We believe the dollar has seen its highs for this cycle
Expect more dollar weakness in the medium term after more favourable near-term momentum.
Euro to regain ground after some consolidation.
Sterling to weaken again on growth deceleration and lingering Brexit negotiations.
Fading political and economic risks to drive the Swiss franc gradually lower.
Widening yield gap with the US to weaken Japanese yen.
Choppiness ahead for sterling
"With Brexit talks unlikely to end before late 2018, sterling will stay volatile."
Euro – range-trading ahead. Strong data and positive investor sentiment led to the euro overshoot this summer. However, several factors have since helped it stabilise: 1/ markets again expect a rate hike by December in the USA; 2/ German elections have left a fragmented Bundestag, making it harder to form a coalition; and 3/ speculators have reduced their long positions. The euro will now come under some pressure if the Fed pushes ahead with normalising monetary policy while the ECB stays put with inflation still below target. However, any weakness is likely to be short-lived given further economic improvement will underline the euro’s appeal. We remain bullish in the medium term and still see EUR/USD hovering around 1.20 in 6 months and 1.25 in a year.
Sterling – cloudier skies. Thanks to a weaker currency and the global economic recovery, the UK has weathered Brexit uncertainties. In addition, talk of an extended transition period and the BoE’s hints of a forthcoming rate hike have helped sterling gain ground against the dollar. However, we think this is premature – recent price pressures have more to do with imports than wages. Also, there are still risks to the downside with slower growth, Brexit-related volatility and a wider yield gap with the US. All in all, we have decided to adjust our 6- and 12-month targets for GBP/USD to 1.28.
Swiss franc stuck in low gear
"Less easing from the ECB could lead to a modest depreciation in the CHF."
Swiss franc – limited downside potential. EUR/CHF will continue higher as stronger eurozone growth drives hopes of ECB policy normalisation and persistently negative Swiss interest rates discourage investors from building positions. In addition, the expected rise in core European bond yields will trigger capital outflows, a negative for the franc. The Swiss central bank still views the franc as overvalued – if any bouts of risk aversion encourage safe-haven CHF bids, the central bank would feel compelled to intervene to mitigate the impact on the economy. All in all, we see EUR/CHF rising to 1.15 in 6 months and 1.17 in a year.
Yen – edging down. After a long period of range-trading, we believe the yen will now begin to weaken. Above potential US growth and very tight labour market conditions could revive wage pressure, driving inflation upward. As rate hikes drive US yields higher, the widening interest rate gap will encourage flows into the greenback. However, the yen could still find some support given the boost to the economy brought by the Bank of Japan’s asset purchases. All in all, we expect USD/JPY to hover around 115 in both six and twelve months.
Sources: SGPB, Bloomberg, 05/10/2017. 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.