#Market Strategy — 17.10.2019

Monthly Currency Outlook October 2019

Guy Ertz

Early signs of stabilization in terms of risk aversion

BNP Paribas Wealth Management

There were signs of improvement in the US-China talks as a partial deal could be reached. Probabilities of a hard Brexit fell in recent weeks. The Japanese and Swiss currencies have underperformed as equities bounced back and the US dollar remained resilient. However, trade tensions are not expected to be fully resolved in the coming months.

United States dollar (USD)

The global environment did not help the EUR to recover. Fears of global growth deceleration and no major breakthrough in trade talks fueled a risk-off mode. Beside, economic data continue to support the strong US momentum while there is no sign of a Eurozone growth recovery. The European political landscape seems to be slightly improving as risks of a hard Brexit fell. Short term, the USD should remain supported by lingering uncertainties which weigh on global growth and undermine investor’s sentiment. Thus, we keep our target at 1.12 in a 3-month horizon. Near term, monetary policy should be the major driver. The Fed mid-cycle adjustment should drive the rate differential against the dollar lower. We see little scope for a further USD appreciation as the dollar remains strong compared to the long-term fair value (Purchasing Power Parity). Against this background, we forecast that the EURUSD will trade around 1.14 over the next 12 months.

The Japanese yen (JPY)

In September, the yen weakened as the USD/JPY retraced most of its decline recorded in August, on the back of an easing appetite for safe assets. However, the global environment remains broadly in favour of the JPY. Downward revisions to global growth, worsening trade tensions and more central bank easing suggest that the risk-off sentiment will not go away. This supports our view of a strong yen. With respect to the monetary stance, we think it will be hard for the BoJ to prevent JPY strength when other G10 central banks have a lot more ammunition at their disposal to ease monetary policy. It is noteworthy to monitor tensions between Japan and South Korea while the US-Sino trade tensions have already weakened the global economy.  All in all, limited risk appetite should continue to support the yen. Hence, we see the USDJPY trading around 106 over the next 3 and 12 months.

The Swiss Franc (CHF)

The recent upward trend of the Swiss franc has been halted in September. While peripheral eurozone economies enjoy record low yields pushing the peripheral spread down, the CHF remains resilient. This suggests that short-term, the CHF will remain supported by the uncertain global environment, the sagging Eurozone economy and to a lesser extent political uncertainty, materialized by the rise of the European Economic Policy Uncertainty index. The latest manufacturing PMI (business survey) for the eurozone worsened. In this context, we keep our EURCHF 3-month target at 1.10. Near term, we expect risk sentiment to remain subdued since we do not see an imminent breakthrough on the trade side. Thus, we see the CHF benefitting from a lasting risk-off mode. We maintain the EURCHF at 1.12 over the next 12-months.

The Swedish Krona (SEK)

The Swedish krone strengthened in September alongside the reassuring speech of the central bank. Strong fundamentals support the domestic economy. However, alongside the Eurozone weakening, signs of slowdown materialized as the PMI fell. This should cap the SEK appreciation potential. We keep our 10.70 (value of 1 euro) over the next 3 months. On the monetary side, the governor of the central bank left interest rates unchanged at the last committee, but kept its hawkish bias, suggesting that a rate hike could follow. Hence, the divergence of monetary policy seems to have increased as the ECB launched a further easing package. This should drive the SEK up. Moreover, the growth differential should remain in favor of the Scandinavian currency. All in all, the valuation of the SEK does not seem in line with its fundamentals. Hence, we continue to see the SEK stronger near term and expect the EURSEK to meet our 12-month target at 10.20.

The Norwegian Krona (NOK)

The weak valuation of the Norwegian krone does not reflect the strength of the economy. The growth differential with the Eurozone is more favorable as the Norwegian activity remains resilient regardless of external headwinds. The monetary policy divergence with the ECB is a support for the NOK as well. Recently, the central bank hiked interest rates for the fourth time in a year when most other central banks are easing monetary policy. Expectations of further easing from the Fed and the ECB may prove positive for the krone which might soon be the highest yielding G10 currency. All in all, the NOK's gradual decline to historical low levels has been uncorrelated with fundamentals and driven by market fears regarding world growth. We expect a strengthening of the NOK fueled by growth and interest rate differentials with the eurozone. The EURNOK is expected to reach 9.60 at 3 months and 9.40 over the next 12 months.

 

Guy ERTZ

Chief Investment Advisor
BNP Paribas Wealth Management