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Summary
1.The US dollar index (DXY) increased by around 2.5% over the past month. On September 20th, the Fed left rates unchanged at 5.5% but delivered a “hawkish” message with upwards revisions in the economic projections and suggesting that rates can stay high for longer. The dot plot (overview of forecasts by Fed members) suggests one more rate hike this year and the market is pricing less rate cuts next year. We also believe that the ECB has reached its terminal rate at 4% after their communication following the 25bp hike on September 14th. The yield differential should gradually fall and will thus be less favorable to the US dollar. We decrease our EUR/USD 3-month target from 1.08 to 1.06 given the recent market movements and the lack of drivers short-term. In the long term we maintain our 12-month target at 1.15.
2.Major Asian countries are yet to give a clear guidance as to how they will support their economies. More economic stimulus is expected in China which would help build up some economic momentum in the region. In Japan, the BoJ’s Governor had some hawkish comments after widening the yield curve control (YCC). We expect the BoJ to end its negative interest rate policy in Q2 2024. In the short-term, the US dollar should remain strong versus Asian currencies given the lack of new drivers. We maintain our USD/CNY 3-month target at 7.2 and our 12-month target at 6.8. We increase our USD/JPY 3-month target from 140 to 145 and maintain our 12-month target at 134.
USD VIEW >> TARGET 12M VS EUR: 1.15
Dollar should remain overvalued short-term
The US dollar appreciated another 2% against the Euro in September and was trading close to 1.05 (value of one euro) as of October 4th. On September 20th, the Fed left rates unchanged at 5.5% but delivered a hawkish message with upwards revisions in the economic projections and hawkish dots. The “dot plot” (forecast of the Fed members) suggests one more rate hike this year and the market is pricing less rate cuts next year. Subsequently the US dollar got a boost from rising yields. As of October 4th, the market is pricing a 22% chance of another 25bp hike on November 1st. External factors such as higher oil prices and uncertainty around the health of the Chinese economy has also favored defensive currencies such as the US dollar. The economic momentum as measured by the surprise index has been more favorable to the US. Production is recovering as pointed by manufacturing PMI printed 49.8.
In the EU, the ECB implemented a dovish 25bp hike on September 14th setting rates at 4%. We believe the ECB has reached its terminal rate. The market is pricing a 21% chance of another 25bp hike on October 26th. The gap between the service and manufacturing PMI is closing in the US and remains wide in the EU at 48,7 and 43.4, respectively.
The yield differential should decrease gradually over 2024. The dollar remains overvalued when using fair value estimates such as the Purchasing Power Parity. A gradual normailization is thus expected over the coming years
We decrease our EUR/USD 3-month target from 1.08 to 1.06 given the recent market movements and the lack of drivers short-term. Over the coming year we maintain our 12-month target at 1.15 (value of one euro).
GBP VIEW >>TARGET 12M VS EUR: 0.86
No major driver short-term
The GBP depreciated 1.2% against the euro in September and was trading at 0.86 (value of one euro) on October 4th. This move is primarily due to positive economic figures in the UK. In September inflation showed some easing with the CPI YY printing lower than expected for the month of at 4.7%. A hike in interest rates was expected on September 21st but the BoE maintained rates at 5.25%. More surprising than the overall decision was the lack of consensus among BoE rate setters. As of October 4th, the market is pricing a 34% probability for a 25bp hike on November 2nd.
The UK’s data are unusually volatile at the moment, The evolution of the UK’s GDP remains low. The Q2 2023 figure printing slightly higher than expected at 0.6%. The manufacturing PMI remains low at 44.3 and the service PMI at 49.3. The real estate sector is still weak with nationwide house price (year-on-year) down -5.3% in September. Signs of stabilization came after the average borrowing rate on a five-year fixed-rate deal fell below 6%. Borrowing rates are still at high levels. The BoE data suggests that interest rates on new mortgages are more than triple their level in early 2022. We believe this sector will remain depressed in Q4 2023.
The market views on the interest rate differential are quite in line with our expectations. In the short term we do not see the macroeconomic environment nor the relative growth outlook to create a new trend in the EUR/GBP (value of one euro).
We maintain our 3-month and 12-month targets at 0.86 (value of one euro). This suggests a stable GBP.
CHF VIEW >> TARGET 12M VS EUR: 0.98
CHF to stay strong
In September, the CHF depreciated 1.3% against the Euro. As of October 4th , the EURCHF was trading at around 0.96 (value of one euro).
On September 21st the SNB policy rate was maintained at 1.75%, lower than expected. Comments suggested that the bank’s tightening has already dampened demand and subdued growth and inflation, driving the Swiss GDP to stagnate in Q2 2023. On top of that, inflation forecasts remained below 2.2% for next year. As of October 4th, markets are pricing another 19% probability for a 25bp hike on December 14th. With only quarterly monetary policy meetings we believe the Swiss economy has weakened sufficiently to warrant the current rate of 1.75 to be the terminal rate.
The September CPI rose to a three-month high at 1.7%, It was however lower than expected. The main upward pressures came from alcoholic beverages and tobacco as well as housing and energy. Overall, the Swiss economic outlook remains grim with a KOF indicator still below the 100 threshold this year. The manufacturing PMI in September increased to 44.9, higher than expected but still well below the 50 threshold. Retail sales YY remains low at -1.8%. Investor sentiment remains negative.
The recent weakening of the CHF does not change our assumptions. We keep our 3- and 12-month targets at 0.98 (value of one euro). This suggests a strong Swiss franc over the coming months.
JPY VIEW >> TARGET 12M VS USD: 134
Looking for a stabilization
The Japanese yen (JPY) experienced a further 2.5% depreciation against the US dollar in September and is down 15% this year. As of October 4th, the JPY was trading at around 149 (value of one dollar).
On September 22nd, the central bank voted to leave its key monetary policy settings unchanged and made no changes to its forward guidance despite some prior speculation that it might revise its wording to try to curb downward pressures on the currency. The central Bank Governor said, “there is still distance to go before reaching then end of negative rates”. We expect the BoJ to end its negative interest rate policy around Q2 2024. Core CPI inflation continues to run above 3% despite the BoJ previously having envisaged a return to sub-2% levels before the end of this year.
Early October the USDJPY breached the critical 150 mark and subsequently corrected in favor of the JPY. This implies a government intervention to reduce the adverse impact on households but we expect such action to have limited impact as long as the interest rate differentials continue remain high.
The interest rate differential remains a strong driver for the USDJPY. Markets expect less US rate cuts in 2024 and that has been in favor of the US dollar. In the short-term, the US dollar should remain strong relative to the Yen. Next year we expect the dollar to weaken as it becomes that the Fed can cut rates.
We increase our USD/JPY 3-month target from 140 to 145 and maintain our 12-month target at 134.
SEK VIEW >> TARGET 12M VS EUR: 11
Look for a stabilization after the recent rise
The Swedish Krona (SEK) appreciated 3% against the Euro in September. As of October 4th, it was trading at around 11.65.
On September 21st, the Riksbank raised rates another 25bp to 4%, as expected. Inflation figures have decreased to 7.5%. The figure was lower than expected lower than expected, mainly due to the slowdown in prices for housing and utilities. On top of that housing prices have decreased to 6% suggesting that the main headwinds are weaker. However, we believe the door is open for more rate hikes. As of October 4th, markets are pricing a 48% probability of another 25bp rate hike on November 22nd.
Structural headwinds remain. These are mainly linked to the housing market. There is a significant percentage of mortgages based on floating rates and house prices have started to fall rapidly. Additionally, housing starts in Sweden decreased to 4.71 Thousand units in the second quarter of 2023 from 7.96 in the first quarter of 2023. This has probably weighed on consumer confidence and suggest some weakness ahead. That limits the potential for a sustainable rebound in the currency. The ECB is expected to cut rates by about 1% next year as inflation normalizes. In Sweden that could take more time.
We maintain our 3- and 12-month targets at 11 (value of one Euro), indicating a slight appreciation of the Swedish krona.
NOK VIEW >> TARGET 12M VS EUR: 10.80
Positive outlook medium-term
The Norwegian Krone (NOK) appreciated 1.5% against the Euro in September. On October 4th it was trading at around 11.57.
The recent appreciation was backed by Norges bank’s rate hike on September 21st from 4 to 4.25% and the communication that followed that decision. Governor Ida Wolden’s comment saying “Whether additional tightening will be needed depends on economic developments. There will likely be one additional policy rate hike, most probably in December”. Import prices are also a source of inflation. As of October 4th, markets are pricing a 14% probability of a 25bp rate hike on November 2nd.
Inflationary pressures are easing as shown in core inflation which printed 6.3%. This was lower than expected. The manufacturing PMI remains in expansionary territory at 52.5.
The NOK remains quite weak in historical comparison. A gradual appreciation can be expected if more rate cuts for 2024 are expected in the eurozone relative to Norway and if oil prices remain high. This is our scenario.
We maintain our 3-month target for the NOK at 11.3, and our 12-month target at 10.8.
NOK VIEW >> TARGET 12M VS EUR: 10.80
Positive outlook medium-term
The Norwegian Krone (NOK) appreciated 1.5% against the Euro in September. On October 4th it was trading at around 11.57.
The recent appreciation was backed by Norges bank’s rate hike on September 21st from 4 to 4.25% and the communication that followed that decision. Governor Ida Wolden’s comment saying “Whether additional tightening will be needed depends on economic developments. There will likely be one additional policy rate hike, most probably in December”. Import prices are also a source of inflation. As of October 4th, markets are pricing a 14% probability of a 25bp rate hike on November 2nd.
Inflationary pressures are easing as shown in core inflation which printed 6.3%. This was lower than expected. The manufacturing PMI remains in expansionary territory at 52.5.
The NOK remains quite weak in historical comparison. A gradual appreciation can be expected if more rate cuts for 2024 are expected in the eurozone relative to Norway and if oil prices remain high. This is our scenario.
We maintain our 3-month target for the NOK at 11.3, and our 12-month target at 10.8.
CAD VIEW >> TARGET 12M VS USD: 1.30
Some upside from current levels
The Canadian dollar (CAD) remained flat in September against the US dollar. As of October 4th it was trading at around 1.37. On September 6th, the BoC maintained rates at 5% despite increasing inflation. In September, the YY CPI inflation printed 4%, higher than expected. Data shows that higher gas prices and rising shelter costs including mortgage payments were largely to blame. This may set the BoC on a higher for longer rate policy. As of October 4th, the markets were pricing a 26% chance for another 25bp rate hike on October 25th.
As a commodity currency, the CAD benefits from both supply and demand-driven energy price shocks. We think the recent move higher in oil prices is a key support for the CAD and can be seen as a way to hedge the risk of further upside in oil prices. Other figures such as unemployment rate printed 5.5% lower than expected. However, the elevated household debt-to-GDP ratio (slightly above 100% in Q1 2023) is still a headwind for the currency.
Overall, US yield advantage over Canada has widened supporting the USD. We expect this trend to reverse as it becomes clear that the US will start to cut rates in late Q2 2024. The Bank of Canada is expected to cut less.
We maintain our 3-month target for the CAD at 1.32, and our 12-month target at 1.30 (value of one USD), indicating a moderate appreciation of the CAD from current levels.
CNY VIEW >> TARGET 12M VS USD: 6.80
Strengthening of the CNY
The Chinese Yuan (CNY) depreciated 0.5% against the US dollar in September. On October 4th it was trading at around 7.2.
The PBoC is yet to give a clear guidance as to how they will fight CNY’s depreciation, however, they will “resolutely prevent currency overshooting risks and keep the Yuan basically stable at reasonable and balanced levels”. On September 20th the 1yr and 5yr loan prime rate was maintained at 3.45% and 4.20% respectively.
The Caixin manufacturing PMI printed 50.6, higher than expected but the Service PMI 50.2, lower than previously. The CPI inflation printed 0.1% year-on-year, lower than expected.
The CNY currency is pegged and managed against a basket of currencies suggesting the possibility of a PBOC intervention to maintain stability.
Overall, China’s economic recovery remains uninspiring and easy monetary policy continues to present a yield disadvantage for the yuan against the US dollar.
We maintain our 3-month target at 7.2 and our 12-month target at 6.8. That still suggest a gradual recovery over the coming year.
MXN VIEW >> TARGET 12M VS USD: 18.50
Consolidation after sharp appreciation
The Mexican peso depreciated 1.9% in September. On October 4th it was trading at 18. Since the start of the year the MXN has appreciated 7.8% mainly propelled by Mexico's robust economic momentum in comparison to the US and expectations of further supply chain relocations.
The Mexican central bank has reached its terminal rate in March at 11.25%. On September 28th rates were maintained at 11.25%, as expected but surprised with the tone of hawkishness implicit in its upward revisions to inflation forecasts. Latin American countries are expected to enter a rate cut cycle which must be done cautiously whilst considering some sticky inflation.
The manufacturing PMI for September printed 49.8 while the industrial output printed higher than expected at 4.8%. These figures are probably linked to nearshoring flows and have been driven by continued political tensions between China and the West. On top of that, the balance of growth versus risks for Mexico has turned increasingly favorable, and its geographic proximity to the US is setting Mexico as a natural winner in the nearshoring trend. The MXN is however consolidating after recent rise and should depreciate somewhat as the central bank easing cycle begins. We see the yield differential favoring the US dollar in the coming months.
We maintain our 3-month target at 18 (value of one USD) and our 12-month target at 18.5. These targets suggest a depreciation of the MXN in the coming months.
BRL VIEW >> TARGET 12M VS USD: 5.0
Likely rebound
The Brazilian real (BRL) depreciated 2% against the US dollar in September. Indeed, Brazil’s central bank cutting cycle is well underway. On September 20th Brazil’s central bank unanimously cut the policy rate another 50bp, as expected, setting rates at 12.75%.
Meanwhile the IPCA inflation printed 4.61% year-on-year, lower than expected. Despite positive inflation downtrend the central bank edged up its 2023 inflation forecast to 5.0% from 4.9%, for 2024 to 3.5% from 3.4% and for 2025 to 3.1% from 3.0%.
In September production figures showed a weakening in activity with the manufacturing PMI printing 49 and services PMI 48.7. The trade balance printed lower than expected at 8.90B USD which maintained its current account at deficit -0.778B USD.
Despite improved relations with Western countries, the Brazilian currency remains vulnerable to short-term political uncertainty
Overall, real yields should remain high and limit the downside for the currency.
We maintain our 3-month target at 5 (value of one USD) and our 12-month target at 5. That suggest a moderate rebound in the coming months.