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#Market Strategy — 13.03.2019

Monthly Currency Outlook: The dollars Remains Strong

Guy Ertz

Currency Outlook by Guy Ertz | BNP Paribas Wealth Management

United States dollar (USD)

The EURUSD has remained strong over the past few weeks. While the Fed adopted a more dovish tone bringing in its wake G10 central banks, the ECB officially postponed a rate hike to 2020. Alongside this announcement, the ECB has launched a new TLTRO to kick start the eurozone economy. On the trade side, we still expect that a deal could be concluded in the coming weeks. This should be a catalyst for riskier assets in the short term and weaken the broad dollar index. As we also still expect a positive outcome regarding the Brexit supporting the euro. We keep our 3-month target at 1.16 (value of 1 euro). The 2-year bond yield differential is probably close to a peak. We expect that the slowdown of the US economy and the rising public deficit later this year should also weaken the USD. Furthermore, the EUR/USD remains undervalued compared to its fair value. We maintain that the EUR/USD should reach 1.22 in 12 months.

The Japanese Yen (JPY)

The recent weakening of the Japanese yen alongside a higher risk appetite should last in the coming weeks. Fears of a Chinese slowdown have started to weigh on the Japanese momentum. Moreover, we expect the USD to weaken only in the second part of the year. We keep our 3-month target at 110 (value of 1 dollar). Over the longer run, the main driver of the JPY should be the repatriation of the Japanese capital exposed to US assets. This should support the yen. On the other hand, the impact of the bond yield differential on the JPY should be muted given the stable BoJ monetary stance and the already priced dovish shift of the Fed. We hold on to our 12-month forecast for the yen at 106.

The Canadian Dollar (CAD)

In February, the Canadian dollar benefitted from the upside of oil prices before being hurt by rising growth concerns. Moreover, the corruption scandal involving the Head of the government which has shaken the Canadian political sphere while legislative elections are forthcoming, has to be monitored closely. However, the likely US-China deal should be supportive for the CAD. Hence, we keep our 3-month target at 1.30 (value of 1 dollar).  On the longer run, some downside risks persist given the dampened domestic activity and concerns regarding the ratification of the new NAFTA deal. The central bank left the target rate unchanged at its last meeting alongside a more dovish tone. However, the expected positive outlook for a trade deal and high oil prices should support the CAD. We maintain our target at 1.26 in 12 months.

The Australian Dollar (AUD)

The Australian dollar weakened in February, alongside a worrying external environment (uncertain US-China talks and the slowdown of the Chinese economy) which has not been supportive for the aussie. Furthermore, the domestic growth concerns rose following the depressed Q4 GDP release besides the weakening housing market. Given the recent positive newsflow on rising likelihood of finding a US-China trade deal in the coming weeks, we target the AUD/USD at 0.72 in 3 months. Regarding the global environment, the higher risk appetite should remain a supportive driver as long as Chinese momentum remains sustained. The expected improvement regarding the political uncertainty and stimulus measures in China should be supportive for the AUD medium-term. We forecast the AUD at 0.78 in 12 months.

The New-Zealand Dollar (NZD)

After strong January performances fueled by a regain of risk appetite, the New-Zealand dollar fell by 1.7% in February suffering from growing fears regarding the global outlook. The weaker than expected Chinese manufacturing PMI weighed on the currency. However, dairy prices, one of the main drivers, are still well oriented. We still think the NZD/USD should hover around 0.68 over the next 3 months. At its last meeting, the central bank left rates unchanged, despite lowering its inflation expectations from 1.9% to 1.4 %. Indeed, worries about Chinese growth and weaker commodity prices could weigh on the economic momentum. We still think the interest rate will remain steady in 2019. As the newsflow on US-China trade war should become more positive, we see a moderate upside for the currency with a 12-month target at 0.70 (value of 1 NZD).

currency tab  | BNP Paribas Wealth Management

Guy ERTZ

Chief Investment Advisor
BNP Paribas Wealth Management