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In G10 FX space, we’ve been cognizant of our standpoint and projections by the prospects of monetary policy divergences. Given that the past month has seen a substantial repricing and a reassessment of DM interest rates and monetary policy, it is not surprising that G10 FX forecasts have had more revisions than EMFX this month.
In particular, GBP, AUD and SEK forecasts have been upgraded given the revisions in our economist forecasts for policy rates (three rate hikes now expected from the BoE by end of 2018, no more rate cuts expected from RBA, an earlier rate hike from the Riksbank), although the upward revisions are larger for AUD (September 2018 forecast revised up by 5.5%) than for GBP and SEK (1.5% and 0.5% over the same horizon) as the conviction level is lower for:
1) The BoE given the uncertainty the evolving political landscape injects into the outlook and
2) The Riksbank has given its stubbornly dovish stance. It is worth noting that despite these upgrades, the resulting forecast profiles are still modestly bearish on AUD and GBP(AUDUSD 1-year target is 0.76; EURGBP is 0.92). Meanwhile, the already-bullish view on SEK is unchanged (EURSEK 1-year target is 9.20).
On the flipside, safe-haven space (JPY and CHF) downgraded:
Japanese Yen May Weaken as Risk Appetite Recovers
The hawkish shift from several G10 central banks has also shone the spotlight on the BoJ and the SNB as central banks that are likely to maintain their current dovish policy stance. This increased differentiation has prompted a downgrade in JPY and CHF forecasts this month.
The magnitude is larger for the yen (2% across the forecast horizon) given that it has exhibited the highest sensitivity to US yields and smaller for CHF (0.5%) given our assessment that Swiss fundamentals are currency supportive. Despite these changes, we maintain the bullish outlook on JPY (USDJPY 1-year ahead forecast is at 105) and a range-bound view on CHF (EURCHF at 1.15).
We already stated in our previous write up that the JPY depreciation was notable amid firm global risk sentiments due to receded concerns for North Korea developments and expectations for US tax reforms. Courtesy: JPM
