Currency Outlook 2015

Transcription

1 Currency Outlook 2015 The U.S. dollar experienced quite a run over the last twelve months, strengthening at least 5.0% against all sixteen of its major counterparts. The Bloomberg Dollar Spot Index, which tracks the performance of a basket of ten leading global currencies versus the USD, generated the largest annual gain since its 2005 inception, rising 11%. These gains were a result of the Federal Reserve s elimination of its monthly bond purchasing program while paving the way for a rate hike in The Fed s impending rate hike will provide plenty of dollar support heading into 2015 and is sure to be one of the drivers on the U.S. side of the equation. On the flipside, the euro zone kicks off the New Year facing old questions. Is this the year ECB President Mario Draghi launches full-blown quantitative easing? Is a Greek exit from the euro zone inevitable? Can the currency bloc stave off deflation? Expect these themes to provide plenty of volatility in what is set to be an eventful start to the New Year. Tempus Inc New York Ave, NW Suite 200 Washington, DC John Robert Doyle II Director of Markets (202) Andrew Dilz Foreign Exchange Strategist (202) information@tempus-us.com EUR/USD: Critical Q1 To say the euro zone is entering a critical year is becoming redundant. The region continues to languish in a low growth environment and the European Central Bank s forecast does not offer much hope for a brighter The ECB staff slashed 2015 inflation expectations in December from 1.1% to 0.7% along with their prediction for economic output from 1.6% to 1.0%. The inflation revisions are most troubling. ECB President Mario Draghi is desperate to boost consumer price growth, which turned negative for the first time in December since The recent and relentless slide in oil prices is only adding to the consumer price woes. To combat these dire circumstances Draghi seems prepared to take a shot at the hotly debated sovereign bond buying trend already practiced by the Federal Reserve, Bank of Japan and Bank of England. The Bloomberg Dollar Spot Index rose to a 10-year high, rising 11.0% in 2014 However, buying sovereign debt is not as simple for the ECB. Germany remains firmly opposed to the practice. Bundesbank

2 president Jens Weidmann is perhaps the most vocal detractor, preferring instead to enjoy the purchasing power bump provided by exceptionally low energy prices. Despite the dissenters, the Governing Council is likely to launch a sovereign bond buying program at the March policy meeting if for no other reason than they are running out of covered bonds and asset-backed securities to purchase. Even sovereign debt will have its limits, as Germany will not want to see purchases below investment grade made on the currency bloc s balance sheet, which could limit the overall effectiveness of the program. Greek debt remains non-investment grade and for the first time in 15 months, the 10-year government bond yield is above 10.0%. The double digit yield is giving European policy makers flashbacks to the height of the euro region s debt crisis, and could pose too much risk for the ECB s balance sheet. Before we reach the moment of truth for full-blown quantitative easing (QE), the euro zone will need to dodge another threat to Greece s membership by the Alexis Tsipras led Syriza party. A snap election scheduled for January 25th has anxiety levels about a potential Greek exit on the rise. The Syriza party is running on an anti-austerity agenda, and a win could potentially lead to two scenarios: a debt renegotiation between Greece and its creditors, or the systematic exit of Greece from the euro zone. Pierre Moscovici, the EU s economic chief, called Syriza s economic plan suicidal, and German Chancellor Angela Merkel went so far as welcoming a Greek exit. However, these hot-takes may be simple warnings to Tspiras about the consequences of an inflexible Greek ruling party. The Euro sold-off greatly versus the U.S. dollar in 2014, but the greenback has been unable to hold gains below 1.20 over the past five years. Tspiras is hoping the conservative voices inside the EU do not sabotage this year s election. Remember, in 2012 the Syriza party narrowly lost an election that caused a fever pitch of panic and a 9.0% depreciation of the euro in the weeks leading up to the election. The similarities of 2012 and 2015 are striking, but not fully justified. This time around, the euro has nearly doubled its decline versus the dollar as a major policy divergence between the Fed and the ECB has magnified the euro decline. The Syriza party also appears ready to pull off the win in A recent Alco poll showed the anti-austerity party holds a three-point lead over current Prime Minister Antonis Samaras s New Democracy party with only a few weeks left. We expect the Greek elections (no matter the winner) to result in a Greece that remains a member of the currency bloc. Tsipras has expressed his intention of remaining a member while dumping most of the conditions attached to the nation s bailouts, ending austerity, repudiating much of their debt and 2

3 increasing the minimum wage. As you can imagine, these conditions might rub the creditors the wrong way, but the alternative may be an even worse option. In our opinion, both parties are likely to meet somewhere in the middle. In the event of a Syriza party win we expect the euro zone finance ministers to cooperate with Tspiras on a new plan to write-down debt while meeting a new set of economic reform commitments. The result will be a near-term bumpy ride for the euro, but a long-term easing of Greek bond yields. The build up to the elections will likely come with bold proclamations served with a side of fear mongering that we expect will send the EUR/USD to new lows. We believe the pair will trade to as low as 1.15 in the first quarter of 2015 before the euro zone political instability settles down enough to reverse what we view as an oversold common currency. Our forecast has the cross slowly climbing back north of 1.20, as far worse economic circumstances in the last five years proved unable to break this psychological barrier. This forecast does come with a caveat. In the event that Greece does exit the euro zone, the lasting power of a sub 1.20 EUR/USD will receive a permanent boost for 2015, and could test below 1.10 in the wake of what would be the major economic event of the New Year. EUR Forecast: Q Q Q Q GBP/USD: Growing Divide As the euro zone prepares for the possibility of a Greek exit, Britain can take solace in the fact they avoided the Scottish push for independence in The pound experienced a volatile 2014 in large part due to the September Scottish referendum, trading in an 11.0% range before ultimately slipping to 17-month low to start the year. The currency weakness can be mostly attributed to the renewed risk and a weak outlook for growth in the euro zone, Britain s largest trading partner. As a result, the Bank of England is no longer a lock to hike rates in 2015 alongside the Fed. Comparatively, the British economy is in an enviable economic position relative to its European peers. This divide can be seen in the GBP/EUR cross, which appreciated over 7% in The pound s strength against its European counterparts and weakness versus the dollar derives from a general policy divergence between the three central banks. For a brief period of time in 2014, the Bank of England was expected to hike interest rates before the Fed, sending the GBP/USD to However, the gap closed and ultimately the Fed became the favorite to hike rates first leading to a 10% depreciation of the pound. The British pound fell to a 17-month low versus the U.S. dollar on delayed expectations of a rate hike. 3

4 We expect the U.S. dollar to peak against the British pound in the first half of 2015 before recouping at least half of the 10% loss in the second half of 2014 to close out the year. It is our assumption that the BOE Monetary Policy Committee will be on pace to hike rates either Q or Q Investors will be eager to price in these positions as the date gets closer. The MPC should see British construction activity and personal consumption accelerate in the low interest rate, cheap oil environment. The increase in consumption will continue the trend of tightening in the labor market, and keep upward pressure on wages. While the headwinds from the euro zone present a hurdle, it only puts the nation s normalization of monetary policy just a bit behind the Fed, leaving the current sterling weakness unjustified in our view. As such, we expect the pound to trade to a low of 1.48 in the first half of 2015 before trending back toward 1.54 to close the year. GBP Forecast: Q Q Q Q USD/JPY: Abenomics in Progress The Japanese yen had an extremely one-sided 2014, losing 12% against the U.S. dollar as the Bank of Japan ramped up the pace of quantitative easing. Prime Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda are sticking to the same dovish agenda to counteract Japan s long fight against deflation. So far, the results have been mixed. The decision to pump an additional 80 trillion yen into the economy depreciated the currency to the weakest level since The devalued exchange rate bolstered net exports and gave Japan s equity market a major boost. However, last spring s VAT tax hike diminished consumer spending and presented a bump in the road to the rebound in economic growth. As a result, Prime Minister Abe dissolved the lower parliament and successfully called for a snap election in December to stall the second tax hike scheduled for The tax hike delay affords the BOJ more time to boost the economy without political interruption, giving Abenomics a new lease on life. We are expecting to see the USD/JPY continue its meteoric rise in The divide in policy between the BOJ and the Fed will only be amplified this year. The BOJ has proved its willingness to launch unconventional measures to stimulate consumer prices that have been near zero for two decades, and the Federal Reserve is expected to start raising short-term interest rates in the near future. We expect these diverging policies to send the exchange rate to 130 by the end of JPY Forecast: Q Q Q Q

5 Commodity Currencies: USD/CAD The Canadian dollar dramatically sold off versus the U.S. dollar in the second half of The move was accompanied by the sudden and steep decline in oil prices that has dominated headlines of late. The decline stems from a slowdown in global demand combined with excess supply. As a result, WTI oil prices have dropped to $48/bbl, while Brent crude has fallen to $51/bbl. Declines in oil will likely curb production in North America, which will weigh on Canada s largest export. While these declines will weaken the outlook for growth, the effect should not be overestimated. Personal consumption and construction activity will both receive a boost from lower oil prices and the low interest rate environment, while the optimistic outlook in the U.S. always has a positive secondary effect on the Canadian economy. We are also hesitant to expect crude prices to continue falling in The 50% slide over the last 6 months leaves prices below production costs, which is by all accounts not a sustainable state. OPEC s reluctance to cut supply may just be a ploy to curb production in rival countries, and the reality is that the low interest rate environment combined with cheap energy prices will boost the global economy, increase manufacturing activity, and ultimately revive demand for oil in In this scenario, we expect the Canadian dollar to gradually recover in the second half of Even with the sharp oil declines, the Bank of Canada is still expected to hike interest rates in Q4. The BOC decision is still in wait-and-see mode, but even after the 50% decline in WTI the central bank still saw consumer prices grow at a pace of 2.0% in We believe oil prices will remain exceptionally low in the first two quarters, driving the USD/CAD exchange rate to 1.20 and 1.22, respectively, before rebounding to 1.18 and 1.16 in the third and fourth quarters as the BOC prepares to join the Fed and start hiking rates. The Canadian dollar lost as the price of oil slumped over 50.0% in CAD Forecast: Q Q Q Q AUD/USD & NZD/USD The 55% decline in oil prices has not solely affected the loonie. The Australian dollar is also showing a bit more sensitivity to crude prices due to their emerging liquefied natural gas export industry. Production of LNG is expected to double by 2019, which will compensate for the expected slowdown in the 5

6 capital spending forecast for the mining industry. Unfortunately, slumping energy prices is cooling LNG momentum and may have adverse effects on the outlook for Australian GDP in Australia s economy may also be subjected to a weatherinduced slowdown. Goldman Sachs is forecasting a drought year in Australia, which typically shaves half a percentage point off gross domestic product. These growth headwinds are going to make it difficult for the Reserve Bank of Australia to carry out a rate hike in The RBA cash rate has been on hold at 2.50% for 15 straight months, and although some analysts were predicting mid-2015 to see the first hike, we see weak inflationary pressures and slower economic growth allowing the central bank to keep rates on hold into As a result, we expect the AUD/USD to continue its recent trend lower in Last year, the exchange rate depreciated 10%, highlighted by a 15% drop in the final four months. This year, we are expecting the Aussie to decline to a low of by the third quarter. This decline is in part due to policy divergence between the RBA and the Fed, but also attributable to the unimpressive outlook for Chinese growth, Australia s largest trading partner, and the weaker outlook for commodity prices. Unlike the Australian dollar, the New Zealand dollar performed fairly well in Although the kiwi declined 6.7% against the U.S. dollar, it was still the second best performing currency last year. However, we expect the NZD to experience a more difficult Similar to Australia, we expect New Zealand s economy to be negatively affected by the decline in critical export prices. The Reserve Bank of New Zealand will likely take measures to devalue what they view as an overly priced currency, though the central bank s scope to do so may be limited to words instead of actions. We expect the NZD to depreciate to by Q4 as the RBNZ keeps its cash rate unchanged at 3.5%. Easing inflation and falling commodity prices will keep rates on hold and magnify policy divergence with the Fed, leading to a consistently weaker kiwi. The Aussie dollar fell in lockstep with commodity prices last year. AUD Forecast: Q Q Q Q NZD Forecast: Q Q Q Q