ING Group Forecast Update: Modest Declines for USD as GBP, CAD and Antipodeans Recover Lost Ground

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- USD index to fall a modest 2% in 2020 says ING Group.

- EUR inches higher to 1.13 as other score more solid gains.

- GBP, AUD, NZD and CAD all to advance on USD in 2020.

- As investors look for yields that can hold own Vs the USD.

- Amid ongoing trade talks and stagnating global economy.

The Dollar has defied downbeat expectations in 2019 but is now set for modest declines as investors chase resilient bond yields and faster growth outside of the so-called 'G3 economies, according to new forecasts from ING Group, which envision the Pound-Dollar rate hitting a post-referendum high in 2020.

Exchange rates have retrodden the contours of 2018 throughout much of the current year, with the Dollar index rising a few percentage points as the Euro and antipodean currencies underperformed in the face of a slowing global economy, falling domestic interest rates and best-in-class U.S. bond yields. The greenback has risen 2.4% in broad terms this year even after accounting for respectable performances from the Canadian Dollar and Pound Sterling. 

Sterling has arguably produced the loudest echoe of its 2018 trend, gaining sharply in the first quarter only to sustain punishing losses over the subsequent six months that have ultimately given way to a final quarter rally. The British currency almost touched the 1.34 handle against the Dollar in March only to collapse through the summer, hitting a nadir of 1.1960 in early September before rallying 8.8% to its peak of 1.3111 in the latter half of October. 

Above: Pound-to-Dollar rate shown at daily intervals.

"We think the call for 2020 is to identify those undervalued currencies able to hold their own against the dollar – but which are also backed by both yield and growth," says Chris Turner, head of research at ING.  "Screening for these characteristics we find that commodity currencies should perform well in 2020. In the G10 space, we like the currencies of Norway, Canada and New Zealand. In the EM space, BRL may offer one of the best stories in 2020."

Many analysts had suggested this time last year that 2019 would bring a marked downturn in U.S. Dollar exchange rates as the world's largest economy slowed and the Federal Reserve (Fed) called time on its interest rate hiking cycle. That was supposed to drive investors out of the Dollar and toward further afield places where the currency market pastures were meant to be greener. 

However, and despite slower growth and three Fed rate cuts, the rest-of-world economy has remained in the doldrums amid the ongoing U.S.-China trade war. That's seen other central banks also cut their rates, leaving the Dollar boasting still-best-in-class bond yields that've proven a significant draw for safe-haven and yield-seeking investors.

"Unlike many others, we don’t see a clean dollar bear trend in 2020. Continued money printing from G3 central banks mean relatively subdued ranges for G3 currencies, with the EUR emerging as the funding currency of choice," Turner says. "Even if the dollar did start to sell off, we doubt European currencies would be major beneficiaries, largely because this is not 2017 – when pent up European optimism was unlocked after the French election and the ECB signalled the ‘all-clear’ on the deflation scare."

Above: Dollar Index shown at daily intervals.

The stagnating global economic environment combined with the looming 2020 U.S. presidential election is set to dominate the currency market next year, with each acting as an opposing force on the Dollar, but especially the Euro-to-Dollar rate. President Donald Trump will bid for re-election in November 2020 but his return to the White House is far from guaranteed. 

White House economic policies have provided a powerful tailwind of support to the Dollar in the last two years, with tax cuts buoying the greenback from the domestic side while the trade war was kept flows biased toward the U.S. currency on the international side. However, the continuity of those policies could be questioned next year by opinion polls once the campaigns get underway and that might not be good for the Dollar. 

Below is a selection of ING's views on what this environment is likely to mean for individual exchange rates.

Above: ING Group exchange rate forecasts for 2019/20.



Pound Sterling 

"The GBP outlook for the coming 1-3 months primarily hinges on the outcome of the 12 December Parliamentary elections and its implications for the Brexit path. As current polls are predicting a non-negligible lead of the Conservative Party (and it achieving a Parliamentary majority) such an outcome should be beneficial for sterling as it would sharply increase the odds of the Withdrawal Agreement being ratified in Parliament and thus reduce the Brexit uncertainty."

"We expect EUR/GBP to reach 0.83 (and GBP/USD to 1.33) over the next two months....GBP trades with a modest premium vs EUR based on our short-term financial fair value model). So while positive, more Brexit clarity should lead to a less pronounced GBP rally compared to the one observed this October when GBP corrected from stretched and oversold levels."

"The issue of extending the transition period is, in our view, another risk event for GBP and should therefore tame the potential optimism in the case of the Parliament successfully ratifying the Withdrawal Agreement and the UK leaving the EU. That’s why we kink EUR/GBP and GBP/USD profiles, pencilling initial GBP strength (next 1-3 months) and some reversal in 2Q20."


U.S. Dollar 

"We think the US yield curve has been a good barometer for risk appetite and secular stagnation fears have largely been a dollar positive. Our rates strategy team see the US 2-10 year curve locked in a zero to 30bp range for 1H20, largely based on the soft US macro view and the possibility of one or two more Fed rate cuts expected by our US macro team."

"We don’t see a clean dollar bear trend in 2020. Continued money printing from G3 central banks mean relatively subdued ranges for G3 currencies...Even if the dollar did start to sell off, we doubt European currencies would be major beneficiaries, largely because this is not 2017 – when pent up European optimism was unlocked after the French election and the ECB signalled the ‘all-clear’ on the deflation scare."

"When examining the presidential election and its implication for economic policy there are three key areas to focus on. Firstly, there is the stance of fiscal policy...Secondly, there is the regulatory framework...there is protectionism."

""Re-election of Donald Trump would likely see the pursuit of looser fiscal policy (should Congress allow it), reduced regulations and fullon protectionism. Despite consistent pressure on the Fed to cut, this policy mix is USD bullish."



"We remain unexcited about the EUR. The currency is no longer meaningfully cheap vs. USD, growth remains sluggish and there are little prospects of ECB tightening. With EUR offering deeply negative implied yields, it should be used as the funding currency of choice for investors searching for yield in the undervalued EM FX world."

"A 2017-like EUR/USD rally is off the table as EZ fundamentals are weak. We look for a range bound EUR/USD (1.10-1.15) next year, with clear downside risks...With the forward curve rather steep (12-month EUR/USD forwards at 1.1265 vs spot 1.1016), speculative long EUR/USD positions remain unattractive and offer limited return potential."


Australian, New Zealand and Canadian Dollars

"We consider the $-bloc as a highly attractive pool of currencies for the coming year. The main underlying assumption for this view is that no further deterioration in the US-China trade spat will contribute to a further stabilisation in global risk sentiment that will ultimately push investors towards high yielding and pro-cyclical currencies in an attempt to secure attractive returns."

 "Better China-related sentiment should pair with the end of RBA easing to fuel a realignment of the very cheap AUD with its medium-term fair value. NZD: Valuation, abating risk aversion, stable commodity outlook and the RBNZ’s neutral stance all point to Kiwi outperformance next year (vs USD and AUD). CAD: Even if the BoC delivers one insurance cut, CAD should be a G10 outperformer, benefiting from superior risk adjusted carry and valuation."

"We expect carry trades to be the strategy of choice thanks to low expected volatility and this should come particularly to the benefit of CAD that currently holds the most attractive risk-adjusted carry. The yield on AUD and NZD appears less attractive after their respective central banks cut rates in 2019, but both currencies can leverage on their very attractive undervaluation."



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