Monthly Currency Outlook February 2020

The beginning of the year was marked by a fall in risk appetite, triggered first by heightened geopolitical tensions in the Middle East and then by the swift spread of the coronavirus.

Thanks to its safe-haven status, the US dollar benefitted from a risk averse behaviour, which severely weakened high-risk currency performances. The DXY climbed by 2% on a year-to-date basis while all G10 currencies weakened against the greenback. The Swiss franc continued to strengthen against the euro as the global environment and the US decision to include the CHF in its currency manipulator watch list supported the franc. The NOK underwent the biggest drop with losses close to 3% as the unfavourable external context and disappointing economic data weighed on the krone. On the other hand, the SEK was more resilient. The Aussie and Kiwi currencies were the worst G10 performers against the dollar. The combination of bushfires in Australia and fears of a negative economic impact of the coronavirus outbreak weakened both currencies. The CAD followed the same trend as some signs of an economic slowdown increased, and pressed the central bank to be more dovish.

On the monetary policy side, we revised our Fed policy rate expectations last month. Latest US economic data surprised to the upside, highlighting the resilience of the US economy. We thus see the Fed keeping interest rates on hold this year. While Australia’s central bank unexpectedly left the key rate unchanged despite current downside pressure on the economy, Canada’s central bank turned dovish as the economy was showing some signs of a deceleration.

Summary of our forecasts

We keep our expectations of a stronger euro this year. We expect the EUR/USD at around 1.12 in 3 months and 1.14 in 12 months. The sterling should fluctuate in the near term as a tough negotiation period lays ahead. We keep our expectations of 0.85 in the short term and 0.88 in 12 months. The CHF positive trend should reverse over the coming months. We maintain our targets of 1.10 and 1.12 respectively in 3 and 12 months. The AUD and the NZD have weakened alongside the risk-off period. However, we keep our appreciation view since we see a rebound fuelled by the expected Chinese recovery. While the SEK should remain steady, we expect the NOK to rebound to 9.80 following the recent strong dip. More importantly, we have revised our 12-month target for the USD/CAD to 1.30 (from 1.28) as the Canadian monetary authority has shifted to a data-dependent policy and latest economic indicators suggest a slowdown.