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The key assumption for all of the following 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 – regardless of whether the hike comes at the September, October or December FOMC meetings.
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).
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.
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.
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.
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.
Originally from Texas, John Hardy graduated from the University of Texas at Austin with high honors. He has been with Saxo Bank since 2002 in various roles in FX Strategy and Asset Management. Today, John works as Head of FX Strategy. John has developed a broad following from his popular and often quoted daily FX Update column, received by Saxo Bank clients, the press and sales traders. He is a regular guest and commentator on television networks, including CNBC, CNBC Arabia and Bloomberg. Alongside his column and media appearances, John writes regular ad-hoc commentary focusing on the major currencies, central bank policies, macro-economic trends and other developments. John Hardy is available to comment on FX and the major asset classes from a macro perspective.