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CIBC's Monthly FX Outlook

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MONTHLY FX OUTLOOK
January 29, 2015
CURRENCY STRATEGY HIGHLIGHTS
Economics
•
Earlier this month, we pushed back our timeline for a Fed hike to June, as we will
need to see firmer wage growth to justify a move. Led by household demand,
a stronger US economy and positive spreads will support a further lift to the
greenback against other majors in the coming months and quarters.
•
The Bank of Canada surprised by doing more than just talking about a rate cut, and
we’re adding a further 25-bp cut to our forecast given the BoC’s evident impatience
with respect to oil’s hit to growth. While that second cut is priced in, markets may
then guess about a third. Add in an earlier-than-expected Fed hike and a sharply
weaker current account balance, and the C$ should slide to 77 cents US (USDCAD
1.30), 3 cents weaker than our forecast prior to the rate announcement.
•
Draghi’s unleashing of QE is extending the rotation away from euro-denominated
assets. That will help the EURUSD fall to US$1.07 by 2015 Q3, before a firming in
growth and solid current account allow it to recover through 2016.
Avery Shenfeld
ECONOMICS
TORONTO
(416) 594-7356
[email protected]
Nick Exarhos
ECONOMICS
TORONTO
(416) 956-6527
[email protected]
Jeremy Stretch
MACRO STRATEGY
LONDON
+44 (0) 207-234-7232
[email protected]
Patrick Bennett
MACRO STRATEGY
HONG KONG
+852 3907 6351
[email protected]
John H Welch
MACRO STRATEGY
TORONTO
(416) 956-6983
[email protected]
http://research.
cibcwm.com/res/Eco/
EcoResearch.html
EVENTS
TO
WATCH
IN
COMING MONTH
•
Greece’s new left-of-centre government must strike a deal with its Troika partners
to extend the nation’s current bailout, which expires on February 28th. As it waves
the threat of a full default, a Tsipras-led coalition will be a spark-plug for further
FX volatility, but an easing of fiscal austerity across the Eurozone would actually
be a plus for the region’s growth.
•
FOMC minutes due on February 18th will give us more insight on the eventual
tightening of US monetary policy, and how Fed thinking has evolved on the
expected path of inflation and wages.
CURRENCY OUTLOOK
End of period:
27-Jan-15
US$ Rates:
USDCAD
EURUSD
USDJPY
GBPUSD
USDCHF
AUDUSD
USDBRL
USDMXN
USDKRW
USDCNY
USDSGD
USDTWD
USDMYR
USDINR
1.24
1.14
118
1.52
0.90
0.79
2.57
14.57
1080
6.24
1.34
31.3
3.60
61.4
1.26
1.12
119
1.50
0.88
0.77
2.75
14.15
1100
6.25
1.35
31.3
3.65
61.5
1.30
1.09
122
1.45
0.89
0.76
2.80
13.85
1105
6.25
1.36
31.3
3.65
61.3
1.30
1.07
125
1.45
0.90
0.74
2.83
13.58
1110
6.20
1.35
31.2
3.55
61.0
1.28
1.10
122
1.49
0.89
0.76
2.97
13.55
1100
6.20
1.35
31.1
3.50
61.0
1.25
1.13
117
1.51
0.88
0.79
3.02
13.62
1090
6.15
1.34
30.9
3.47
60.8
1.23
1.16
116
1.53
0.86
0.81
3.05
13.63
1080
6.15
1.34
30.7
3.42
60.8
1.22
1.20
115
1.56
0.83
0.83
3.05
13.90
1070
6.10
1.34
30.6
3.40
60.5
1.24
1.23
114
1.58
0.83
0.85
3.04
13.86
1060
6.10
1.33
30.4
3.38
60.5
95
0.99
1.88
1.41
134
0.75
1.03
9.29
8.78
94
0.97
1.89
1.41
133
0.75
0.98
9.25
8.90
94
0.98
1.89
1.42
133
0.75
0.97
9.15
8.80
96
0.96
1.88
1.39
134
0.74
0.96
9.05
8.70
95
0.97
1.90
1.41
134
0.74
0.98
8.95
8.50
94
0.99
1.88
1.41
132
0.75
0.99
8.90
8.40
94
1.00
1.88
1.43
135
0.76
1.00
8.85
8.30
94
1.01
1.90
1.46
138
0.77
1.00
8.80
8.25
92
1.05
1.96
1.53
140
0.78
1.02
8.75
8.20
Other Crosses:
CADJPY
AUDCAD
GBPCAD
EURCAD
EURJPY
EURGBP
EURCHF
EURSEK
EURNOK
2015 I
2015 II 2015 III 2015 IV
2016 I
2016 II 2016 III 2016 IV
CIBC World Markets Inc. • PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 • Bloomberg @ CIBC • (416) 594-7000
CIBC World Markets Corp. • 3 0 0 M a d i s o n A v e n u e , N e w Yo r k , N Y 1 0 0 1 7 • ( 2 1 2 ) 8 5 6 - 4 0 0 0 , ( 8 0 0 ) 9 9 9 - 6 7 2 6
CIBC WORLD MARKETS INC.
Monthly FX Outlook - January 29, 2015
Yellen: Waiting for Wages
head to its 2.0% target over time. That timeline is a bit
quicker than is currently being priced in, which will see
the dollar outperform most majors through at least the
first half of this year.
America’s dollar wears the crown these days. And
because investors are clamouring to increase their
exposure not only to the USD, but also to strengthening
American economic fundamentals, we’re sold on King
Dollar extending his stay on the throne.
Impatient Poloz
There’s good reason for investors to favour an American
skew for their portfolios. The collapse in crude is
sending shockwaves through many developed and
emerging markets, but for the US, it’s a resounding
win. Despite the emergence of the shale energy sector,
America is still a large net oil importer and an energyintensive economy. Cheaper prices at the pumps,
and unlike much of the developed world, ongoing
job gains, are putting more dollars in the average
consumers’ pockets.
The Bank of Canada was looking to see momentum
in exports and capital spending before tightening
the screws on household sector borrowing and
homebuilding by raising rates. But the collapse in crude
prices, at least for 2015, leaves that dream deferred,
as the energy sector represents about a quarter of
Canadian exports and nearly 30% of business capital
spending. While we see oil starting a recovery before
year end, in the interim we could see the sector’s capital
spending slashed sharply, and production growth fall
well short of earlier expectations (Chart 2), according
to industry estimates.
Tame headline and core inflation have the Fed on
stand-by for now, and with that likely to continue,
we will have to see at least one precursor to inflation,
in the form of firmer wages, before Yellen & Co. feel
comfortable with lifting off of zero. But evidence from
prior tightening episodes suggests that policymakers
don’t wait for wages to flash red before pulling the
trigger on hikes (Chart 1).
Given those concerns, we’re calling for the Fed to raise
its target to 0.25% in June. The pace of the labour
market’s improvement will see wages heat up enough
by then to reassure the FOMC that core will indeed
Although Canadian consumers will save on gasoline,
the combined hit to industry and government revenues
will slow growth to less than 2%, and leave it more
dependent on continued household sector activity and
non-energy exports. As an “insurance” move, rather
than just talk about rate cuts as we expected, the Bank
of Canada delivered a surprise 25-bp move in January,
likely counting on the negative reaction in the C$ to
add some stimulus to exports, even if the response by
households is, after so many years of low rates, likely
to be rather tepid.
Chart 1 - Fed Hasn’t Historically Waited for Red-Hot Wages
Chart 2 - Oil Patch Spending Plans Slashed (L),
Production Growth Tailing Off (R)
Yr/Yr Wage Growth (%-pts)
Western C anadian C apital
Investment For Oil Production
4.5
70
3.0
C $ bn
60
200
50
1.5
150
40
100
30
50
20
0.0
Late 80's
Trough
Mid-90's
Mid-00's
at Fed Hike*
Latest
10
Cycle Peak
0
0
2014
2014
*at Dec-2014 for Latest
Source: BLS, Federal Reserve, CIBC
Forecasted C anadian Oil
Production Growth
300
000 bbl/day
250
2015F
2015
2016
Lost Due To Oil Rout
C urr Fcst
Source: Canadian Assoc. of Petroleum Producers, CIBC
2
CIBC WORLD MARKETS INC.
Monthly FX Outlook - January 29, 2015
Better Late Than Never as Draghi Delivers
While a further cut is now priced in, we’re not done
with the downdraft for the loonie. Taking the overnight
rate to 0.5% will no doubt have the market pricing in
some odds of a final trimming to 0.25%, even if, as
we expect, firm oil prices later this year obviates the
need for such a measure. Moreover, the Fed will end
up hiking earlier, and at least in 2015, more than the
FX market now expects.
After taking years longer than we thought was
justified, Draghi delivered QE to the Eurozone. With
purchases of EUR60 bn per month slated from March
of this year to September 2016, the ECB committed
to a plan that was, in sum, roughly twice as large as
the street had been expecting. At over a trillion euros,
these purchases will include covered bonds and ABS,
and will do work in achieving the previously mentioned
target of bringing total ECB assets back to 2012 levels
(Chart 4, left).
Finally, this is more than a rate spread story. Oil isn’t the
only commodity price that has softened. While nonenergy export volumes will gain some support from a
weaker C$, manufacturing is now running at fairly tight
capacity use rates, due to earlier plant closures. And in
nominal terms, exports will be crushed by the weakness
in prices for oil, natural gas and other commodities.
That will take the current account balance into sharply
negative territory, miles below the consensus outlook
that prevailed prior to oil’s nosedive (Chart 3).
The purchase program will help the continued
narrowing of peripheral spreads, and hopefully—by
taking a page from the US QE program—encourage
strength in regional equity markets. But the cheaper
exchange rate is likely to do more of the heavy lifting in
supporting growth, through its impact on net trade.
Indeed, the euro has been on a precipitous slide since
Draghi first hinted at easing, and official selling of the
euro assets over recent months dropped the proportion
of EUR-denominated holdings to multi-year lows in Q3
according to IMF data (Chart 4, right). Euro divestment
should continue as the ECB rolls out its program, with
a more competitive exchange rate and lower financing
costs boosting economic fundamentals.
Look for dollar-Canada to take a run at a nice round
target of 1.30, or flipped around, a Canadian dollar
worth only 77 US cents. Thereafter, a recovery in oil
prices, and a reversal of the Bank of Canada’s rate cuts
in 2016, suggest a return to a firmer loonie. But even
longer term, the need to have exports take the lead in
growth from housing and debt-financed consumption
points to a trading rate not far above 80 cents US.
While the euro’s recent and dramatic slide could be
bringing it closer to oversold territory, downside risks
to EURUSD should prevail over the near term, with
Chart 3 - Current Account Much Worse Than Earlier
Consensus
Current Account Balance
0
-10
-20
Chart 4 - Draghi’s Plan To Reflate Balance Sheet (L);
Euro Falling Out of Favour Amongst CBs (R)
-30
-40
EC B Balance Sheet Assets
-50
-60
3500 EUR bn
-70
3000
-80
2500
2000
1400
1500
1300
1000
Current CIBC Fcst
1200
500
0
Source: Consensus Economics, CIBC
1100
Sep-2016
Fcst
1000
QE Purchases
C urr Assets
Peak Assets
14Q3
14Q1
13Q3
13Q1
2012
12Q3
June-14 Consensus
2016
12Q1
2015
11Q3
2014
1500
11Q1
C$ bn
Total World FX Holdings:
C laims in Euros
1600 US$ bn
Source: ECB, IMF, CIBC
3
CIBC WORLD MARKETS INC.
Monthly FX Outlook - January 29, 2015
markets eyeing 2003 lows at 1.08. Notwithstanding
the risks that we overshoot to the downside, parity on
the euro-dollar cross seems unlikely. Sounder economic
fundamentals, along with a sizeable current account
surplus should see the euro eventually stabilize heading
into the second half, but not before EURUSD hits its
low of 1.07 in 15Q3.
While those economic fundamentals should be
supportive for sterling, in the near term, they may
have to play second fiddle to politics. The UK is facing
its first ever fixed-term, five-year Parliament, with
elections slated for May 7th. Though the results can’t
be predicted at this still-early juncture, neither of the
two large parties looks currently capable of a majority,
suggesting an inconclusive outcome, and the formation
of a potentially unstable government. Expect such
concerns to weigh on sterling during the first half.
BoE on the Sidelines, But for How Long?
While we agree that there’s only a small chance of a
hike before Q3, the market is becoming overly dovish
in its assessment of the Bank of England, with futures
pricing in less and less on end-2015 rates (Chart 5, left).
The UK shares several characteristics with the US on
the growth front, especially in its reliance on consumer
spending. And there, lower fuel costs, in addition to
retail competition which is suppressing price pressures
at the grocery store checkout counter, are giving Britons
a boost to their purchasing power.
More Than One Type of Japanese Deflation
Fluctuations in energy markets, and their sometimesdivergent effects on the economy and prices, have some
missing the mark with their expectations. Recently, the
BoJ downgraded its inflation forecasts for the current
fiscal year to 1.0% at their January meeting, from 1.7%
previously. However, that change in outlook didn’t
bring with it additional policy stimulus, confounding
some observers and investors, as this isn’t the sort of
inflation drop that concerns the central bankers.
Wages are also supporting British wallets, with a sturdier
labour market driving healthy growth in average
earnings (Chart 5, right). The ILO unemployment
measure breached the 6% barrier for the first time
since the Great Recession ended, driving the UK
misery index—i.e. the CPI plus the unemployment
rate—toward new cyclical lows.
For a major oil importer such as Japan, a cut in inflation
from weaker crude costs is an unmitigated positive, and
doesn’t signal the type of deflation that comes from
wider slack in the economy. Indeed, we should see
slightly firmer growth this year from cheaper energy
prices, and the restarting of some nuclear facilities.
Having said that, Japan’s economy isn’t out of the
woods just yet. While the BoJ didn’t expand net
monetary injections this time, crude’s slide will likely not
be enough to jar the economy out of its decades-long
slumber. Indeed, expect additional stimulus by the start
of H2 of the Japanese financial year.
Chart 5 - Market Discounting BoE Action More Aggressively
Than Fed (L), Despite Acceleration in UK Pay-Rates (L)
C hange In end-2015 Futures
0.0
UK AWE Regular Pay Whole
Economy
2.5 3M Avg YoY SA, %
-0.2
1.8
2.0
-0.4
In terms of the potential policy options, the BoJ
could end up being more creative, with current asset
purchases already including JGBs, exchange-traded
funds and real estate investment trusts. For the yen,
relatively low growth and lacklustre inflation will
support wider UST-JGB spreads, and in the process
USDJPY. And further stimulus in the back half of this
year should support strength in the Nikkei, whose
gains have been correlated with upside moves in
dollar-yen. That upside should be more clearly seen as
the divergence between the Fed and the BoJ comes
into sharper focus in the second half with the USDJPY
hitting 125 by 15Q3.
1.5
-0.6
1.0
-0.8
0.5
-1.0
Jul-14
Jul-13
Jan-14
Jul-12
Jan-13
BoE
Jul-11
Fed
Jan-12
-1.2
Jan-11
0.0
Source: ONS, Bloomberg, CIBC
4
CIBC WORLD MARKETS INC.
Monthly FX Outlook - January 29, 2015
Raising the Roof in Switzerland
Part of the rationale for such confidence is that despite
a generally sliding euro, the NOK has been the worst
performer versus the common currency over the last six
months. The economy has previously been supported
by consumption and business investment, maintaining
GDP growth above 2.5% in 2014. The latter of those
two underpinnings faces risks from the oil sector, but a
more competitive exchange rate should spur healthierthan-assumed growth prospects. Furthermore, with
the ECB undertaking QE, we expected a NOK rebound
across the forecast profile.
For over three years, coming up with a Swiss franc
outlook was a boring affair. But one monetary domino
appears to have hit another on the old continent.
Facing the imminent arrival of Draghi’s QE program,
SNB President Jordan balked at defending the Swissie’s
peg versus the euro.
Although the ceiling had been in place since the
beginning of 2011, accelerating asset purchases were
necessary to offset what was an investor exodus of
euros in favour of francs. The SNB had aggressively
expanded its FX reserves in December, adding CHF33
bn in the month to bring its balance sheet total to
nearly half a trillion francs. With the details of the ECB’s
asset purchase program still a matter of speculation,
and Greek elections pointing to a potentially disruptive
Syriza outcome, the central bankers feared a tidal wave
of further inflows.
Riksbank on Hold, for Now
Although we have modestly revised up our profile,
we maintain a bias towards a lower EURSEK over
the forecast period. However, we remain mindful of
additional Riksbank action, with inflation forecasts
set to be revised down next month and policymakers
standing pat at the last meeting. The minutes of the
December Riksbank meeting underlined that they were
unanimous in their latest decision, with their current
preference to push back the timing of the first hike,
and in effect extend the duration of forward guidance.
Unconventional measures are to be held, for now, as
an insurance policy.
In abandoning the ceiling, the SNB did push rates into
more negative territory, but that did little to stem the
CHF’s sharp appreciation. The magnitude of the move
was likely a surprise to the central bank, and a concern
for Swiss exporters. While that run against the euro
could be extended, the threat of renewed intervention
might temper the move, and we look for euro-swiss to
return to current levels as the common currency area
shows some signs of economic life later this year and
into 2016.
Taking a page from the ECB, discussions on
unconventional measures have included the prospect of
a move to a negative deposit rate, or bond purchases.
We would put more weight on the former, but neither
is as of yet probable. Central bank Governor Ingves
recently downplayed immediate deflation risks, even
if inflation currently remains well below target. The
argument has been that stripping out the energy
effects and the impact of lower rates, CPI would be
running at a comfortable 1.1% annual pace.
Second Norwegian Cut Unlikely
With oil’s slide also prompting the Norges Bank to
unexpectedly cut rates by 25 bps on December 11th,
we’ve revised up our forecast profile. However, the
revision is largely a parallel shift, in part as we are
looking for oil prices to firm in the second half of this
year.
The Governor has argued that the fall in the oil prices
will prove ultimately positive for the economy, which
will be necessary to reverse the downtrend in the PMI,
whose three-month average is now tracking the slowest
pace since early 2013. Though we discount action for
now, the unfolding of the economic backdrop will
determine monetary policy, and the path of SEK.
Furthermore, we aren’t convinced that the Norges
Bank will sanction a second rate cut at its March
meeting. Central bank Governor Oeysten Olsen recently
highlighted that while growth will be lower this year
than previously expected, there isn’t a crisis ahead for
the Norwegian economy.
5
CIBC WORLD MARKETS INC.
Monthly FX Outlook - January 29, 2015
Will Stevens Borrow Poloz’s Clippers?
Levying Brazil’s Credibility
The AUD has been another currency succumbing to a
resurgent USD over the last six months, depreciating by
almost 16%. And although in Canada we’re familiar
with the effect that crude’s drop has had on the loonie,
iron ore has seen a more persistent—if slightly less
dramatic—decline since the beginning of 2014 (Chart
6, left). It’s no doubt that the drop in Australia’s most
important commodity export is a key driver of the
AUD’s recent trajectory, but rates should also play a role
in the AUD’s performance this year.
New Finance Minister Joaquim Levy and team continue
on their mission to resuscitate Brazil’s credibility, but
the political limits to necessary fiscal restraint remain
uncertain. As we expect disturbing fiscal news next
week, in addition to more concrete news on the
Petrobrás’ corruption scandal, we are looking for the
USDBRL to breach the 2.80 level by Q2.
January IPCA-15 inflation came in around expectations
at 6.7% year-on-year. Inflation is now well above the
6.5% top of the target band and accelerating. Hence,
we expect inflation to breach 7.0% in February. The
government has finally stopped playing dangerous
games of price repression, but the transition will prove
rough. Needless to say, as we expected, the COPOM
raised the SELIC target 50 bps to 12.25%.
While the RBA continues to maintain that they’re
standing pat on policy—fearing what are already
elevated debt levels and housing market froth—
implied rate expectations have been sliding since
mid-September. That said, easing would likely have to
be preceded by macro-prudential measures to stem
accelerating housing market activity that is seen as a
stability risk.
Later this week, the Banco Central will report December
public sector fiscal data. Last minute creative accounting
has thrown a large and not yet revealed amount of
primary spending into January 2015 to make the
primary surplus look better than it actually is. Despite
promises to the contrary, the outgoing Finance Ministry
team continued to have federal banks over-declare
dividends and then recapitalize them with government
bonds. Despite these and other accounting gimmicks,
fiscal accounts have turned in their worst performance
through November 2014 in more than 15 years.
Moreover, state and municipal government finances
deteriorated substantially. Despite the huge improvement
and competence of the new team, we do not expect
enough adjustment even in 2015 to avoid a downgrade
below investment grade. Therefore, we still expect
downgrades by Moody’s and Fitch or Baa3 and BBB- and
a negative outlook from S&P on its BBB- rating.
As for the AUD, the currency remains well in overvalued territory, at more than 15% above the long
term OECD ‘fair value’ estimates (Chart 6, right). And
while we don’t expect it to close the gap with that
measure entirely, look for AUDUSD to breach 0.75—a
level recently mentioned by RBA Governor Stevens—as
the Fed begins tightening in June and demand for
commodities remains weak through the first half of
the year.
Chart 6 - Ore’s Fall Just as Great as Crude’s (L),
Aussie Still More Overvalued vs PPP (R)
Index=100
110
30
25
20
10
10%
2.5
8%
2.0
6%
1.5
4%
1.0
5
0
Now
2%
Source: Bloomberg, OECD, CIBC
TARGET
0.5
Forecast
IPCA inflation (% YoY, L)
Inflation target
6
Oct-16
Oct-15
Apr-16
Apr-15
Oct-14
0.0
Apr-09
0%
Oct-13
Jun '14
Apr-14
62% Iron Ore ($/tonne)
WTI ($/bbl)
3.0
Oct-12
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Jan-14
Mar-14
40
3.5
12%
Apr-13
50
14%
15
Apr-12
60
Chart 7 - USDBRL Spot, the SELIC Policy Rate, and Inflation
Oct-11
70
AUD
C AD
Oct-10
80
Apr-11
90
Oct-09
100
Puchasing Power Parity
(OEC D): Degree of
Overvaluation, %-pts
Apr-10
120
SELIC rate (L)
USD/BRL (R)
Source: Banco Central do Brasil, IBGE, CIBC
CIBC WORLD MARKETS INC.
Monthly FX Outlook - January 29, 2015
Banxico to Reverse Policy Move
Chart 8 - Mexico: USDMXN, Fondeo Rate, Headline and
Core Inflation (y/y %)
USDMXN rose early in the week until Wednesday
morning when the Bank of Canada unexpectedly
decided to cut its policy rate. We’ve changed our
Banxico rate hike forecast to July 2015 and revised
down to 50 bps tightening for all of 2015.
Forecast
7.0
15
6.0
14
5.0
12
4.0
11
3.0
INEGI reported that 1H January 2015 showed slowing
price pressures, with core CPI running at 2.4% year-onyear. The massive 62% drop in the Mexican oil basket
prices since June 2014 has caused a 12.7% jump in
USDMXN. This came on the heels of a surprise cut by
Banxico of its fondeo policy interest rate on the 6th of
June, 2014. Many analysts speculate that the Banxico
board now regrets that move.
2.0
1.0
9
Target Range
8
C PI inflation (YoY %, L)
Fondeo rate (Left)
2018
2017
2016
2015
2014
2013
2012
2011
6
2010
0.0
C ore inflation (YoY %, L)
USD/MXN (Right)
Source: Banxico, Bloomberg, CIBC
For our part, we have maintained that Banxico has
remained too loose and that their move exacerbated
that position. At the time, it seemed that Banxico
took a calculated risk and could undo the ease at a
later time. Inflation jumped in early 2014 after the
government implemented a tax reform (hike), leaving
Banxico sanguine as to its ultimate convergence back
toward the 3.0% target. This comfort led to the 50-bp
fondeo rate cut in June, but inflation fell much slower
than Banxico’s expectations to end the year at 4.1%.
CNY Appreciation on Trade-weighted Basis
USDCNY has been trading with a firm tone since early
December, underpinned by a stronger USD overall,
though impacted significantly by the weaker EUR.
USDCNY has recently been trading around 1.9% above
the PBoC daily fix, within sight of the +/-2% limit, at
which point the PBoC will intervene.
The PBoC has characterized the ECB QE decision as
possibly double-edged, with euro selling potentially
putting pressure for intervening in the CNY, while at
the same time it could underpin growth prospects for
the Eurozone. The stronger USD (weaker EUR) has
clearly already been placing some upward pressure on
USDCNY, with spot around 2% higher in the last three
months, 0.7% of that in January.
Although Banxico’s existing credibility diminished the
effect of USDMXN on inflation and also led the market
to a positive reaction to the rate cut, we felt the move
was risky. But the rise of USDMXN and persistently
high inflation should lead Banxico to change its stance.
Hence, we expect Banxico to become more hawkish
and start tightening in late 15Q2 (Chart 8), whether
the US Fed starts tightening or not. Higher growth and
tighter money should reveal that the current level of
USDMXN is too high even for lower oil prices in the
second half of this year.
In the same period against EUR, CNY is stronger by
10.4%. Talk of capital outflow from China or demand
to repay foreign borrowing is an easy touch point for
commentators to explain a higher USDCNY, though
our analysis of the supply demand balance, including
the trade surplus, still has the demand side as the
stronger.
7
CIBC WORLD MARKETS INC.
Monthly FX Outlook - January 29, 2015
KRW Tracking the JPY
rode into power with a great deal of goodwill and
expectation in May last year is, according to reports,
taking time to put the reform plan (including removing
layers of bureaucracy) into place. That need not be an
overwhelming concern as any progress is welcome,
though suggestions of slippage on the fiscal deficit
(next data due January 30th) will heighten concerns.
The external accounts are in better shape than in
the last couple of years, but worryingly, exports have
contracted in two of the last three months and a
blowout in imports in November would be a concern
if repeated.
Recent movements of the KRW have been closely tied
to the JPY, with both currencies having made near2% gains against the USD during the last month.
Previous South Korean policymaker concerns regarding
competitiveness risk from JPY weakness have not
disappeared altogether, but the number of comments
has dropped significantly.
We expect that is due in part to domestic economic
results remaining solid, exports are still expanding and
the economy posted moderate GDP of 2.7% year-onyear in Q4. We maintain a positive view on the South
Korean economy and expect steady growth through
2015. For the KRW, best positioning for strength will
be on a trade-weighted basis.
A positive has been the workings of the RBI. Governor
Rajan has been held in high regard since he took the
role in September 2013. Initially raising rates and
defending a sell-off in the INR in the wake of the ‘taper
tantrum’, RBI went on to rebuild foreign reserves when
USDINR subsequently fell below 60 and kept a tight
rein on policy as inflation has eased—of course with
no small degree of assistance from the lower oil price.
But nonetheless, with subsequent room to make its first
policy ease since May 2013, earlier than was expected.
We now anticipate a further 50-75 bps of easing this
year.
INR Gaining on Yield Demand
In the wake of the ECB delivering plans for QE, there is
widespread and valid expectation of an ongoing search
for yield. Within Asia, INR stands out as offering yield
and stability and should outperform a number of its
emerging market peers over 3-6 months while yields
on sovereign debt may also come down further (Chart
9). During the last month the INR has been the bestperformed currency within Asia, gaining 3.5% against
the USD.
MYR Being Challenged by Lower Oil
We caution, however, that this is a yield story first
and not an overtly bullish India view, as a number of
the challenges faced by the economy last year are
still present. For one, the Modi administration who
Amongst Asian currencies the MYR has been hit
hardest by the decline in oil prices and fears that
broadly lower commodity prices are here to stay (Chart
10). The MYR has lost 10% against the USD during the
last three months, 3.3% in January. The lower oil prices
in themselves are not the only fear, though are a simple
Chart 9 - Indian Bonds Have Attracted Foreign Inflow to
Support INR
Chart 10 - USDMYR Shows a Tight Correlation With Crude
Price
10.0
40
India 5-year yield %
Crude
50
9.5
3.7
USDMYR
3.6
60
9.0
3.5
70
8.5
80
3.4
90
8.0
3.3
100
7.5
3.2
110
Source: Bloomberg, CIBC
120
8
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
3.1
Sep-13
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
7.0
Source: Bloomberg, CIBC
CIBC WORLD MARKETS INC.
Monthly FX Outlook - January 29, 2015
Exposure to lower oil is indeed a risk, though quick
analysis of Malaysia’s exposures may be flawed. PM
Najib when speaking recently on rescinding of a goal
to bring the fiscal deficit to 3% of GDP (revised only to
3.2% with the benefit of spending cuts), was at pains
to point out that Malaysia is in fact a net importer of
oil—though the market and rating agencies didn’t care
too much for that reassurance. At the same time as
the budget review, the government revised its growth
target to 4.5-5.5% from the previous 5-6% and now
assumes oil at $55/bbl.
touch-point for markets and do show tight correlation
with USDMYR. Ahead of the oil price decline we had
been constructive on the outlook for the MYR and note
EURMYR still lower on a six-month horizon—since oil
dipped below $100/bbl.
Still, MYR underperformance within Asia has been stark
and at present levels we estimate the Malaysian tradeweighted index to be near the weakest levels since
2009. While further pressures cannot be ruled out,
we believe bearishness priced in MYR is now reaching
extreme.
INTEREST RATE
AND
End of period:
Canada Overnight target rate
2-Year Gov't Bond
10-Year Gov't Bond
US
Federal Funds Rate
2-Year Gov't Note
10-Year Gov't Note
Eurozone Refin.operations rate
2-Year Gov't Bunds
10-Year Gov't Bunds
UK
Bank rate
2-Year Gilts
10-Year Gilts
Japan
Overnight rate
2-Year Gov't Bond
10-Year Gov't Bond
ECONOMIC OUTLOOK
2015 I 2015 II 2015 III 2015 IV 2016 I
0.50
0.50
0.50
0.50
0.50
0.40
0.45
0.50
0.60
0.70
1.40
1.70
2.00
2.00
2.10
0.10
0.25
0.75
1.25
1.25
0.75
1.20
1.50
1.70
1.65
2.10
2.65
3.00
2.90
2.80
0.10
0.10
0.10
0.10
0.10
0.05
0.05
0.10
0.10
0.15
1.00
1.10
1.10
1.20
1.40
0.50
0.50
0.50
0.75
1.00
0.45
0.60
0.75
1.05
1.25
1.60
1.75
2.10
2.20
2.30
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.45
0.50
0.50
0.50
0.50
Canada
US
Eurozone
UK
Japan
Real GDP growth (%)
Unemployment rate (%)
CPI (%)
Real GDP growth (%)
Unemployment rate (%)
CPI (%)
Real GDP growth (%)
Unemployment rate (%)
CPI (%)
Real GDP growth (%)
Unemployment rate (%)
CPI (%)
Real GDP growth (%)
Unemployment rate (%)
CPI (%)
2013
2.0
7.1
0.9
2.2
7.4
1.5
-0.4
11.9
1.3
1.7
7.6
2.6
1.5
4.0
0.4
2014
2.4
6.9
1.9
2.4
6.2
1.6
0.8
11.6
0.4
2.6
6.3
1.5
0.3
3.6
2.8
2015
1.9
6.9
0.5
3.2
5.5
0.7
1.4
11.2
0.7
2.2
5.9
1.8
1.0
3.5
1.6
2016
2.5
6.5
2.3
2.4
5.3
2.7
1.9
10.8
1.5
2.4
5.5
2.0
1.3
3.5
1.8
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