The US Dollar is expected to outperform generally by ANZ while analysts also suggest that the majority of Pound Sterling's declines against the Euro and Dollar are now behind it.
- ANZ do not see much more downside in Pound to Dollar exchange rate
- Euro to Pound Sterling exchange rate peak at 0.89
- Euro to Dollar rate to move down towards the 1.00-1.05 range
The Dollar index is reaching a major level at 100 where it has been rebuffed several times before.
Can the Dollar make break above the sacred 100 level and push into unchartered territory or whether it will be rejected again?
ANZ say they see a further leg higher in the Dollar owing to their expectations for an elevated inflationary outlook for the G7.
Analysts argue higher inflation in developed countries will halt outflows to emerging markets and commodity currencies such as AUD, NZD and CAD - outflows which had been part of a global hunt for yield in a ‘zero-yield world’.
Rising inflation will likely see central banks raise their interest rates at a rate faster than markets are presently anticipating.
Thus the desire for investors to hunt yield elsewhere diminishes.
The source of rising inflation is likely to come from rising commodity prices.
“Even if oil prices remain at USD50/bbl, this will be sufficient to push G7 inflation higher towards 2%, based on past relationships,” says ANZ's head of FX Daniel Been.
Higher commodity prices will also increase inflation in China, pushing up the value of their goods and preventing them from ‘exporting inflation’.
“In addition, China will cease exporting deflation to the rest of the world and will start putting some upward pressure on inflation instead.
This is because China’s PPI – which has been negative since 2012 – has turned positive in September 2016, and is set to head higher due to higher commodity prices and the weaker RMB,” adds the report.
Increased Political Risk in Europe
Another source of Dollar Index strength is likely to come from a weakening Euro, since the Euro is the Indexes most weighty component.
ANZ's Been sees Euro weakness as emanating from increased political risk in Europe.
First up is the Italian referendum on Constitutional reform on December 4.
“Should the Italian referendum fail – which opinion polls suggest it will – there may be an election called in Italy early next year.
“Elections are also planned in the Netherlands, France, and Germany in 2017.
“These suggest some political risk premium will be priced into the EUR and we look for a move down towards a 1.00-1.05 range over the coming months,” says the report of the EUR/USD.
They also see UK Brexit concerns continuing to keep the pound subdued, although it may range trade rather than weaken any further as, “we feel the currency may have adjusted sufficiently”.
Summary of Forecasts For Major Pairs
Despite their strong-dollar thesis ANZ do not see much more downside in GBP/USD, but rather a continued range.
It will not be until March 2018 that GBP/USD reaches their absolute forecast high of 1.25.
For most of the rest of the time, the pair will trade within the early 1.20s with a bias towards the 1.2000 level.
EUR/GBP has peaked at 0.89 and from here on in its downhill.
They forecast a step fall – first to 0.88 in Q4 2016, they 0.87 in June 2017 and finally down to 0.84 in December 2017.
As already mentioned, they see EUR/USD range trading below 1.09 and above 1.05 until 2018.
ANZ see USD/JPY actually falling to 100 for most of the long-term, rising only to 105 in the first quarter of 2018.
They see substantial losses for both the antipodeans versus the dollar in line with their rising G7 yield thesis, with AUD/USD falling from the current 0.76 to 0.66 in a steady step decline and NZD from its current 0.72 to 0.64 in a similar fashion.