#Articles — 17.05.2023

Monthly Currencies Focus May 2023

Guy Ertz, Chief Investment Advisor


1.The US dollar index (DXY) remained broadly flat in April while the Euro index (EXY) gained 1,5%.

2.In the US, uncertainty remained high in the financial sector with the stress around regional banks. The US Fed hiked another 25bps on May 3rd , as expected, and signaled a likely “pause” in rate hikes. In Europe, the banking sector has proven to be robust. The ECB’s 25bps hike on May 4th was followed by a message suggesting that the more rate hikes could follow.

3.We increase our targets for EURUSD (value of one euro) as economic momentum and the 2-year yield differential are more in favor of the Euro. Additionally, we may be ending an eight-year cycle, well below the purchasing power parity (PPP) that is estimated around 1.37.  Hence, we increase our 3-month target from 1.06 to 1.08 and our 12-month target from 1.08 to 1.15.

4.Oil prices have stabilized at much lower levels. This has limited the upside for oil-sensitive currencies  such as the CAD, AUD, NOK.

5.The NOK is the worst performing currency in the G10 FX so far in 2023 as the Norges bank is adopting a cautious approach to rate hikes. The expected rebound in oil prices and technical factors however continue to point to a stronger NOK. The 2-year yield differential is however continuing its upward trend in favor of the Euro. This will limit the upside for the NOK. Hence, we increase our 3-month target from 10.6 to 11.3 and our 12-month target from 10.3 to 10.8 (value of one euro).



A lot is priced at this stage

The EURUSD, recovered to 1.09 from its March 15th low of 1.05, mainly due to the changing interest rate expectations between the Fed and ECB. The banking sector in the US is recovering from the collapse of Silicon Valley Bank around March 10 which had a significant impact on Fed expectations. The market was factoring in a terminal rate well below 5% as of March 16th, compared to almost 6% before the banking stress. The Fed increased its target rate to 5% as inflation remains a key concern despite the banking crisis. We expect only one more rate hike of 0.25% in May with a terminal rate of 5.25%. In Europe, the ECB hiked its target rate by 50 basis points, as largely expected, to 3%. The stress in the banking sector did not change their perception regarding the need to hike more, and we still expect a terminal rate of 3.5% reached in June.

The economic momentum should also be more supportive for the euro. In the US, we expect a recession in the second half of the year while growth should stabilize just above zero in the eurozone.  A lot of the euro supportive news are probably priced at this stage and we keep our 12-month target at 1.08.

Over the coming months uncertainty could however stay high and that is why the dollar could make a temporary come back.

We maintain our 3-month target at 1.06 and our 12-month target at 1.08 for the EURUSD.


GBP  VIEW >>   TARGET 12M VS EUR: 0.88

No clear trend

The EURGBP (value of one euro) has remained flat since the beginning of the year at around 0.88. This is largely due to a combination of economic and political factors mainly in the UK.

Inflation printed higher than expected in March and April at 10.4% and 10.1% respectively. The Bank of England’s 25bps hike in March suggested this would suffice to tamper inflation. On May 11th the BoE increased its bank rate another 25bp to 4,5, as expected..

The composite PMI printed higher than expected at 54.9 suggesting an expansion in economic activity.

The recent sharp fluctuations in the yield differential between the eurozone and the UK seems to persist. Both the Euro and Sterling are benefiting from the rapidly falling gas prices and signs of robust economic growth. The GBP is resisting against the broad strengthening of the Euro.

We maintain our 3- and 12-month targets at 0.88 (value of one euro), which suggests a lateral move of the currency from current level.


CHF VIEW >>    TARGET 12M VS EUR: 0.98

CHF to remain strong

The EURCHF (value of one euro) has been trading close to parity with an attempt to breach the parity mark end of April. It was trading at 0.98 as of May 3rd. The Swiss franc is resisting against the strengthening of the Euro.

In April, the CPI YY printed 2.6%, lower than expected. This is the steepest decline in almost three years, mainly due to lower energy costs. This move may still not be enough to stop the central bank from raising interest rates again in June. As of May 4th, markets were pricing a 99% probability of a 25-bps hike end of June.

Overall, the SNB should hike rates slightly less than the ECB over the course of the coming year, as inflation in Switzerland remains much lower than in the euro area.

Despite the KOF leading economic indicator printing lower than expected at 96.4 in April and the manufacturing PMI 47, also lower than expected, Swiss economic fundamentals remain overall strong, and GDP is expected to expand quarter on quarter.

We maintain our 3- and 12-month targets at 0.98 (value of one euro), which suggests no major move of the Swiss franc relative to current levels (May 10th).




Strengthening of the Yen

The Yen (JPY) gained 2,5% against the dollar in March. The sharp revisions in the Fed terminal rate expectation following the collapse of the Silicon Valley Bank led to a rebound of the Yen, bringing the value of one dollar (USDJPY) down to 130 on March 25th, closer to our targets (see below).

Following K.Ueda's confirmation hearing in February, the new central bank governor left the doors open for further policy normalization. We still believe that Japan will maintain its YCC (yield curve control) while adopting a slightly more hawkish view by widening its yield curve control range by 0.5% to 0% ± 1.00% during the first semester. This should be supportive for the JPY in the coming months.

March figures showed a negative trade balance, however higher than expected, supported by higher exports and the reopening of China. The CPI core inflation steadily increased to 3.1%. Looking forward the OPEC cut in oil supply should decrease the current account surplus and could limit the upside for the currency. Lower Japanese demand for US fixed income assets this year is also likely to support the JPY's strength, along with other flow dynamics.

The economic momentum should also move more in favour of the Japanese currency as the US slowly slips in a recession in the second half of the year.

We maintain our 3-month target to 130 (value of one USD) and the 12-month target to 128. 


Positive outlook despite recent depreciation

The Swedish currency (SEK) lost 1.5% to the euro in March. Since the beginning of the year, it hovered in a range around 11.20. This is related to the sharp rise in the yield differential in favor of the euro. Both central banks are hiking rates, but expectations moved in favor of more rate hikes by the ECB. With core inflation printing higher than expected in March at 12%, markets are pricing a 25-bps rate hike by the Swedish central bank in April.

The housing market in Sweden is cause for concern, as rates have decreased demand for houses due to mortgage rates. House prices are down around 15% since their peak in spring last year. This is a bigger drop than during the global financial crisis and prices could decline further in the coming months. This represent a downside risk as most mortgages have variable rates, leaving households exposed to rising interest rates.

The main factors seem largely priced at this stage. All in all, we see no clear trend from current levels for the coming months.

We keep our 3- and 12-month targets at 11 (value of one euro). 



Less upside for the NOK (target change)

The NOK is the worst performing currency in the G10 currency universe so far in 2023. We however saw a rebound of the Norwegian currency since early May.

The weakness over April can be attributed to the recent market turmoil and reduced liquidity/volatility conditions in the FX market. The Norges bank is adopting a cautious approach to rate hikes and this is a drag for the currency.

The CPI inflation for March printed 6.5%, higher than expected. On May 4th  the Norges bank acted by hiking interest rates by 25bps to 3.25%. According to Governor Ida Wolden Bache rates could continue to rise. Hence, another hike is likely in June.

The yield differential has favored the Euro until late April but has reversed since early May. The expected rise in oil prices and technical factors continue to point to a stronger NOK.  


We increase our 3-month target from 10.6 to 11.3 and our 12-month target from 10.3 to 10.8 suggesting a strengthening of the NOK.



Upside from current levels

The Australian dollar (AUD) experienced higher volatility over recent weeks, loosing some ground against the US dollar.

On May 2nd, the central bank surprised the market by increasing its cash rate by a further 25bp to 3.85% followed by a statement indicating that inflation was still relatively high, and that the unemployment rate was at its lowest in over 50 years.

This rate hike is a way to prevent upside risks in services inflation. The latter remained high as reflected in the higher-than-expected CPI inflation at 7% for the month of April (compared to April last year). As of May 5th, markets were pricing a 94% chance of no hikes at the next meeting on June 6th .

Meanwhile, the reopening of China and rising demand for key industrial commodities, especially those needed for batteries and electronics, should improve Australia’s terms of trade, ultimately favoring the AUD.

We maintain our 3- and 12-month target at 0.70 (value of one AUD) and 0.73, respectively suggesting an appreciation of the Australian dollar.


NZD VIEW >>    TARGET 12M VS  USD: 0.65

Looking for a rebound

NZD gained against the USD early May after a disappointing performance over April. The central bank raised its cash rate another 50bps now at 5.25%. A pause in future hikes would provide some relief to household, but inflation needs to fall more before it can end it rate hike cycle. Inflation fell back to 6.7% year on year in the first quarter 2023.

Domestically the focus is on the labor market which remains under some pressure as reflected in the unemployment rate printing lower than expected at 3.4%. A higher unemployment rate should reduce wage inflation and be a sign of relief for the central bank.

The recent reopening in China is yet to be reflected in New Zealand’s  trade balance which printed negative 16.40B (NZD) for the month of March.

The price of milk has increased 8% in April reaching an average selling price of 3’506.00 USD per ton which could support the NZD as milk represents about 20% of New Zealand’s exports.

We maintain our 3- and 12-month targets at 0.65 (value of one NZD). This suggests a moderate appreciation of the NZD from current levels.


CAD VIEW >>    TARGET 12M VS USD: 1.30

Moderate upside

The Canadian dollar (CAD) hovered around 1,34 (value of one USD) over recent weeks. With the US eyeing a decrease in rates and the Bank of Canada maintaining a hawkish tone we see potential for the CAD to appreciate.

On April 12th, the Bank of Canada maintained its rate at 4.5% as it waits to see the full effect of its restrictive policy to pass through into the economy. Inflation seems under control with core CPI inflation for the month of March printing 4.3% lower than expected. The trade balance for March was higher than expected with a surplus of 0.97Bn (CAD). The unemployment rate however printed lower than expected at 5% for the month of April.

The CAD was influenced by oil price movements over recent weeks. Oil prices are expected to move gradually higher and this could give the CAD additional upside. The high level of household debt to GDP ratio (103% for Q4 2022) could however be a drag.

We maintain our 3-month target to 1.32 and our 12-month target to 1.30 (value of one dollar), suggesting a moderate appreciation potential from current levels.



Strength ahead

The CNY (value of one dollar) was quite stable over recent weeks. It was hovering around 6.90 most of the time.

The Medium-Term Lending Facility remains unchanged at 3.65%. The central bank announced no change in its policy rate for the eighth consecutive month, partly due to a strong economic recovery following the withdrawal of most anti-covid measures in December.

China’s economy expanded 4.5% year-on-year and exports for the month of March rose sharply to 14.8%. Imports on the other hand, remained negative when compared to last year.

Year-on-year retail sales are up 10,6%, higher than expected and inflation printed 0,7%, lower than expected in March. The manufacturing PMI printed lower than expected at 49,5 and services PMI 56,4 for the month of April.

Improvements in China’s trade balance and economic outlook have favored equities and high-yield credit sentiment. Ultimately this should be more inflows and this should drive the appreciation of the CNY.

We maintain our 3- and 12-month targets at 6.75 and 6.50, respectively (value of one dollar). This suggests an appreciation of the CNY from current levels.