Lloyds Bank Commercial Banking, Bloomberg and Datastream : Monthly outlook for EUR , USD (GBP/EUR , USD/JPY, USD/CAD, AUD/USD )
Quotes from Lloyds Bank:
-The euro came come under renewed selling pressure over the past month. EUR/USD tumbled through 1.34 for the first time since last November, while EUR/GBP slid below 0.79 for the first time in almost two years. An escalation of the Russia/Ukraine crisis is a key downside risk for the euro in the short-term.
-The situation already appears to be having a detrimental impact on euro area activity, with the softening in recent German data particularly concerning. Euro area inflation has also continued to ease, with lower energy prices pushing CPI inflation down to 0.4% in July, its lowest since October 2009.
-Against this backdrop, the ECB left policy unchanged in August but highlighted the need for stimulus to underpin a still gradual and fragile recovery. The take-up of its Targeted Longer-Term Refinancing Operations in the coming months will be a key test. The deterioration in the euro area outlook has coincided with an improvement in the US. This divergence is expected to weigh on EUR/USD and EUR/GBP in the year ahead.
Quotes from Lloyds Bank:
-The USD has appreciated against its main peers in the past month. This in part reflects relatively strong US activity data, while geopolitical tensions in Eastern Europe and the Middle East may also be supportive. US Q2 GDP rose by a stronger-than-expected 4%, while the labour market continues to recover and robust July ISM surveys suggest Q3 GDP growth will also be rapid.
-Fed communications maintain a dovish tone, but markets are beginning to speculate the improving economic environment could lead to an earlier hike in interest rate. However, US treasury yields have been weighed down by the geopolitical risks.
-The FOMC tapered by a further $10bnin July (to $25bn) and QE is expected to end at their October policy meeting. Recent activity data in the euro area, Japan and UK have to varying degrees disappointed. While political developments may have a significant say on currencies in the short-term, we believe underlying economic fundamentals point to further dollar strength in the year ahead.
GBP/EUR weakness is likely to be short-lived
-A combination of geopolitics, mixed data and thin summer trading conditions has pulled sterling lower. Since hitting a peak of just under $1.72in mid July, GBP/USD has fallen to below 1.68. The pound has also ended the month slightly weaker against the euro, at €1.2550 (having reached a 2-yr high of 1.27 in late July).
-It is difficult to disentangle how much of sterling's drop has been due to temporary factors and how much reflects a genuine shift in sentiment. We stick with our long-standing view that GBP/USD remains overvalued and has scope to fall further over the coming months if,as we expect, forthcoming data continue to highlight the improvement in the US economy and BoE communications provide, at worst, a balanced assessment of the UK monetary policy outlook.
-The uncertainty surrounding the Scottish Referendum poses an additional downside risk. However, the relatively weaker growth and policy dynamics of the euro area suggest GBP/EUR weakness is likely to be short-lived. We look for GBP/USD and GBP/EURto end 2014 at 1.68 and 1.27, respectively.
USD/JPY likely to reach 110 by June 2015
-The yen has shown some signs of weakening over the past month approaching 103 versus the USD, although geopolitical developments have subsequently caused it to rally. Domestic news has generally moved against the currency. Disappointing retail sales, industrial production and housing numbers all suggest that economic activity slumped in Q2.
-Consensus expectations are that GDP will decline at an annualised rate of more than 7%, more than reversing the big rise in Q1. The slump primarily reflects the impact of the rise in sales tax at the start of April but is nevertheless boosting expectations that the BoJ will need to do more to support the economy. For now at least the BoJ is refusing to acknowledge this, citing higher CPI inflation as evidence that its policies are working.
-However, this primarily reflects a combination of the sales tax hike and a weaker yen and the impact of both will fade over time. Consequently we expect the BoJ to acknowledge the need for more stimulus later this year. This, along with continued signs of stronger US activity, is expected to push USD/JPY to 110 by June 2015.
USD/CAD likely to reach 1.10 by end 2014
-The CAD has declined sharply over the past month moving close to 1.10 against a generally stronger dollar. While the move primarily reflects USD strength rather than 'loonie' weakness some domestic factors have contributed to theback-up. Recent economic data has been mixed.
-CPI inflation climbed to anannual rate of 2.4% in June and May retail sales and GDP were stronger than expected but the unemployment rate remained elevated at 7.0%. More significantly for the CAD, the BOC continues to sound dovish.
-In its July Monetary policy report it noted that much of the recent rebound in inflation was due to one-off factors including the weak CAD, and that a for a more sustained rebound the excess capacity in the economy needed to be absorbed.
-This suggests that the BOC is in no hurry to raise interest rates. We suspect it may lag the Fed in tightening, which could lead to further currency weakness.We forecast USD/CAD at 1.10 at end 2014 and 1.14 at end 2015.
AUD/USD likely to fall to 0.92 by end 2014 and to 0.85 by end 2015
-The AUD has fallen over the past month approaching 0.92 versus the USD. The decline seems to be primarily due to a combination of stronger-than-expected US economic data along with some contribution from geopolitical developments. Domestic factors have played only a secondary role in the move.
-Some economic data have been weaker than expected. In particular, the unemployment rate posted a shocking rise to 6.4% in July, from 6.0% in June, its highest level in over a decade. This prompted some speculation that the next interest rate move will be downward, although most commentators still expect the RBA to hike rates some time next year.
-The RBA left policy unchanged after its latest meeting for the 12th successive month, although it again noted that the AUD was overvalued and the Statement on Monetary Policy was a little more dovish.
-With the rebalancing of the economy having further to run, we expect monetary policy to remain loose for an extended period, which is likely to undermine AUD/USD. We forecast AUD/USD to fall to 0.92 by end 2014 and to 0.85 by end 2015.
