Credit Ágricole: FX & Gold Outlook - FJElite
- The EUR should continue to trade as collateral damage of global geopolitical risks. We are no longer as bearish on EUR/USD from current levels as before because we expect additional ECB tightening to limit the downside risks to a degree in the coming months. Subdued growth prospects and loss of international competitiveness should continue to hurt the appeal of EUR-denominated assets. US tariffs and domestic-demand-driven growth policies in the Eurozone (eg, German fiscal stimulus) could also hurt Eurozone net exports & reduce corporate demand for the EUR and thus keep EUR/USD historically depressed in the longer term. Despite its recent drop, EUR/USD still looks expensive relative to our long-term fair value model.
- The high-yielding, safe-haven King of FX should remain supported even if geopolitical risks in the Middle East start abating, given that we expect the US economy to outperform many European and Asian economies. Robust economic outlook & sticky inflation have already boosted Fed policy rate expectations and the USD’s rate appeal, although we believe that the current market outlook has become too hawkish. US policy uncertainty could intensify again if fiscal dominance fears resurface, muting any future USD gains to a degree. In contrast, the Al boom and thus the US exceptionalism narrative persist and could keep the USD in demand as unhedged foreign portfolio inflows continue to power the US stock market rally. We also expect a pick-up of FDI inflows. Lastly, while the USD is still the world’s preeminent reserve fiat currency, de-dollarisation fears could resurface in the coming months.
- The CHF has hit new decade highs against the EUR and USD on the back of sustained safe-haven demand, and the SNB has had to step up its line of defence against undue CHF strength. EUR/CHF’s 0.90 looks like a line in the sand the market seems willing to respect, while reduced geopolitical threats and a subsequent risk recovery would be needed for the CHF to give up more ground.
- Record levels of intervention have only delayed USD/JPY’s rise as the US-Japan short-term rates spread has continued moving higher, despite the BoJ’s rate hike. The BoJ has given investors no reason to raise their expectations for faster rate hikes. While Japan’s economy benefits from a weak JPY, its authorities must manage the domestic and international politics around the currency leaving intervention still likely. Intervention could help cap the exchange rate at 164; we previously thought the cap would be around 160.