Volatility wasn’t absent in July with the re-emergence of Covid concerns, dovish tone from Chair Powell, moderation in growth expectations, and turmoil in Chinese markets. Despite this volatility, Monex’s near-term forecasts weathered the storm, albeit better in the EM space than G10.
Our medium-term expectation of broad USD weakness continued to hold Monex’s 3-to-6-month forecasts in good stead across both asset classes, with notable rankings in the antipodean currencies and traditional high yielders (ZAR, RUB, MXN, BRL).
In addition to this, Monex retained its standing as the best 1-month forecaster for MXN and BRL for a second month in a row, while a more bearish view on the yuan saw Monex climb from 13th and 10th to 9th and 7th in the USDCNY 1-month and 3-month rankings.
In our latest forecasts, the narrative of broad USD weakness is no longer as strong in our view as more currencies hold idiosyncratic risk.
We anticipate further weakness in EUR and JPY from rising US yields in the short-run, while our expectation of an AUD rally is put on ice in the near-term due to domestic Covid risk. We also continue to hold a bearish view on CNY, which was confirmed by last month’s regulatory tightening, and believe the recent rally in ZAR at the beginning of August is overbought. (See more on our latest forecasts here)
Rising Covid cases and subsequent growth concerns meant that our 1-month G10 forecasts were roughly a point too optimistic, with the DXY index closing out July at 92.17 versus our expectation of 91.15. Our near-term USDCAD forecasts, for example, were a bit further off the mark as the rising Covid concerns coupled with OPEC+ announcing a plan to increase production until the structural supply shortage was reversed. The combination of both factors weighed on oil markets and extended CAD losses, with the USDCAD pair closing the month out at 1.24 compared with our 1-month forecast of 1.22. Additionally, the outbreak of the Delta variant in Australia meant our 1-month forecast of 0.76 on AUDUSD was far from the pair’s closing value of 0.73, however, our more conservative stance on the Aussie dollar meant that our forecast garnered a strong near-term ranking nevertheless.
Monex’s bearish stance on CNY resulted in an improvement in the 1-month and 3-month ranking, with our forecasts now sitting within the top 10. A tightening of regulations and a slowing growth profile in July confirmed our view that officials will tolerate a gradual depreciation in the currency to offset the growth impact.
Elsewhere within the EM space, our MXN forecasts remained top of the pile for the 1-month horizon, while we also picked up a top ranking in the 6-month category.
The peso’s lack of volatility in July meant the decision to make only slight tweaks to our June forecasts was the correct decision.
Author: Simon Harvey, Senior FX Market Analyst