By Andrew Nelson
One of the results of the fiscal cliff deferral is that risk has remained somewhat "on" for the start of the year. The funny thing is, the US dollar hasn’t really lost any ground, which is one of the things that tend to happen when the risk switch is flipped.
Analysts at Canadian investment bank CIBC World Markets see greenback support coming from a weaker yen, but also from growing hopes the current US easing cycle may well be brought to an end before next New Year. However, the biggest support, says CIBC, will be the only partial risk on push to date, with upcoming debt ceiling negotiations and political concerns in Europe making sure some form of risk aversion still exists.
However, once these bridges are crossed (assuming they are) the bank expects the USD to start pulling back once more. This is especially so given it will take more than a few weeks for US rates to even start looking like they’re going generate some interest. CIBC also notes stubborn employment data could also push out rate hikes further out. The call: the USD should weaken later in 2013 and on into 2014.
Also, the bank notes that as the global economic recovery starts to gather pace (assuming it does), commodity prices will hopefully start finding some support. This will likely encourage the Bank of Canada to begin lifting rates later in the year. Given the prospect of higher Canadian rates, CIBC expects the Canadian dollar, or loonie, to push past USD parity by early 2014. Over an even longer timeframe, the bank believes investing in the loonie should be profitable, although it notes there could be better buying opportunities in the coming months.
As far as the euro goes, CIBC notes that current policy doesn’t seem to care about the possible impact of near term euro appreciation. However, the bank notes this could change swiftly if concerns about fundamentals come to the fore again. The bank doesn’t seem in favour of hanging on to euros, saying any sort of near-term rally in the EUR/USD, possibly testing 2012 highs, would provide a good level to sell euro holdings.
Next, the more subdued tone in Europe hasn’t done much for the pound sterling, which has continued to slip against both the euro and the USD. The expectation of continued weak data do little to improve the prospects of the pound, with CIBC expecting it to ease further against both the euro and USD. Although, the bank does note the move in EUR/GBP could well prove temporary. USD moves are a little more solid, with CIBC expecting the GBP/USD should to continue to decline towards the mid-point of a 1.50-1.60 fair value range.
Since the start of November, the Japanese yen has fallen more than 10% against the USD on the newly appointed government’s push to end deflation and jumpstart CPI. The bank expects some very aggressive monetary policy will undertaken, and thus the yen will weaken further. However, with central banks needing to re-balance positions, the bank thinks there could be some near-term support for the yen. But after that, yen depreciation is set to resume in Q2, with CIBC expecting the USD/JPY to reach 92.
CIBC also expects the Aussie will have to crack sooner or later, thinking it is currently both over-valued and over-bought. Domestic data are increasingly soft and the prospect of more rate cuts remains. However, China is starting to pick back up and the rate differential is still attractive, meaning the Aussie still has plenty of support for the time being. But were China to hit a bump and were more rate cuts to ensue on a further softening of the Australian economic outlook, CIBC thinks a correction in the Aussie towards mid-year could pull it below USD parity. Maybe.
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