#Market Strategy — 12.09.2019

Monthly Currency Outlook September 2019

Guy Ertz

Prudence is back and pushed up defensive currencies

BNP Paribas Wealth Management

The Worsening trade tensions dampened investors’ confidence and triggered a sell-off of emerging market assets. Uncertainty is set to persist more than previously expected as the US and China do not seem inclined to grant concessions, making a deal difficult. We think a lasting deadlock is more likely than a resolution, thus tensions will continue to weigh on the global economy. The slowdown of global trade hurt commodity currencies, in particular the ones of Australia and New since these economies highly rely on Chinese demand. Markets turned risk-averse and have increasingly moved to safer currencies, supporting the Yen and the Swiss Franc.

United States dollar (USD)

The EURUSD hovered around 1.10 recently, the lowest level since May 2017, alongside the spike of risk aversion and the broadly expected Fed rate cut. On the trade side, the announcement of new US tariffs made a trade deal with China even more difficult. Regarding the European policy landscape, Brexit overshadows market sentiment. As we believe that the Chinese demand has few room to recover short term and that the European economy should remain dampened, we see the EURUSD hovering around 1.12 over the next 3 months instead of 1.14.  Medium-term, the US-EU growth differential and sustained uncertainty is likely to limit the upside potential of the EUR. The lower interest rate differential however still points to a weaker dollar. Thus we revised our 12-month target from 1.18 to 1.14.

The Japanese yen (JPY)

The Japanese yen spiked in late August. Sustained uncertainties should maintain a risk-off sentiment for a while. We expect the economy to record zero growth in the second half of 2019 and throughout 2020. We don’t see any stimulus from the monetary policy. All in all, risk-aversion should continue to support the yen but we do not believe that the currency has an additional major appreciation potential given that the USD should remain resilient. Indeed, the expected US fiscal stimulus should support the US dollar. Beyond this, current spats with South Korea could represent a tangible downside risk. We see the USDJPY trading around current levels short and near term. Hence, we revised down our 3-month target from 108 to 106 and keep the 12-month target unchanged at 106 (value of 1 dollar).

The Swiss Franc (CHF)

The Swiss franc benefitted from the risk-off mode and has been supported by investors’ preference for secure investments. Against the backdrop of trade tensions and rising fears of global slowing, the European economic and political newsflow have supported the CHF. The German manufacturing sector remains dampened by the weaker global trade environment while the Eurozone outlook is much weaker. Short term, we do not see an imminent breakthrough on the trade side while the Brexit issue remains uncertain. In this context, we revised down the EURCHF 3-month target to 1.10 from 1.11. Near term, as we expect risk sentiment to remain depressed by the end of Q3 2020, we see the CHF benefitting from a lingering risk-off mode. Thus, we forecast a weaker euro than previously projected. We see the EURCHF at 1.12 over the next 12-months (previously at 1.18).

The Australian dollar (AUD)

The Australian dollar trend reversed mid-July. Indeed, the slowdown of the Chinese demand hit market confidence as Australia is strongly relying on iron ore demand while prices have tumbled drastically in August. In this context, we think that the AUD has less appreciation potential short term as tensions are not expected to abate over the upcoming months. We forecast that the AUDUSD will trade close to current levels over the next 3 months (around 0.69). Regarding the monetary policy, the central bank already cut rates by 50bp while a further rate cut is anticipated by year-end. However, this easing monetary policy seems to have been priced by the market. Moreover, we expect that the potential recovery of Chinese demand to stimulate Australian momentum. The expected resilience of the USD should hamper the strengthening of the AUD. Thus, we revised down our 12-month targets respectively to 0.72 (from 0.74)

The New-Zealand Dollar (NZD)

The New Zealand dollar has been the worst performing G10 currency in August. The kiwi has been hurt by a sell-off given higher risk aversion and the resulting flight-to-quality. The slowdown of the Chinese demand curbed dairy prices, on which the New Zealand economy strongly relies on. On the monetary side, the higher rate cut than expected last month surprised the market to the downside and strengthened odds of a further cut while inflation expectations kept falling in July. The latest ANZ business confidence survey materialized the increasing pessimism of investors. Hence, we do not see the kiwi rising short term, and think that the NZDUSD should trade close to the current levels, around 0.65, over 3 months. The NZD should strengthen near term since we expect the Chinese fiscal stimulus to give more impetus to the kiwi economy. However, we see a lower appreciation potential given a lasting unfavorable external environment. The NZDUSD should trade around 0.68 instead of 0.70 over the next 12 months.

Guy ERTZ

Chief Investment Advisor
BNP Paribas Wealth Management