#Market Strategy — 11.04.2019

Monthly Currency Outlook April 2019

Guy Ertz

Political uncertainties still support the US dollar and Swiss franc

BNP Paribas Wealth Management

United States dollar (USD)

In March, the euro was slightly down against the US dollar which continued to benefit from a supportive environment given its counter-cyclical status and its attractiveness for “carry trade” (investors borrowing in currencies with low interest rates to invest in currencies with higher rates) higher yields)  strategies. On the political side, the EU summit on April 10 lead to a further extension regarding Brexit. The new deadline is October 31st. The UK will thus have to participate to the European elections. PM May mentioned that her target date to leave the EU is still May 22nd. This lowered uncertainty as a no-deal is normally off the table until the new deadline. We hold on to our 3-month target on the EURUSD at 1.16 (value of 1 euro). We revised both our Fed and ECB forecasts. The expected yield differential is not changed. It should not support the USD higher. Further, the increasing US public deficit and the forecasted Chinese rebound which should support the European momentum, would be supportive for the EURUSD over the coming year. Moreover, the US dollar remains expensive compared to its fair value. We keep the target of the EURUSD at 1.22 in a 12-month horizon.

The Swiss Franc (CHF)

The recent prudent ECB combined with a weaker economy and political concerns in Eurozone pushed the Swiss franc at its highest level since late 2017. The increasing turmoil regarding the power struggle between the UK and the European Union fuelled investor’s worries and has been supportive for the safe haven currency. The improvement of the European economy will take time. We thus keep our 3-month target at 1.13.  Over the medium-term, the monetary policies should remain broadly on the same path and rates should remain unchanged this year as the two central banks took a more prudent stance. Therefore, we don’t expect a substantial impact on the exchange rate. However, even if we still expect a positive Brexit outcome, the recent downward revisions in Eurozone growth led us to be more cautious on the appreciation potential of the euro against the Swiss franc. We reduce our 12-month expectations down from 1.22 to 1.18 (value of 1 euro).

The Japanese yen (JPY)

The Japanese yen continued to weaken against the US dollar. We expect a US-China trade deal in the coming weeks and a more positive newsflow from China. Hence, we keep our 3-month target at 110 (value of 1 dollar). On the longer run, we expect that the decreasing trend of Japanese exposure to US assets will continue given the forecasted slowing of the US economy. Therefore, we think that the JPY has upside potential. We hold on to our 12-month forecast for the yen, at 106.

The Canadian Dollar (CAD)

After a strong rebound earlier this year alongside the oil price increase, the Canadian dollar has been recently penalized by a slowing of the domestic activity and the weaker global environment. Moreover, the recent newsflow regarding the corruption scandal deepened the political crisis and have to be monitored while legislative elections are forthcoming. However, some supportive signals have been observed such as the recent recovery of wage growth and the above-expectations March economic growth. Moreover, the likely US-China deal should reduce trade tensions and support the CAD. Hence, we keep our 3-month target at 1.30 (value of 1 dollar).  The more cautious speech of the central bank created uncertainty regarding the timing of the future rate hike. Given our downward revisions for global growth and uncertainty regarding the ratification of the new NAFTA, we see less upside for the CAD. We revised down our 12-month target from 1.26 to 1.28. We still expect a stronger CAD.

The Australian Dollar (AUD)

The strong US dollar coupled with the uncertain external environment prevented the Australian dollar from appreciating. The US-China deal is still pending. The weakened momentum illustrated by the disappointing growth over the last quarter has to be monitored. Furthermore, as the Australian activity is reliant on Chinese imports, the latest positive signals of recovery should support the aussie. Therefore, we think that the AUDUSD will fluctuate around current levels. We target the AUD/USD at 0.72 in 3 months. Over the near term, we still think the AUD has room to appreciate. However, we anticipate a lower potential for appreciation compared to last month given the recent shift from tight to neutral monetary policy due to the lower upside potential for the Australian economy already weakened by the negative trend of house prices. Hence, we revised down our 12-month target for the AUDUSD from 0.78 to 0.74 (value of 1 AUD), but we still expect a stronger AUD against the USD.

The New-Zealand Dollar (NZD)

The global uncertainty around world trade and the weak domestic spending have resulted in a relatively disappointing performance of the New-Zealand dollar. The central bank suggested that the balance of risks deteriorated. This hit the kiwi. However, the recent positive newsflow on a likely trade deal combined with sustained dairy prices should support the NZD short term. We keep thinking that the NZD/USD should trade around 0.68 in 3 months.  Medium-term, we think that the inflation will hover close to the central bank target. Moreover, thanks to solid fundamentals, we expect that the bond yield differential should play in favor of the NZD by the end of the year while the US economy is forecasted to slow down. On the other side, the likely upswing of the Chinese momentum later this year should support the New Zealand economy. Hence, we continue to see a moderate upside for the currency with a 12-month target at 0.70 (value of 1 NZD).

 

Guy ERTZ

Chief Investment Advisor
BNP Paribas Wealth Management