The current bout of extreme market volatility won’t last forever.
The question in many traders’ minds is – once this is over, where are we headed?
Not too many analysts are willing to stick out their necks in this environment and look beyond the storm. However LeapRate is pleased to share with our readers the views of John Hardy, Head of FX Strategy at Saxo Bank. Hardy makes some fairly bold calls, including the USDJPY at above 130, and the EURUSD falling to par.
More of John Hardy’s writing can be seen at Saxo Bank’s TradingFloor.com website.
Currency forecast following the recent turbulence
The key assumption for all of these forecasts is that global markets recover from their recent turbulence, that China doesn’t move aggressively on devaluing its currency but only lets it down slowly, and that the Fed moves forward with its first rate hike amid still strong US data – not particularly concerned with whether the hike comes at the September, October or December FOMC meetings.
USD/JPY
130+ There could be upside risk to this assessment if the Bank of Japan feels that it can move one more time to ease policy due to the deflationary effects of crashing energy and other commodity prices and the Chinese currency devaluation, but the yen is already quite weak and the cycle is mostly over with for now. Any downside risk would be due to this market turmoil not easing in the coming months, but instead worsening (not our base case scenario).
GBP/USD
1.50. The move here is likely to be less dramatic than the move in other major USD pairs because the themes driving the USD and the GBP are similar, but expecting the USD to outperform as the Fed moves to hike rates before the Bank of England.
EUR/USD
1.00. EURUSD should trade considerably lower if we get over this latest bout of nervousness and get back to focusing on central bank policy divergence and the euro carry trade (borrowing in Euros to finance higher yielding trades elsewhere) that was driving the euro previously.
USD/TRY
3.10. Ongoing pressure on EM currencies as the Fed moves to normalize policy, though the pressure may ease for Turkey and other EM currencies, relatively speaking, if the market overcomes the recent turbulence and begins rallying again.
USD/CHF
1.10. USDCHF should rally strongly if the market gets over the recent hiccup. The Swiss franc is woefully overvalued but the market has been reluctant to touch it after the January 15 abandonment of the CHF ceiling by the Swiss National Bank. But the recent market turmoil entirely failed to see significant CHF strength, suggesting it has lost its safe haven status and this could embolden sellers, who may also get a helping hand from an intervening Swiss National Bank, who would like to see the currency considerably weaker.