Limited upside for US dollar unless Trump pushes massive fiscal stimulus.
Many supports for euro. Target 1.10 in 6 months and 1.15 in a year for EUR/USD.
Sterling faced with uncertain 1-year horizon. We see 1.25 in the event of hard Brexit and 1.35 in case of soft Brexit.
Swiss franc to appreciate slightly. Target 1.10 in six months and 1.12 in a year for EUR/CHF.
Yen – under cross fire. Target 112 in six and twelve months for USD/JPY.
Choppiness ahead for sterling
"With Brexit talks unlikely to end before late 2018, sterling will stay volatile."
Euro – range-trading ahead. In coming quarters, the widening interest rate gap should whet investors’ appetite for the dollar. However, there are many supports for EUR/USD. First, less easing from the European Central Bank – although the ECB sees inflation below 2%, at least until 2019, stronger economic momentum may convince it to reduce asset purchases further and raise the deposit rate. Second, speculators are net buyers of euros for the first time since 2014 and long USD positions are back to mid-2016 levels. Third, the dollar remains expensive, limiting upside unless Trump pushes massive fiscal stimulus – unlikely before 2018. Fourth, an ageing business cycle increases the risks of a downturn in 2018, leading to Fed caution and a softer dollar. All in all, we see EUR/USD around 1.10 in 6 months and 1.15 in a year.
Sterling – driven by politics. Soft Brexit would benefit GBP as continued access to the Single Market would ease concerns. On the other hand, trade and direct investment would be hit by hard Brexit, keeping the currency weak for long. However, with talks unlikely to end before late 2018, sterling will stay volatile. Inflation pressure should also continue to weigh on GBP through increasingly negative real yields. Still, we see no UK rate hike due to weak growth and limited wage pressure. Finally, speculators are now much less bearish GBP. GBP/USD should stay around 1.25 in 6 months. The 1-year horizon is more uncertain – we see 1.25 in the event of hard Brexit and 1.35 in case of soft Brexit.
Stuck in low gear
"Less easing from the ECB could lead a modest depreciation in the CHF."
Swiss franc – limited upside. In January 2015, the Swiss National Bank abandoned its 1.20 floor. However this decision did not mark the end of SNB currency intervention as investors have not been deterred by negative rates from buying Swiss assets – currency reserves are up 40% to CHF 710bn since December 2014. Of course, any bout of risk aversion in the eurozone, especially at the periphery, or weaker economic momentum would benefit the franc. However, less easing from the ECB could lead a modest depreciation in the CHF. All in all, we see EUR/CHF rising to 1.10 in 6 months and 1.12 in a year.
Yen – under cross fire. The spike in the dollar in late 2016 pushed the yen sharply lower but these moves have now reversed. Looking ahead, there are several negatives for the yen. First, we expect a wider yield gap with the US as faltering inflation will convince the Bank of Japan to stay put. Second, global recovery will drive investors away from safe havens. Third, domestic institutional investors will continue to seek higher yields overseas. However, there are also positives. The recovery in Japan, the closing output gap and rising wages pressure could encourage the central bank to turn less accommodative. Also, the yen’s undervaluation will cap its downside. The combined negative and positive forces will lead to extended range-trading. We expect the yen to trade around 112 in six and twelve months, i.e. right in the middle of a 110-115 range against the US dollar.
Sources: SG Private Banking, Datastream (28/06/2017). 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.