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#Investments — 12.10.2018

Monthly Currency Outlook: October 2018

Guy Ertz

Trade tensions supported the USD. The trend should reverse in the coming months. Positive opinion on the Norwegian and Swedish currencies against the Euro.

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United States dollar

As fears over the weak links in emerging markets were building further and trade tariffs threats were implemented, the US dollar was supported and traded at around 1.16 versus euro in the first part of September. Thereafter, lower US inflation’s pressure on the Fed and some emerging markets acting to counter the fall in their currencies had the USD weaken towards 1.18 despite still strong US economic data and lasting trade concerns. Finally, the Italian budget proposal, presenting a more fiscally aggressive budget than expected, sent the EUR/USD below 1.15 (value of 1 EUR). Over the coming months, the euro is unlikely to appreciate by much and we target the EUR/USD at 1.16. We think that the trade situation needs to stabilize before the euro can materially trend upward. Over a 12 months horizon, the euro should reach 1.22 in our view. As monetary policy divergences slowly diminish, the United States economy reaches the peak of the cycle and macroeconomic imbalances weigh on the USD, the EUR/USD should head towards its fundamental value (estimated around 1.28).

The British pound

The British pound was supported by positive headlines in the run-up to the Salzburg meeting (20 of September), appreciating towards 0.886 from 0.90 (value of 1 euro) in early September. Markets had expected both parties to soften their stance and progress towards the Withdrawal Agreement’s signature. Nonetheless, EU officials being more critical of Theresa May’s proposed plan and both parties sticking to their respective position lead the British pound rapidly depreciate versus euro. Overall the GBP is stronger than on September 1st, having benefited from the weaker EUR since the Italian budget proposal was published. We maintain our view on the GBP. The pound should be driven by Brexit negotiations over the next 12 months and we think that a soft Brexit option will prevail. We however have entered a crucial moment in the negotiations, with Brexit happening in less than 6 months and with a Withdrawal Agreement that need to be signed in the next couple of months. Hence, we see the Pound sterling remaining under pressure at 0.90 (value of 1 EUR) in 3 months before the mood eases and the GBP should trade around 0.88 in 12 months.

Scandinavian currencies

In September, the Norwegian krone appreciated by 3.1% and the Swedish krona ticked up by 2.2% versus the euro. The move higher was mainly the result of the Norges Bank raising interest rates and the Riksbank appearing more inclined to start tightening its monetary policy by the beginning of 2019. Over the next 3 months, both currencies are unlikely to appreciate much further (EUR/NOK at 9.40 and EUR/SEK at 10.30) as the market has discounted the more hawkish central banks rhetoric and trade tensions could still weigh on the currencies. Yet, we still see the NOK and the SEK being stronger in 12 months at 9.10 and 9.80 respectively (value of 1 EUR) as economic growth remains solid, inflation supports rate hikes and geopolitical tensions ease. We keep a positive opinion on those two currencies for Euro based investors.

The Swiss franc

Overall, the negative surprise in late September stemming from Italy, where the proposed budget deficit is larger than expected, failed to support the CHF. Looking at Swiss inflation, both our expectations and those of the Swiss National Bank are inconsistent with the central bank raising interest rates. Meanwhile, inflation in Eurozone should be close to the ECB’s 2% target, opening the door for monetary policy tightening. On top of that, the CHF remains overvalued and the SNB has consistently described it as “highly valued”. Due to persistent geopolitical tensions, we expect the CHF to trade around 1.16 in 3 months. In 12 months, we forecast it at 1.22 on the back of tighter Eurozone spreads and the ECB starting to tighten its monetary policy.

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Source: BNP Paribas Wealth Management