G10: Big trended moves now require strong political views - HSBC

Research Team at HSBC, suggests that for G10 the uncertainty can make it difficult to hold many strong directional views.

Key Quotes

“Overall, we expect the USD to gain further support. This is in part due to the increased uncertainty, which tends to see investors look for safety in liquidity – and in FX you don’t get more liquid than the USD. Also, our fixed income team now expects US rates to remain elevated, at least in the coming months. This will also provide some support for the USD.” 

“Where we do hold strong directional forecasts we have had to take a political view too. For example, we retain a very bearish GBP view due to the ongoing political challenges posed by Brexit. We believe that political uncertainty will curb foreign investment from funding the current account deficit, which means GBP will need to keep adjusting lower.”

“Where we don’t have a strong political view, we hold more neutral outlooks. The EUR’s own political challenges will put downward pressure on the currency in the near-term. But we believe that to take a long-term bearish view on the currency, one needs to believe the Eurozone is going to break up. We do not hold this as a base case view. The political pendulum is likely to keep swinging and the stalemate between political difficulties in Europe and the US will mean EUR-USD struggles to see a strong directional trend. We see EUR-USD at 1.05 at the end of 2016 but then see a gradual rise to 1.10 through the course of 2017.”

“In Japan, we do not believe there is enough local political will to see a bold shift in monetary policy toward helicopter money. But external political risks will dominate. The possibility of a US-China trade war, and a weaker RMB, alongside higher US rates, mean that the market will continue to price in more JPY weakness. We now see USD-JPY rising to 110.”

“Other currencies also face a balance of local political stability versus external volatility. For the CAD, a positive local story may be challenged by political risk from south of the border. We now see USD-CAD rising to 1.45 during 2017. The AUD and the NZD will not be immune to changing global trade conditions and China’s less stable outlook. NOK and SEK will see their structural strengths challenged by ongoing fears about the European project. We have noticeably tempered our expectations for SEK appreciation, and see EUR-SEK at 10.00 from 9.00 previously.”