Forex
EUR/USD forecast for 2024: UBS presents 3 scenarios that could lead to a decline
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The euro (EUR) has remained in a narrow trading range against the US dollar (USD) for much of 2023, with UBS analysts predicting that this trend may persist into the entire 2024.
According to UBS, a combination of political, economic, and market dynamics makes forecasting the exchange rate particularly challenging. The key factors influencing this outlook include the outcomes of the French elections, the UK’s economic policies under its new administration, and upcoming US economic data releases.
Impact of French Elections
The recent French elections have had a significant impact on the EUR/USD outlook. The elections resulted in a hung parliament, with President Emmanuel Macron’s centrist Ensemble group performing better than expected.
The far-right National Rally (RN) party suffered a significant defeat, coming in third behind the left-wing New Ecologic and Social People’s Union (NUPES) coalition and Macron’s centrists.
UBS analysts noted that the election results remove the immediate risk of a conflict between the next French government and the European Union. With RN’s radical proposals off the table, the likelihood of EUR volatility driven by French political uncertainty has diminished.
However, the formation of the new government and its policy directions remain unclear, which could still influence the euro’s performance in the medium term.
Despite the election results being less disruptive than feared, UBS maintains its longer-term target for EUR/USD at 1.0500. Analysts argue that while the French political outcomes are not the worst-case scenario, they are not particularly favorable for the euro either.
Macron’s focus on domestic politics might limit his ability to drive further EU integration, which could weigh on the euro.
Scenarios for EUR/USD Decline
UBS outlines three scenarios that could lead to a more significant decline in EUR/USD than currently projected.
In the first case, UBS said that if the new French government, dominated by the left, actively works to reverse key reforms such as the pension age increase, it could create market uncertainty and pressure the euro.
Secondly, a stalemate in the French government could generate a sense of instability, affecting investor confidence and the euro.
Last but not least, upcoming French economic data, including flash PMI, business confidence, and consumer confidence, could show signs of weakness due to political uncertainty. Poor economic performance would make it harder for France to meet budget targets, negatively impacting the euro, said UBS.
Despite the challenges, UBS maintains its EUR/USD target at 1.0500, with the potential for deviations depending on future political and economic developments.
Meanwhile, a potential shift in the Democratic ticket is expected to keep markets abuzz, potentially leading to increased volatility.
However, with no definitive deadline or timeline for changes other than the Democratic Party Convention from August 19-22, pricing in risk premia related to this issue remains difficult.
UBS analysts view the upcoming election as a catalyst for increased implied and realized volatility in the latter half of the year.
Forex
Major Russian lenders say yuan coffers empty, urge central bank action
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By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Forex
Bank of America sees more downside for the dollar
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Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Forex
Dollar’s demise appears overstated – JPMorgan
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Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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