Sunday, February 25, 2018

Forex Outlook for 2010 1st 2 months

December 31, 2009 by  
Filed under Uncategorized

Update on Exchange Rate Forecast: USD, EUR, JPY, GBP, CHF

An overwhelming amount of liquidity has been the major driver of risky assets. Although indicators of economic have been mixed, we have been seeing rallies in, not only in, higher-yield currencies but also in stocks and commodities as well. Thanks to the huge capitals in the market, the market is extremely confident.

Traders and investors are going to carry on putting their money on the dollar. They are speculating that the FED will carry on it’s policy rate at unprecedentedly low level for a very long time. The first rate increase in United States will come later than other countries. This has always been the case for 2009, the USD may, however, come back as when 2010 comes in as the FED stop the assets purchase programs.

It is going to be tough for anyone to make a ‘long’ trade in USD as it has dropped below the fair value against the major currencies.

Consensus

4Q2009

1Q2010

2Q2010

3Q2010

EUR/USD

1.4780

1.4760

1.4660

1.4400

USD/JPY

93.20

95.20

97.00

99.60

GBP/USD

1.6460

1.6580

1.6620

1.6620

USD/CHF

1.0320

1.0360

1.0500

1.0700

EUR/XHF

1.5253

1.5291

1.5393

1.5408

EUR/JPY

137.75

140.52

142.20

143.42

EUR/GBP

0.8979

0.8902

0.8821

0.8664

GBP/JPY

153.41

157.84

161.21

165.54

GBP/CHF

1.6987

1.7177

1.7451

1.7783

USD/JPY

This currency pair drop around -1% since October 20th. USD/JPY rose to almost as high as 92.3 in the late October at first, then it dropped again. The price is moving within a range of 88 to 92.5 during that period.

In the near future, the outlook for USD/JPY is kind of mixed. Some are predicting it will weaken further towards 85 while others believe it will bounce to upper bound of the ranged ’88 to 92.5′. In the medium-term, many believe that the dollar should appreciate against the yen to 95.2 in 1st quarter of 2010. And then rise higher to 99.6 by 3rd quarter of 2010.

Morgan Stanley is bullish about Japanese yen as it carry on to benefit from quite high real rates. To add on, the increasing Forex market volatility makes the attractiveness of carry trades less appealing.

Barclays Capitals worry the financial situation in Japan. Japan’s fiscal deficit forecast for 2010 is at 10.2% GDP. It is the second largest among G20, the first is UK, and it is predicted that the government debt in 2014 will be at 245.6% of GDP. This will by far the largest. With a weak recovery on it’s economy, Japanese financial situation are most likely going to linger longer. This will provide a potentially impact JPY negatively.

USD/JPY

USD/JPY

EUR/USD

After rallying to a 14 month at 1.5 in late October, the euro dropped below at 1.465. However, price raised recently and looks likes it is going to attempt previous high one more time. Although the current price level has already break the market forecast of 1.48, it is not recommended to sell or short the euro for the moment as there may be a chance to overshoot.

Improvement in economic data seems to be more consistent in the Eurozone, compared with United States and United Kingdom. This allow the ECB to deliver more positive outlook than both the FED and the BOE. Trichet, ECB president, said that there is no reason to go and use extraordinary means into next year. This may causes ECB to withdraw expansionary policies earlier than FED. Moreover, as talks about the reserve diversification from USD bad situation, the euro’s status as the second largest reserve currency attracts investors’ capital.

Credit Suisse remains bullish on the euro. The reason because of ECB signalled gradual phase out of stimuli at November’s meeting. Credit Suisse believes ECB’s announcement about exiting QE should ‘push interest rate spread in the euro’s favor’.

USD/EURO

USD/EURO

GBP/USD

Sterling rallied higher 1.68 after BOE increased the asset purchase program by 25billion pound to 200billion pound. The reaction shows the market had anticipated a bigger extension. However, the gains were disappeared after the central bank released the quarterly Inflation Report later that week.

While improving both inflation and growth outlooks, Mervyn King, BOE Governor, said that the central bank is ‘completely open mind’ on extension of QE and the decreasing value of sterling should make a recovery in the economic activity.

Many also felt that GBP/USD is currently trading at fair value. Although change in monetary policy and release of economic data can cause price to fluctuate. 1.65/1.66 is a fair value for the currency in 4Q2009 to 3Q2010.

Morgan Stanley also believes that GBP has win some lost ground, much of the move is a positioning squeeze that opens up more chances to sell the currency. Morgan Stanley also suggest to sell GBP as the MPC continued to extend QE while other Central banks are starting to or considering policy tightening. Moreover, M4 growth has been flat, even as base money continues its upwards trajectory, suggesting that QE programs may not be as effective as the bank envisioned at first.

Goldman Sachs is also bullishness on GBP/USD, but for a different reason. It’s reason is based on the government’s large easing in financial conditions. The government’s action help in boosting growth. Recent PMI reports suggest growth is moving at more than 2 % to 3%. This is faster than what actual activity data suggests, although actual activity data is under very through revisions in the UK. Even so, appreciation potential is limited, as there are many worries about the fiscal outlook in United Kingdom and the possibility to cut down expenditure.

UK Weaken

UK Weaken

USD/CHF

EUR/CHF has been trading around 1.51, due to SNB’s decision to prevent CHF to appreciate against EUR. We are not expecting drastic changes towards the end of the year. But, as Switzerland’s economy recovers, the Central Bank would be reluctant to intervene.

In the near future, the market may continue to channel. Therefore it is advisable not to take any action as both long and short CHF risks seems to be equally risky.

Economic improvement should life CHF higher, thanks to the acceleration in money growth, credit, and also property prices. SNB intervention should continue to keep EUR/CHF above 1.508. however, the more the economy recovers, the less the SNB will step into the market.

Morgan Stanley believes SNB is monitoring inflation. Morgan Stanley also believe SNB is likely to target a weaker CHF so as to combat inflation. As for now, SNB continue to favour the current weak CHF. SNB is also considering changing its position on the EUR/CHF, and that it is likely to be less motivated to intervene going forward.

KOF/CHF

KOF/CHF

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