FX markets remain caught between developments in the Gulf and the pivotal Federal Reserve meeting on 16 September. There is a very narrow path, which we favour, of lower energy prices and unchanged Fed policy leading to a benign weakening of the dollar. Whether that outcome materialises depends heavily on two soft US CPI prints ahead of the FOMC meeting. Failure to see those would likely point to a Fed hike and a stronger dollar.
Combined with a European Central Bank hike in September, we’re still looking for a modest rise in /USD to 1.18 by year-end. Unchanged Fed policy would also create more fertile ground for intervention to bring /JPY lower. A Bank of Japan rate hike in September could be the quid pro quo for US participation in intervention, but we suspect Washington also wanted to apply the brakes to the slide in North Asian currencies for fear of the renminbi handing back recent gains. We think /JPY has probably topped and /CNY can come even lower.
Within G10, a pro-risk environment should continue to favour the high-yielders – preferably with some commodity exposure. This should keep the Australian dollar and Norwegian krone in demand. Sterling is a relative high-yielder, but we see the doves at the Bank of England starting to spread their wings. Here, expectations of BoE tightening should start to fade this autumn. The UK Budget in October also poses an event risk.
Assuming our Fed call is correct, we should be heading into another supportive period for emerging currencies. Some of the highest yields are found in Latin America, and it is mainly the October elections in Brazil that pose a threat to the otherwise popular real.
In the EMEA region, we expect Turkish authorities to maintain their FX regime and the Hungarian forint should continue to attract inflows on the back of the euro adoption story.
Source: ING
