FX forecasts and associated rankings are published on behalf of Monex Europe and Monex Canada.
The Federal Reserve’s hawkish shift in June caught markets off-guard and resulted in broad US dollar strength throughout the remainder of the month. Despite calling for further dollar depreciation, Monex’s conservative stance on further dollar downside meant shorter-term forecasts (1-month/ 3-month) weathered the storm of a stronger dollar relatively well. This was especially the case within the EM space, where traditionally high-yielding currencies such as RUB, MXN and BRL continued to rally against the greenback.
Looking ahead, we have held our expectation of a broad depreciation in the US dollar, but have raised the starting base to reflect June’s price action and the Fed’s current stance.
Select currencies, namely JPY and CNY, are outliers to our expectations of a weaker dollar, largely due to their increased sensitivity to rising US yields relative to peers.
A stronger dollar in the wake of the Fed’s June decision meant that most of our 1-month forecasts in the G10 space failed to rank highly. However, our longer-term forecasts continued to rank well as the dollar’s initial rebound wasn’t as seismic within a longer-term context.
Stability in the EURGBP rate over the 1-month horizon highlights how idiosyncratic factors were largely absent in FX price action, with currencies trading on broader USD dynamics instead. Over the course of the next month, we continue to see broad USD dynamics as a dominant driver of G10 price action, with idiosyncratic factors and diverging monetary policy stances set to play an increasing role over the 3-to-12-month horizon.
Monex’s EM forecasts fared much better than the G10 forecasts over the 1-month horizon. Traditionally high-yielding currencies, such as RUB, MXN and BRL, saw exceptionally high rankings as domestic interest rate hikes negated the impact of rising US yields in the aftermath of the Fed decision. Over the coming quarter, we continue to expect a strong EM performance against the dollar, with the exception of CNY and TRY.
Author: Simon Harvey, Senior FX Market Analyst