ING Group 2019 Forecast Update: USD Capitulation Leads to Market Regime Change

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- USD to capitulate in 2019 as market frets about Federal Reserve pause. 

- EUR to enter shallow v-shaped recovery against USD, aided by the ECB.

- GBP volatility ahead as MPs squabble and March 2019 Brexit day looms.

The U.S. Dollar will capitulate to rivals next next year enabling the Pound and Euro to recover from punishing losses wracked up in 2018, according to the latest forecasts from ING Group

The global currency market has been dominated this year by a U.S. Dollar that emerged resurgent from a first-quarter decline after it became clear the U.S. economy was gathering pace just as growth elsewhere had begun to slow. 

That supported the Dollar by enabling the Federal Reserve to raise its interest rate repeatedly as other central banks moved only slowly, if at all. President Trump's trade war against China has also helped spur a bid for the currency.

But the ING team says the tables will turn on the greenback next year as the high from earlier White House tax cuts turns into a hangover for the economy and growth slows from close to 4% annualised, back to more normal levels. 

Markets have become increasingly attuned in recent weeks to the possibility that growth could soon slow and force the Federal Reserve to at least pause its interest rate hiking cycle. This is exactly what the ING team have in mind.

"Despite the normalisation in growth rates, we suspect the Fed has unfinished business and could take the policy rate another 100bp higher by 3Q19. Fed tightening does not always deliver a firmer dollar – and the dollar can fall quite sharply when the market thinks the Fed is nearly done with rate hikes. We see this kind of environment for 2019," says Chris Turner, head of strategy at ING. 

This would amount to a regime change that, for all other currencies, means 2019 could be more than just an exercise in damage limitation. Below is a selection of ING's views on what this could mean for individual exchange rates.

The Dollar index was quoted -0.08% lower at 97.05 Monday and is now up 5.1% for the 2018 year overall. It is up 8.3% since the beginning of April.

The Pound was -0.10% lower at 1.2722 against the Dollar but is down -5% in 2018, while the Pound-to-Euro rate was down -0.43% at 1.1212.

The EUR/USD rate was up 0.25% at 1.1340 but is down -5.45% this year, and the EUR/GBP rate was 0.67% higher at 0.8915 and has risen 0.78% in 2018.

Above: ING Group currency forecasts.

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Pound Sterling 

"The UK is barely four months away from leaving the EU, but the nature of the departure, let alone the future relationship with Europe, remains highly uncertain. Fundamental undervaluation has limited some of GBP’s downside since 2016. However, there would be no saving GBP under a no deal scenario."

"We think EUR/GBP could still have another run at the 0.91/0.92 area by the end of this year as PM May struggles to get her Withdrawal Agreement through parliament at the first attempt. There is now speculation of a second vote as late as February 2019." 

"There are not too many positive GBP scenarios. While some certainty over an orderly Brexit would be welcomed by markets, the move to fully price two BoE rate hikes in 2019 may only be worth 2-3% GBP upside. This is because we see very little progress on the UK’s ultimate relationship with the EU next year."

"It will probably take a year for the UK Parliament to work out what it really wants. And perhaps more importantly recent EU unity on the subject could easily evaporate as vested interests come to the fore - think Spain on Gibraltar, northern Europe on fisheries policy."


U.S. Dollar 

"2018 has proved a pretty miserable year for asset markets. International investment opportunities have been crowded out by a stronger dollar and an outperforming US equity market. Like a noisy dinner party guest, Washington has dominated the macro-political conversation."

"Looking into 2019, we don't see any major changes in Washington's foreign policy agenda – particularly trade. But on the domestic side, a divided Congress and a late cycle US economy should start investors thinking about a peak in the US rate cycle – and potentially a peak in the dollar as well."

"We think bearish flattening of the US yield curve can drive some modest dollar strength against the low yielders in the early part of 2019 – and keep already cheap risk assets undervalued as high US rates pressure test the global economy."

"As 2019 progresses, however, and as US growth slows towards trend, signals of at least a pause in the Fed cycle can allow risk assets to breathe again. A safe descent from the dollar summit should start the great rotation out of the US and into the undervalued asset markets overseas."



"The window for the independent EUR rally is closing and our constructive EUR/USD outlook for 2H19 is more about a negative USD view than a bullish EUR call."

"We no longer expect ECB policy to be a meaningful driver of the EUR/USD in the year ahead. The QE tapering adjustment is now behind us and, while the second step in the ECB policy normalisation is still ahead of us (deposit rate hikes), we now expect the cycle to be a shallow one – perhaps even one-and-done."

"With Eurozone growth gradually slowing and core CPI expected to remain below 2% throughout our forecast horizon (Figure 23), there will be little reason for the cautious ECB to tighten policy beyond the exit from the unorthodox measures (that is beyond exiting the negative rate environment)."

"We look for a V-shaped EUR/USD profile, first reaching 1.10 by 1Q19 as the mix of peaking Italian risk and the last push in the USD bull cycle weighs on the cross before rebounding to 1.20 by end-2019, driven by a turn lower in the USD and the ECB’s first depo hike in late-2019. This should give modest support to cheap EUR."


Australian Dollar 

"The last time the Reserve Bank of Australia (RBA) changed policy rates, it was August 2016 and then it was to cut rates 25bp from 1.75%. Since then, the economy has given little cause for them to alter rates one way or another."

"The RBA seems disinclined to suggest any imminent change to its policy, and the uncertain outlook for China reinforces that sense of caution. A positive conclusion to the US-China trade war is the most likely upside boost to the AUD in the coming quarters, though we see that as unlikely, and a sub-0.70 figure seems the more likely direction of travel."

"Further downside risks include the housing market, where high levels of mortgage debt and falling home prices could not only curb household confidence spending, but also spark some distress amongst Australia’s biggest mortgage lenders. Bank funding costs rose sharply in 2Q18 even without RBA tightening, and that has already been largely passed on in lending rates."

"Although the RBA says that the next rate move will probably be a hike, we believe there is two-way risk around this. We certainly don’t feel the RBA would be worried by a sub-0.70 AUD/USD outcome, with a far lower rate possible if downside risks to the growth and rate outlook materialise."


New Zealand Dollar 

"Until recently, New Zealand looked the runt of the $-Bloc, with weak growth and tepid inflation. Reserve Bank of New Zealand (RBNZ) Governor, Adrian Orr had hinted that rates could actually be cut further, not just be raised. Though like the RBA, his real message has been consistent with an expectation that rates were going nowhere fast."

"Bank bill futures implied rates in New Zealand and Australia hint at little expected action over the coming 24 months. Though expectations in New Zealand recently perked up as the unemployment rate in 3Q18 dropped sharply to only 3.9% (was 4.4%) and wages growth, though still subdued, also posted a surprising upwards surge of 1.4%QoQ taking ordinary time hourly wages growth up to 3.6%YoY - well ahead of wages growth in Australia."

"Despite the possibility of some weather related softness in New Zealand and the NZD, we suspect that the AUD/NZD cross could move closer to parity during 2019 as a result."


Canadian Dollar 

"The Bank of Canada (BoC) is set to remain in policy normalisation mode in response to an economy operating close to potential; Canadian growth has been strong and GDP growth should average 2.5% this year. Even with a mild slowdown forecast, growth should remain healthy – we expect 2.1% in 2019."

"On the surface, the Canadian labour market looks good, with the unemployment rate at a four-decade-low of 5.8%. But wages growth has declined for five months in a row now; and may point to some hidden slack. We do see a pick-up in wages on the horizon."

"Downside risks reside in the housing market. And here, to some extent, the situation resembles that of Australia. Higher rates and tighter mortgage rules have lowered residential investment. Gains from house price appreciation are shrinking as house price growth cools. This could ultimately weigh enough on Canadian growth expectations to cause the BoC to alter their normalisation plans and pause earlier than expected. This would certainly limit CAD appreciation."

"We see two further hikes in 1Q19 and 3Q19, respectively. This tracks slightly behind the three hikes we forecast for the Fed, which is still benefiting from the earlier fiscal boost. We are definitely not ruling out a third hike next year, but it is hinged on downside risks subsiding - particularly on wage growth picking up and the ratification of USMCA."


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