G10 report: Forecasting major world currencies for 2015
20/Feb/2015 • Currency Updates•
In line with our previous forecast, the key theme in G10 currency trading continues to be the steady appreciation of the US Dollar, driven by the divergence in the path of the Federal Reserve’s monetary policy by contrast to those of most other G10 central banks.
This divergence has actually widened since our last publication. The Federal Reserve has upgraded its assessment of the strength of the US labour market, which is the key to the beginning of interest rate hikes. Its latest monetary policy statements are consistent with a first hike in mid-2015, though we now think this is more likely to come in the June meeting rather than the April one.
By contrast, we have seen a steady drumbeat of dovish turns from most other G10 central banks. The European Central Bank (ECB) announced a more aggressive than expected quantitative easing program. The Bank of Canada, the Reserve Bank of Australia, the Riksbank, the Norges Bank and the Bank of Denmark have all cut rates, some of them shocking the markets in doing so. The vote in the Bank of England for unchanged rates is now a unanimous 9-0, as the two members of the MPC that voted for hikes changed their mind at the last meeting. Only the Swiss National Bank tightened its stand by abandoning the peg and allowing the Swiss Franc to appreciate against the Euro – however, even this move came with a cut in rates to an unprecedented -0.75%, testing the practical limits of negative interest rates.
We are therefore revising our Dollar forecasts higher against most G10 currencies, with the obvious exception of the Swiss Franc. We make an exception for Sterling, as we think that we are already close to the 2015 bottom in Cable.