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MTFX Currency Update, May 2023

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FX Monthly Currency Forecast

Currency PairMay 1, 2023 
Spot
Jun 2023 
(Q2)
Sep 2023 
(Q3)
Dec 2023 
(Q4)
Mar 2024 
(Q1)

USD/CAD

1.35

1.36

1.34

1.31

1.29

EUR/CAD

1.49

1.47

1.45

1.43

1.44

GBP/CAD

1.69

1.66

1.63

1.61

1.60

EUR/USD

1.10

1.08

1.06

1.09

1.12

GBP/USD

1.25

1.22

1.20

1.22

1.25

USD/JPY

137

134

133

129

125

USD/CHF

0.89

0.92

0.91

0.89

0.88

USD/CNY

6.91

6.85

6.82

6.72

6.73

USD/INR

81.76

82.25

81.58

81.00

79.92

AUD/USD

0.66

0.66

0.68

0.70

0.72

NZD/USD

0.62

0.61

0.63

0.65

0.66

USD/MXN

17.94

18.58

18.83

18.83

19.13

 

Currency Views

USDIn April, the US dollar had a mixed performance against global currencies, weakening against core G10 currencies such as CHF and EUR, but performing better against higher beta global growth-sensitive currencies like AUD, NZD, NOK, and CAD. The upcoming FOMC meeting and nonfarm payrolls report are two significant events that could impact the US dollar's short-term performance this month. If the Fed signals a pause in its tightening cycle after this week's 25bp hike, it may indicate a dovish stance that could potentially weaken the dollar. Conversely, if the Fed maintains its course of gradual rate hikes, it may provide support for the dollar. The US jobs report could confirm that the US labor market is slowing, and price pressures are easing, albeit not at a fast enough pace from the Fed's perspective.
CADThroughout this year, the Canadian dollar has been trading within a relatively well-defined range versus the US dollar, with the upper end being around CAD1.3850-CAD1.3900 and the lower end in the CAD1.3225-CAD1.3250 area. Towards the end of April, the US dollar experienced an upward trend and rose to CAD1.3670 where it encountered significant selling pressure. As a result, it is probable that the US dollar will return towards the CAD1.3400-50 area in the following weeks. Despite the challenging prospects for the CAD, it appears that the broad, erratic range that has been in effect for the past few months will persist, influenced by the push and pull of economic data and market sentiment.
EURThe euro's performance against the US dollar has been noteworthy, having reached a 12-month high in late April. This has been mainly attributed to the divergence in policy outlooks between the ECB and the Fed, with the ECB taking a more aggressive approach than the Fed. However, with the upcoming ECB meeting, there is a likelihood that the euro's fortunes may be reversed, particularly if the ECB Governing Council remains dependent on data and indicates that most of the tightening has already occurred. Additionally, the market's assessment of the ECB-Fed policy divergence may be excessive, which could result in headwinds for the EUR/USD in the upcoming months.
GBPDespite being the worst-performing G10 currency, as per an FX scorecard analysis, the GBP has recently shown a better performance. While some FX investors may regard the GBP as a helpful risk aversion and stagflation hedge, its rebound may be restricted without the backing of actual UK rates and yields. Furthermore, worries remain regarding the influence of the UK slowdown and the new fiscal austerity measures imposed by the Sunak government. It remains uncertain how these factors will unfold in the upcoming months, but they could potentially drag down the GBP's performance.
JPYAt its first meeting under new leadership, the Bank of Japan chose to keep its policy unchanged but scrapped its forward guidance on policy rates to increase policy flexibility. While there had been expectations for a change in policy in the June-July period based on surveys and press accounts, Governor Ueda's endorsement of the current policy settings has made the markets somewhat less confident of that timeframe. As a result, the yen appears to be in a state of paralysis until further direction is announced.
CNYEven though the local economy has demonstrated signs of progress, USD/CNY has remained constant. The outlook for business is in favor of expansion, and both households and firms are experiencing lower inflationary pressures. Domestic demand is believed to be the foundation for growth in the upcoming years, and the CNY is predicted to benefit from a more robust fundamental base, which could result in a rise in portfolio inflows. However, there is a risk that geopolitical tensions may offset these positive trends. As a result, it is expected that the CNY will be traded within the range of USD/CNY 6.82-7.05.
INRIn recent months, USD/INR has encountered difficulties in surpassing the crucial resistance threshold of 83, and it is expected that this level will persist as a significant resistance level. Nonetheless, the rupee may appreciate this month, supported by a weaker dollar and an increase in risk appetite in global markets. It is foreseen that the Indian rupee is likely to be traded within the USD/INR range of 81.00-83.00.
AUDTowards the end of April, the Australian dollar approached its low point of March, which indicated a weakening of the currency. After a Q1 CPI report that showed no major changes, the market lowered the probability of a rate hike from almost 20% to zero. While the reopening of China is anticipated to have a positive impact on the AUD, its economic recovery is expected to be moderate and consumption-driven rather than investment-driven. However, the AUD is projected to benefit from the elevated energy prices due to the ongoing conflict in Ukraine . Unlike other central banks such as the Fed, BoC, and RBNZ, the RBA is expected to be less aggressive in hiking rates , which will also limit the AUD's strength.
NZDThe Reserve Bank of New Zealand's (RBNZ) aggressive tightening cycle will result in the country's official cash rate (OCR) peaking at the highest rate among G10 countries, potentially leading to a recession following a recent cyclone and flood. This will limit the NZD's upside despite a weaker USD and China's re-opening. Nevertheless, it is anticipated that China's reopening will benefit New Zealand's agricultural exports, though the nation's terms of trade may be limited by high energy costs.
MXNBanxico raised the overnight rate by 25bps to 11.25% on March 30, but has since moved to a data-dependent stance and signaled that the tightening cycle may be close to or already at its end. The mention of annual headline inflation in the statement also suggested a more dovish tone. While Banxico's rate announcement is seen as neutral for the MXN, there is a call for a final 25bps rate hike in May. With the market focusing on Mexico's high exposure to US growth, there is an upward bias for USD/MXN towards 18.00.

 

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