month forecast for $/CLP of 615 is likely to be choppier. The PEN looks more compelling from a valuation standpoint, has a higher nominal carry (of around 2%) and we are optimistic on the medium-term growth outlook as cyclical headwinds fade. Given the heavy intervention in FX market, we expect any move towards our 12-month $/PEN forecast of 3.15 to be slow and steady, but then in volatile times for EM FX, that is an attractive feature rather than a bug.

 

6. Monetary policy is unlikely to pressure the Pound, but politics might. Markets saw a relatively dovish signal in the BoE’s rate decision last week, as the Bank no longer said that policy needs to be tightened “by a somewhat greater extent over the forecast period than current market expectations”. However, we read the accompanying Inflation Report (IR) as saying the Bank remains in tightening mode (albeit at a very slow pace). Conditional on current market pricing, CPI inflation in the IR does not converge fully back to the Bank’s 2% target even by the end of 2020 (it sits just above at 2.15%)—which, taken literally, means that a higher policy rate path would be desirable. This point also came across in Governor Carney’s press conference, where he noted: “…we, in fact, need those two additional rate increases in order to get that return of inflation to target. In fact, if you look closely at the forecast, inflation approaches the target, it doesn’t quite get there, and the economy is likely to be in a position of excess demand, in other words, running a little hot at that point”. So we do not think the BoE gave an all clear for going long EUR/GBP. We ultimately expect more Sterling weakness, but surprises from the increasingly messy political environment are more likely catalysts than new dovish signals from the BoE.

 

7. Lastly, we still see downside to AUD/NZD. In our view, election-related pessimism around NZD looks overdone. First, in our view, yesterday’s announced Review of the RBNZ Act recommending a shift to a dual mandate (inclusive of “full employment”) is more of a reinforcement of the existing “flexible inflation targeting” status quo rather than a material regime shift. Second, most forecasters—including ourselves and the RBNZ—already assume a slowing in net migration, so policy changes under the new coalition government may not introduce much more downside risk. Third, politics aside, the New Zealand economy is in solid shape: last week we learned that labour market activity was firm in Q3, and the level of output already looks to close to its potential. Rate increases still look some way off, but the NZD is unlikely to remain depressed given the economy’s healthy cyclical backdrop.