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FX Blog- Month Ahead Outlook for Major Currencies April 27, 2008

April 27, 2008

Forex Forecast of Major Currency Pairs


Forex market sentiment around the USD has taken a major swing in a positive direction in the latest week. Behind the turn in sentiment has been a nearly universal concern about mounting inflationary pressures. Also in the U.S., there is a growing perception that the FOMC will signal a pause in easing after it cuts its Fed Funds target by -25bps on Wednesday. The USD turn came after the markets managed to trade just above the EUR/USD 1.60 line and pushed crude oil to a few cents shy of the $120 line. The more hawkish European central bankers continue to fret about inflationary pressures and even suggested the possibility of an ECB rate HIKE. That trial balloon floated like a lead zeppelin. The ECB will not even be considering a rate hike in the current climate. Concerns about economic weakness in several regions of the Euroarea continue to mount, but the central bank has been turning a deaf ear in that direction. As we noted here recently, markets seem to perceive that the EUR/USD is heavily overvalued at current levels. There were reports that hedgers were taking advantage of the rally in the EUR/USD to the 1.60 level to take the unusual step of hedging long EUR positions for several years into the future.

The economic outlook for Europe is mixed. The German economy continues to perform fairly solidly, while other economies (Italy, Spain and Italy) are in poor shape. There are rumblings in the forex market that the European common currency could face a major crisis with a number of southern European counties threatening to defect based on discontent with the policies of the central bank targeting only the German economy, but those rumblings have dissipated.

Although U.S. economic data continue to deteriorate, short-term interest rate differentials against the U.S. currency may now be stabilizing. In mid-March, the Fed cut its discount rate in two steps by 100 bps and the Fed Funds target by 75bps to 2.25%. The markets now expect a -25bp rate cut on April 30.

In Japan, the economy appears to be moving into a recessionary period. The government finally has named a new head for the BOJ, Shinkawa. No important changes in monetary policy appear to be in store. The JPY would be at risk if the USD continued to advance.

As for the market outlook, forex trading appears more clearly to be in a transitional phase away from the weak USD period that we have been suggesting. Traders should continue to play the markets cautiously without strong convictions until a clearer view emerges. It would be a major shift ingrained USD bearishness were USD sentiment to turn positive.



The U.S. and Eurozone (ex-Germany) economies are slowing. The U.S. is much further along in the process. Note below in the U.S. Monetary Policy outlook insert below that official U.S. rates appear to be approaching a floor.


UNITED STATES

GVI U.S. Feberal Reserve Bank Policy Meeting Preview

  • Decision: April 30 at 19:15 GMT.
  • Fed Funds rate: 2.25%
  • Expected Decision: -25bp cut
  • Short-term market sentiment contnues to exert a strong infuence on Fed policy decisions. On Tuesday March 18, the central bank cut its funds target by -75bps to 2.25%. That week it also reduced the discount rate by 100 bps to 2.50%. The focus of policy is to reliquify the U.S. financial system. The markets are now expecting a -25bp rate cut on April 30. Many then see the central bank also signaling a policy pause.

FEDERAL RESERVE Policy Objective: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

uscpi

The chart above shows year/year core PCE for the U.S. relative to its its reported "comfort zone for this key price index. Headline and Core CPI figures are also shown.

ezcpi

ezcpi




s-t rates

The above monthly U.S. employment chart is included because its the most closely followed data release each month, and because one of the objectives of the Fed is to maximize employment.

s-t rates


s-t rates

The chart above shows the current three month libor rate, the current Fed funds target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel U.S. interest rates are headed.




interest rates

The chart above shows the U.S. Fed Funds rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

Major Currency Pairs - Currency Forecasts- Monthly Perspective

foreign currency pairs

The ECB has been sending signals that its monetary policy is neutral (see policy insert below). Notable also have been the effective tightening of policy due to rising credit spreads. The ECB remains fixated on its anti-inflation mandate to the chagrin of key politicians.


EUROZONE

GVI European Central Bank Policy Meeting Preview

  • Decision: May 9 at 12:45 GMT.
  • ECB Refi rate: 4.00%
  • Expected Decision: No Change
  • ECB President Trichet signaled no future policy changes after its latest meetng. The central bank is still talking tough about inflation. Key Eurozone PMI figures, which correlate well with GDP, are pointing to a developing economic slowdown.

    ECB Policy Objective: The primary objective of the ECB's monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.

    ezcpi

    The chart above shows year/year HICP (Harmonized CPI) for the Eurozone relatrive to its "below 2%" target level.

    ezcpi

    ezcpi




s-t rates

The chart above shows the current three month libor rate, the current ECB  "refi" rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Eurozone interest rates are headed.


interest rates

The chart above shows the ECB refi rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

forex forecast services The Japanese economy has been slowing and political leadership is in disarray. Tokyo has been uncomfortable with the recent stronger JPY.



JAPAN

GVI BOJ Policy Meeting Preview

  • Decision: April 30
  • Current Overnight Target Rate: 0.50%
  • Expected decision: No change.
  • There is modest market speculation now about a future BOJ rate cut. Note below that core and headline CPI remain mildly deflationary. Also the economy has started to slow. The political situation also is unstable.

BANK OF JAPAN Policy Objective: The Bank of Japan Law states that the Bank's monetary policy should be "aimed at, through the pursuit of price stability, contributing to the sound development of the national economy."

Nationwide CPI

The chart above shows year/year core nationwide CPI and the reported BOJ goal of between 0% and 2% for this price index. 

Manufacturing PMI


s-t rates

The chart above shows the current three month libor rate, the current BOJ overnight rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Japanese interest rates are headed.


interest rates

The chart above shows the Japanese overnight rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

major currency pairs The BOE cut rates at its April meeting as expected. Future rate reductions are seen. The GBP has been under pressure thanks to the credit exposure of U.K. institutions to the sub-prime debt. The BOE caved following considerable criticism because of its slow policy response to the sub-prime crisis. It appears that the BOE has been leaning against it banks to deleverage as well.


UNITED KINGDOM

GVI Bank of England Policy Meeting Preview

  • Decision: May 9 at 12:00 GMT.
  • BOE Repo Rate: 5.00%
  • Expected Decision: Possible -25bp rate cut.
  • BOE policy makers continue to balance concerns about inflation against the risk of a slowing economy. Note below that both the U.K. Manufacturing and Services PMIs have turned south. Inflation data are mixed. See also that the short-term credit markets are expecting further rate reductions over time.

    BANK OF ENGLAND Policy Objective: The Bank's monetary policy objective is to deliver price stability, low inflation, and, subject to that, to support the Government's economic objectives including those for growth and employment. Price stability is defined by the Government's inflation target of 2%.

    ezcpi

    The chart above shows year/year CPI for the U.K. relative to its 2% target for this key price index. 


    ezcpi




s-t rates

The chart above shows the current three month libor rate, the current Repo Rate  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel U.K. interest rates are headed.


interest rates

The chart above shows the U.K. repo rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

forex currency market reports The Swiss National Bank tries to maintain a stable relationship of the CHF vs. the EUR. It is never pleased with weakness of the CHF against the EUR. SNB President Roth has sent a clear signal that the final rate hike of this tightening cycle has probably been seen.



SWITZERLAND

GVI Swiss National Bank Policy Meeting Preview

  • Decision: June 19 at 12:00 GMT.
  • SNB 3mo Swiss libor target: 2.75%
  • Expected Decision: No Change
  • There are concerns that the global economy is slowing. The SNB has indicated that the peak in interest rates has been reached. The rise of the CHF has been a restraint on the economy as well. The Swiss CPI (see below) is well below its target ceiling. The SNB manages the value of the CHF as critical element of monetary poilcy.

    SWISS NATIONAL BANK Policy Objective: The National Bank equates price stability with a rise in the national consumer price index (CPI) of less than 2% per annum. In so doing, it takes account of the fact that not every price movement is necessarily inflationary. Furthermore, it believes that inflation cannot be measured accurately. Measurement problems arise, for example, when the quality of goods and services improves. Such changes are not properly accounted for in the CPI; as a result, inflation, as measured by the CPI, will be slightly overstated.

    chcpi

    The chart above shows year/year CPI and the Swiss goal of less than 2% for this price index. 

    chpmi




s-t rates

The chart above shows the current three month libor rate, the current three-month Euro-Swiss target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Swiss interest rates are headed.


interest rates

The chart above shows the Swiss three-month Euro-swiss rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

currency exchange forecast The Australian economy might be starting to slow. A key focus for the Reserve Bank of Australia remains above target inflation, plus strong employment and commodity demand. This has kept the AUD underpinned. The Reserve Bank of Australia is still trying to rein in price pressures.


AUSTRALIA

GVI Reserve Bank of Australia Policy Meeting Preview

  • Decision Anouncement: May 7 at 03:30 GMT.
  • RBA Cash Rate Target: 7.25%
  • No rate changes likely.
  • Inflation continues to be a problem for the Reserve Bank. Nevertheless, officials have suggested that some softness might be developing in the economy. This suggests that rates have reached their cyclical peaks. Note in the chart below that the two RBA core price measures are testing the top end of the bank's allowable limit. The global economic slowdown and historic highs of AUD are likely to restrain the risk of future rate hikes.

RESERVE BANK OF AUSTRALIA Policy Objective: The policy objective is a target for consumer price inflation, of 2-3 per cent per annum. Monetary policy aims to achieve this over the medium term and, subject to that, to encourage the strong and sustainable growth in the economy. Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy.

aucpi

The chart above shows year/year and the CPI target of 2% to 3% for this price index. 

aupmi


s-t rates

The chart above shows the current three month bank bill rate, the current Cash Rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Australian interest rates are headed.


interest rates

The chart above shows the Australian overnight rate target, three month bank bills, and two- and ten-year bond yields over the past twelve months.

us currency Trading in the CAD has been volatile recently as JPY carry trades are unwound. The Bank of Canada has been making aggressive rate cuts to keep pace with the Fed. The fear is that the Canadian economy will be dragged down by U.S. weakness. Additional rate cuts are in the pipeline.


CANADA

GVI Bank of Canada Policy Meeting Preview

  • Decision: June 10 at 14:00 GMT.
  • BOC Overnight Target Rate: 3.00%
  • Expected Decision: Odds favor another -25bp rate cut. The latest policy statement and BOC comments suggest that further cuts are in the pipeline.
  • There are concerns that the Canadian economy could be negatively impacted by the global economic slowdown and the high level of the Canadian currency. Note below that both the Ivey Manufacturng PMI might have started to weaken. BOC core inflation is below bank estimates. The high level of the Canadian currency. Short-term credit markets anticipate a few additional rate cuts.

    BANK OF CANADA Policy Objective: The Bank of Canada aims to keep inflation at the 2 per cent target, the midpoint of the 1 to 3 per cent inflation-control target range. This target is expressed in terms of total CPI inflation, but the Bank uses a measure of core inflation as an operational guide. Core inflation provides a better measure of the underlying trend of inflation and tends to be a better predictor of future changes in the total CPI.

    cacpi

    The chart above shows year/year CPI-X (core CPI) and the target of 2% for this price index. 

    PMI


s-t rates

The chart above shows the current three month Banker Acceptance rate, the current BOC overnight rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Canadian interest rates are headed.


interest rates

The chart above shows the Canadian overnight rate target, three month Bankers Acceptance, and two- and ten-year bond yields over the past twelve months.

John M. Bland is a co-founder and partner of Global-View.com. Prior to Global-View.com, he was a Vice-President and senior dealer in a forex inter-bank and futures trading arm of a subsidiary (ContiCurrency) of the Continental Grain Company in NYC. Previous to that, he was one of the early members of the Chemical Bank corporate advisory service in NYC, and also worked in international liability management for that bank. John holds an MBA from the Hass School at the University of California at Berkeley and a bachelor's degree in International Economics from Berkeley.

 

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John M. Bland, MBA
co-founding Partner, Global-View.com

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