Monthly Currency Outlook
Political uncertainties are dragging on and limit the upside for the euro
United States dollar (USD)
The EURUSD fell back below 1.12 after breaking 1.13 threshold in mid-April. The strength of the US economy illustrated by robust data continues to be supportive for the dollar while the eurozone suffers from political uncertainty. We still see 3 main reasons why the US dollar should weaken from current levels (1) the peak in the yield differential, (2) the rise in US public debt and deficit and (3) the USD seems overvalued compared to the fair value. We however see less upside for the euro compared to our previous scenario, since that political instability should weigh on the European Union for longer than expected following the recent extension granted to the UK and the risk that US authorities will threaten Europe with car tariffs after the expected deal with China. Our new targets are 1.14 (down from 1.16) for the 3-month target and 1.18 (down from 1.22) for the one-year horizon.
The British pound (GBP)
The granted extension by the EU until October 31 is long enough to remove the pressure on PM May to reach a compromise with Jeremy Corbyn. The outcome of cross-party talks should be known mid-May. But there is still little chance of success. As a consequence, the UK will most likely participate in the EU elections on 23 May. On the monetary side, the BoE left interest rate unchanged and maintained a relatively cautious approach regarding the appropriate path of policy rates, hinting that it could be in either direction. We keep our central scenario that a no-deal will be avoided as we think it is likely that there will be a majority in favor of a soft Brexit. Meanwhile, markets will remain sensitive to the newsflow as uncertainty will last, adding pressure on the GBP. We keep our 3-month and 12-month targets at 0.88 (value of 1 euro).
The Japanese yen (JPY)
The Japanese yen remained contained between 111 and 112 in April, reaching its lowest level this year. We continue to see a negative GDP growth over the Q1. However, as the JPY remains weak, we do not see a high probability of additional easing. At the end of April, the BoJ left interest rate unchanged as broadly expected. The governor annouced that rates should remain «at very low level at least until next spring». As the USD is expected to remain strong over the next quarter, this should keep the JPY close to current weak levels. We still see a USDJPY around 110 in 3 months. Over the medium-term, the bond yield differential should not be the key currency driver. On the other hand, the large FX exposure of Japanese investors is expected to fall especially for US assets given that the US economy is expected to slow down. It would support the JPY. We keep thinking that the USDJPY will decline (stronger JPY) in 12 months and trade around 106.
The Swedish Krona (SEK)
The Swedish krone has continued to underperform. The krona remained resilient to the increasing political instability around Brexit before weakening more recently since the central bank surprised with a more dovish speech than expected. However, Sweden benefits from a strong economic backdrop. According to the technical analysis, the SEK seems oversold. This suggests an appreciation against the euro short-term. We still think the EURSEK will trade around 10.20 (value of 1 EUR) in 3 months. Medium-term, the last meeting of the central bank marked a shift in the policy guideline. The monetary authority postponed the monetary normalization (1) it announced a slower pace of rate hike and (2) it committed to pursue the QE over 18 months from July. The weaker global inflation pressure, the lower interest rate environment and world growth concerns pushed the central bank to adopt a more cautious stance. However, since political uncertainty and economic fears in eurozone are expected to fade, we still see a stronger SEK and keep our 12-month target at 9.80.
The Norwegian Krona (NOK)
The Norwegian krone underperformed from mid-April alongside the decline of oil prices and the regain of risk aversion. However, March inflation figures beat expectations, moving above the central bank target of 2.5% and March PMI data also beat consensus, exhibiting the strength of the Norwegian economy. Indeed, the economic surprise index and economic fundamentals continue to support the Scandinavian currency. In this context, we keep thinking that the EURNOK will gradually decrease (stronger NOK). The cross rate should hover around 9.40 (value of 1 euro) in 3 months. Further, the divergence of monetary policy between Norway and the eurozone should continue to widen and support the NOK. We expect the central bank to continue its policy tightening and thus hike rates once more this year. Although sensitive to political uncertainties in Europe, the Norwegian economy is less vulnerable to current global trade concerns. We maintain our 12-month target at 9.10