Forex Forecast for June – Dollar, Euro, JPY and GBP in Focus – FX Empire
The euro has remained rangebound against the dollar in May, and volatility has eased. Europe moves to center stage in June. First, the ECB meets on June 4 and is widely expected to increase its Pandemic Emergency Purchase Plan by 250-500 bln euros. The modest usage of the Pandemic Emergency Long-Term Refinancing Operation (less than one billion euros), some observers see the terms (-0.25 bp below the zero repo rate) could be made more attractive. Second, and not entirely unrelated, the ECB’s Targeted Long-Term Refinancing Operation, with a rate that could be as low as negative 100 bp if specific lending targets are met, could see strong demand of a billion euros or more.
The amount is likely to be inflated, but the rolling into the new facility some past operations that were made on less favorable terms. Third, the EU heads of state are expected to decide on the joint effort to promote economic recovery among competing proposals. A compromise between conflicting interests could prevent a unanimous decision and precipitate a crisis. Even if successful, a joint bond may not be the prelude to a fiscal union as partisans argue. The European Stabilization Mechanism and the European Investment Bank issue bonds that are collective obligations. Still, if Europe is the sum of its responses to the crisis, its collective action now is critical.
(end of March indicative prices, previous in parentheses)
Spot: $1.1100 ($1.0955)
Median Bloomberg One-month Forecast $1.1075 ($1.0925)
One-month forward $1.1110 ($1.0960) One-month implied vol 6.4% (6.3%)
The dollar-yen exchange rate was stable in May between JPY106 and JPY108. Violations were rare and shallow. Public support for Prime Minister Abe has fallen drop, and this may be invigorating plans for a JPY100 trillion (~$926 bln) economic relief package. The decline in energy prices, which Japan does not exclude from its core measure that the central bank targets, drove the core CPI back below zero in April. The BOJ expanded its corporate bond and commercial support efforts, but the gradual rise in equities allowed it to slow its ETF purchases in May. Interest rate differentials are also low and stable, leaving the broad risk appetites to be the main driver of the exchange rate.
Spot: JPY107.85 (JPY107.20)
Median Bloomberg One-month Forecast JPY107.60 (JPY107.10)
One-month forward JPY107.80 (JPY107.15) One-month implied vol 5.4% (7.1%)
Nothing seemed to go in the UK’s favor in May, and sterling was dragged lower. Although sterling recouped some of its earlier losses that carried it to six-week lows in the middle of May (~$1.2075), it was still the weakest of the majors, depreciating nearly 2.75% against the dollar. The virus has hit the UK hard, and it is slower than many other countries to re-open. Several Bank of England officials have played up the possibility of adopting a negative target rate. It seems neither imminent nor inevitable. At the June 18 meeting, the BOE is more likely to increases is the bond-buying program by GBP100-GBP200 bln. Trade talks with the EU do not appear to be going particularly well, and this may also weigh on sterling.
Spot: $1.2345 ($1.2590)
Median Bloomberg One-month Forecast $1.2355 ($1.2375)
One-month forward $1.2345 ($1.2590) One-month implied vol 8.9% (8.6%)
The combination of the risk-on attitude, reflected in the continued recovery of equities and the better supply/demand factor that lifted oil prices by 60% in May, underpinned the Canadian dollar. The US dollar fell to two-month lows in late-May near CAD1.3725. The Bank of Canada meets on June 3. There seems to be no urgency to adjust policy at Governor Poloz’s last meeting. Macklem will succeed him, but there is a strong sense of continuity. Headline CPI fell below zero in April for the first time since 2009, but this was driven by the drop in oil prices and exaggerates the deflationary pressure. Underlying measures remain steady. There appears potential toward CAD1.3500-CAD1.3600 if risk appetites remain strong.
Spot: CAD1.3780 (CAD 1.3945)
Median Bloomberg One-month Forecast CAD1.3810 (CAD1.4140)
One-month forward CAD1.3800 (CAD1.3945) One-month implied vol 6.9% (7.4%)
Since the end of March, the Australian dollar has been the best performing major currency, appreciating about 8.5% against the US dollar. Australian equities were also a significant beneficiary of the reflation-trade with the main benchmark up nearly 5% in May. The Federal Reserve had greater scope to approach the zero-bound than the Reserve Bank of Australia and this has resulted in the return of a normal relationship, where Australia offers an interest rate premium over the US.
Meanwhile, Australia’s push for an independent investigation of the origins of the coronavirus have earned it the ire of Beijing, with a high tariff (80%) levied on Australia’s barley exports to China and a ban on some beef. While China can find alternative supplies, the same cannot be said Australian’s iron ore (at least in the short-run), which may limit the fallout.
Spot: $0.6665 ($0.6510)
Median Bloomberg One-Month Forecast $.0.6575 ($0.6460)
One-month forward $0.6665 ($0.6510) One-month implied vol 10.8% (11.6%)
The Mexican peso was the world’s strongest currency in May, gaining nearly 9% against the US dollar. It still is off almost 15% year-to-date, making it the third-weakest behind the Brazilian real (~ -24.5%) and the South African rand (~- 19.5%). The shift in the peso’s fortunes is more the result of the broader risk environment than an improvement in Mexico’s economic or political outlook.
The calmer markets and the global liquidity encourages asset managers to re-establish positions to benefit from Mexico’s high real and nominal rates that they were forced to cut in the dark days in March. The peso also serves a proxy for many less liquid or accessible emerging markets currencies. The JP Morgan Emerging Market Currency Index rose about 3.7% in May, the best monthly performance in more than four years. The dollar has surrendered around half of this year’s gains against the peso. The momentum could carry toward MXN21.00-MXN21.50, depending on the broader environment.
Spot: MXN22.18 (MXN24.15)
Median Bloomberg One-Month Forecast MXN22.38 (MXN 24.10)
One-month forward MXN22.28 (MXN24.20) One-month implied vol 18.5% (19.6%)
At the risk of taking Chinese macroeconomic data at face value, it does appear the economy is recovering. Nevertheless, more fiscal and monetary stimulus has been signaled. The year-over-year decline in producer prices warns that a profit squeeze is still materializing. As US-China tensions escalated, the dollar trended higher against the yuan. The dollar appreciated against the yuan for four consecutive weeks through the end of May. It is difficult to see how the tensions will ease in the coming months, especially given the US political cycle. In late 2019, the dollar rose to nearly CNY7.1850 and stopped just shy in late May.
However, given the tensions, the risk is for additional dollar gains, though tempered by China’s other objectives, such as deter capital flight and spur import substitution. In April, the Hong Kong Monetary Authority was intervening to stop the Hong Kong dollar from appreciating, which appeared to be in demand, given the interest rate pick-up. However, by the end of May, investors had become more concerned about the future of the peg that the forward points widened to the most in two decades.
Spot: CNY7.1365 (CNY7.0630)
Median Bloomberg One-month Forecast CNY7.1150 (CNY7.0620)
One-month forward CNY7.1350 (CNY7.0760) One-month implied vol 4.7% (4.3%)
For a look at all of today’s economic events, check out our economic calendar.
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