Analysts at the world’s largest investment bank have released their latest foreign exchange forecast report in which they reassess the world’s currencies now that 2017 is well underway.
The political dynamics of Trump, Brexit and Eurozone elections make for an interesting year in which many a forecaster is likely to struggle based on the unpredictability that politics tends to produce.
Yet, analysts have learnt much from the lessons of 2016, and JP Morgan lay out their expectations in the table below.
First, a snapshot of the prospects facing the currencies we at Pound Sterling Live primarily cover:
“We still expect some modest broad dollar strength to unfold over the first half of this year, But we have trimmed the extent of dollar strength from already relatively modest expectations, now only expecting the dollar index to peak 3.3% stronger by mid-year from current levels, a target 1%-pt lower than our forecasts last month.”
“We still expect GBP to remain weak on hard Brexit uncertainty, but forecasts were tweaked 2.3% higher in 1H and 1.1% in 2H (to range around 1.2 for most of the year but rise to 1.25 in 4Q).
If we are wrong and the economy remains resilient through the summer, we will need to review the extent of GBP weakness, and indeed it is not inconceivable GBP could appreciate for a time if the BoE does indeed hike.
“The forecast for EUR/USD is unchanged with a decline to 1.04 in Q1 on regional political risks (greater in 1H due to the French elections) and optimism on Trump’s policies, followed by a near-10% strengthening later in the year on ECB tapering (Q2 1.06, Q3 1.08 and Q4 1.15).
“Markets will move quickly to price in an inevitably less accommodative ECB stance, assuming mainstream parties prevail.”
“The combination of a more high conviction Fed cycle in 2017 and further RBA easing should see policy rate cross-over occur for the first time since the late 1990s. This will leave minimal carry support for AUD, which is particularly important given its vulnerability to a turn in China’s momentum or adverse developments in global trade.”
“The BoC will, at the very least, act as a constraint to CAD outperformance. January’s policy meeting and press conference asserted the BoC view that the US and Canadian cycles are currently divergent, and strongly implied that it was inappropriate that higher US rates from a cyclical repricing of the American economy should drag Canadian rates higher as well, and similarly that broad dollar strength should not drag the CAD TWI up either.”
New Zealand Dollar
“We expect NZD to fall through this year, reaching 0.62 at year-end. The support to growth from migration will fade, while the RBNZ - at the very least – are likely to hold rates steady as inflation normalises, pushing real rates materially lower."