The dollar has performed well over the last three months. In fact, it has outperformed most currencies. The only exception in G10 is the yen, while currencies like the Norwegian Krone and New Zealand dollar have fallen by 5%-6%. In EM, on a spot basis, almost all currencies have weakened against the dollar. The Argentine peso was the standout underperformer, losing over a quarter of its value, while others like the Brazilian real and South African rand fell by 8%. If we incorporate the carry or interest earned, the picture improves somewhat for EM with currencies like the Indonesian rupiah and Turkish lira eking out small gains against the dollar…
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The dollar has performed well over the last three months. In fact, it has outperformed most currencies. The only exception in G10 is the yen, while currencies like the Norwegian Krone and New Zealand dollar have fallen by 5%-6%. In EM, on a spot basis, almost all currencies have weakened against the dollar. The Argentine peso was the standout underperformer, losing over a quarter of its value, while others like the Brazilian real and South African rand fell by 8%. If we incorporate the carry or interest earned, the picture improves somewhat for EM with currencies like the Indonesian rupiah and Turkish lira eking out small gains against the dollar.
Considering this background, have currency strategists at banks thrown in the towel on their long-held bearish dollar views? Judging by their twelve-month FX forecasts, the resounding answer is ‘no’. Their average forecasts remain bearish the dollar.
i) In G10, they expect significant strength in the Swedish krona, Norwegian krone, and even the pound against the dollar. The last forecast suggests that most are expecting a benign Brexit outcome. Strategists are least constructive the Japanese yen and Swiss franc (see first chart).
Chart 1: Consensus Expected 12m Appreciation of G10 FX Vs. USD (Vs. Forwards)
ii) In EM, strategists are expecting major gains in the South African rand, Colombian peso, Czech koruna, Brazilian real, and Polish zloty. These gains include carry. Meanwhile they expect Asian currencies like the Taiwan dollar, Korean won, and Chinese yuan to weaken against the dollar (see second chart).
Chart 2: Consensus Expected 12m Appreciation of Emerging Markets FX Vs. USD (Vs. Forwards)
Looking at individual banks, most are moderately bullish the euro. JP Morgan is forecasting the euro to appreciate to 1.13 over the next 12 months. Meanwhile, Citi has 1.12, Goldman Sachs has 1.15, Deutsche Bank has 1.22, UBS 1.14, and Barclays stands apart with a 1.03 forecast.
On the yen, views are biased for yen strength. JP Morgan is forecasting USD/JPY to stay around 1.07 over the next 12 months. Citi has 1.01, Goldman Sachs has 1.00, Deutsche Bank has 1.02, UBS has 1.08, and Barclays has 1.06. The Japanese banks: Nomura has 1.09, MUFG has 1.02 and Mizuho has 1.02.
On the pound, most are bullish the pound. JP Morgan is forecasting 1.21, Citi has 1.28, Goldman Sachs has 1.35, Deutsche Bank has 1.31, UBS has 1.25, and Barclays stands apart again with a 1.11 forecast.
Markets always have surprises. So for FX, the biggest ones would be for the pound (and Scandi FX) to weaken, for the euro and yen to start to trend, for Asian FX to perform well, and for EM high-yielders to underperform.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)