With US growth shifting gears and protectionism on the march, the dollar could regain near-term traction.
Although the euro should remain directionless in the short run, we remain constructive in the longer term.
Progress in Brexit talks helped the pound but clouds remain.
Yen to strengthen as further inflation pressure calls for central bank action.
Euro has paused
"Hopes for soft Brexit underpin sterling"
Dollar –bottoming out. In the short term, the dollar should move away from its February low as stronger US shale oil supply helps tighten the trade deficit while the tax boost drives real yields higher. Also, protectionism could foster risk aversion, sending USD up and emerging currencies down. In the longer run, the tax cuts will come at the cost of a wider trade deficit. Also, tariffs are unlikely to shift trade patterns for now as they only apply to a small range of products. Overall, we expect the dollar to slide further as it is still overvalued and monetary policy will begin to normalize in other countries.
Euro – sideways. So far this year, the euro has consolidated because of extreme long positioning and fading economic surprises. With markets focused on the Fed and the ECB still reluctant to adjust its forward guidance, we would expect range-bound trading in coming months. However, the euro retains upside potential as the end of the asset purchase scheme is not priced in and eurozone growth drivers are robust. All in all, the euro should gain ground versus USD in H2 when the monetary policy path becomes clearer. We see EUR/USD around 1.25 in 6 months and 1.30 by end 2018.
Sterling – levelling off. The recent agreement on a transition period before EU exit has reassured investors, lifting sterling. A new rate hike cannot be ruled out in coming months. The pound has recovered all the ground lost after the Brexit vote. Although growth is weaker in the UK than in other developed markets, downside risks have eased. Sterling looks fair-valued and we target 1.40 in six months and 1.43 in a year.
Yen turning up
"Although no rate hike is expected in Japan before 2019, the yen may trade strong in anticipation"
Swiss franc – renewed easing. The franc spiked when markets sold off in February but has since returned to its prior level. Despite all the central bank’s efforts, the currency remains the most overvalued in the G10. Inflation has edged up but remains below its 2% target and foreign investors are deterred by negative interest rates. With political risks fading in the eurozone, we expect the Swiss franc to lose further ground against a buoyant single currency. However, its decline is likely to be gradual and interspersed with short spikes that will be fought by the central bank via market interventions. All in all, we see EUR/CHF rising to 1.18 in 6 months and 1.20 in a year.
Yen – grinding higher. The yen remains a good barometer of risk appetite and recent market jitters have lifted it to levels unseen since late 2016. However, the recent strength could also be linked to signs that the aggressive monetary policy in place since 2012 has finally moved the economy out of deflation. With a buoyant economy, stronger wage pressure and a modest revival in inflation, markets are pricing in a shift in the monetary policy stance. Although the Bank of Japan reaffirmed that the current stance would not be altered before 2019, the yen may trade on the strong side in anticipation and we target 110 in six months and 105 in a year.
Sources: SGPB, Bloomberg, 03/04/2018. Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.