#Articles — 16.01.2020

Monthly Currency Outlook January 2020

Guy Ertz

Markets ended 2019 at record highs. December has been marked by two major breakthroughs, the phase 1 trade agreement and the large victory of the British conservative party. The spike of risk appetite has been particularly favorable for high-risk currencies.

Monthly Currency Outlook December 2019 I BNP Paribas Wealth Management

 

IN A WORD:

Markets ended 2019 at record highs. December has been marked by two major breakthroughs, the phase 1 trade agreement and the large victory of the British conservative party. The spike of risk appetite has been particularly favorable for high-risk currencies.

All monitored currencies strengthened against the greenback in December. Commodity currencies benefited from the wave of risk-on. The New Zealand dollar on the front line rocketed by more than 5%. Emerging currencies rallied too, the Chinese renminbi broke back below 7 as trade tensions eased. The Turkish Lira suffered due to renewed tensions with the US. The Norwegian krone has remarkably recovered at year-end, fuelled by the improved risk sentiment and still robust fundamentals. Safe haven currencies, the Japanese yen and the Swiss franc, were broadly stable.

The political and trade landscape seems clearer. The Chinese authorities are expected to sign the phase 1 trade deal mid-January in Washington. Although widely awaited, we expect its impact to be significant for the improvement of global sentiment and the release of pent-up demand. The victory of Conservative to the British elections marked the end of 42 months of Brexit turmoil. The parliament is expected to pass the Brexit bill by the end of January. However, a new phase of difficult negotiations about the post-Brexit UK-EU relationship will begin.

On the monetary side, the Swedish central bank delivered a rate hike, ending five years of negative rates. Otherwise, most of G10 central banks should remain on hold this year. We revised our Fed scenario and no longer envisage two rate cuts in 2020. The resilience of economic data do not warrant a rate cut in the coming months. While markets have priced out a rate cut in New Zealand, the Australian monetary authority is expected to lower rates this year.

 

Summary of our forecasts

We continue to see the euro stronger next year. We expect the EURUSD around 1.12 over the next 3 months and 1.14 in 12 months. We changed our 3-month EURGBP target to 0.85 (current levels) as we think that the sterling will be subject to less fluctuations short term. We however maintain our 12-month target at 0.88 due to rising uncertainty later this year. We see the AUD and the NZD appreciation potential capped short term after the strong recovery in December. Near term, we still see both currencies strengthening.  We forecast that the CAD will remain steady short term following last year rally, before slightly appreciating near term. Scandinavian currencies benefitted from the general rally and reached their 12-month target. As we do not see further appreciation potential, we moved our stance from neutral to negative and reducing the positions.