In December ‘14 I published an article on the 2015 outlook for EURUSD. Now that half of this year has passed it’s a good moment to look back at the FX forecasts made at that time and also look forward to the remainder of this year.
In December last year spot EURUSD had already fallen some 15 cents from its high in May 2014, and traded around 1,2450. Consensus forecast was 1,20 for 6 months and 1,18 for 1 year. The individual bank forecasts shown were chosen to illustrate the fact that the sooner a Fed hike was expected the lower the forecasts were. Rabo expected a first hike in December ‘15 and Handelsbanken expected a first hike in 2Q15.
It is clear that although all three forecasted the correct direction, they all underestimated the magnitude of the downward move. Now, 6 months later, EURUSD is around 1,10 whereas in the meantime it has reached a low of 1,0465. And no rate hike has yet taken place.
|12-2014 / 1,2450||2Q15||4Q15||07-2015 / 1,1000||4Q15||2Q16|
Looking forward to the remainder of this year, consensus forecast (see also Consensus FX Report July http://bit.ly/1gLYFti) is at 1,0620 in 6 months and 1,0550 in 1 year.
The three banks mentioned above also still forecast a lower EURUSD. Rabo is close to consensus, Scotia is below consensus in 1 year and Handelsbanken is below consensus, expecting parity within 6 months.
Rabo still expects the Fed to hike not sooner than December. “In terms of US data, the June labour report data fell flat. Not only did the headline non-farm payroll number fail to meet expectations but wage data showed no growth on the month. Without pay increases, the prospect of demand led inflation are undermined suggesting that US inflation pressures could stay low for longer” But since all currency values are relative, “Lower for longer interest rate policy is associated with softer currencies and have bearish views on the AUD, NZD and CAD. It remains the case that the Fed and the BoE are still the two G10 central banks least likely to cut rates again this cycle. Consequently we continue to favour the USD and GBP vs. the rest of G10 in the coming months.
Scotia sees the Fed hiking a total of 50bps this 2H15 starting in September. “Consumer confidence and spending remain well supported by strengthening job and income gains, cheaper gasoline prices, low borrowing costs, and rising stock market pricing and home values. Continued strong job growth has pushed the unemployment rate to a seven-year low of 5,5%. The overall momentum in industrial activity, business spending, and capital goods orders remains soft amid the retrenchment in oil & gas drilling and sluggish export sales”
Handelsbanken sees the Fed hiking rates in 2H15, starting in September and then proceed really slowly. “Generally, economic conditions are favourable. The contraction in government spending, which dampened growth, has likely ended. Although US net exports have been hit by the strong USD in the last 12 months, we expect US businesses to stay globally competitive.”
So these three banks still expect a Fed hike to materialise this year, as they did in December last year. If history repeats and they underestimate USD strength once the rate cycle starts then EURUSD below parity is a distinct probability.