Forex Trading

Euro/US Dollar Exchange Rate Forecast

European and US interest rate forecasts took a clear turn for the worse in recent months, but the difference between said rate forecasts continues to favor the US dollar. In fact, Credit Suisse Overnight Index Swaps show that interest rate traders expect the yield spread between the Euro and US dollar will contract by over 100 basis points in the coming twelve months. All else remaining equal, this will add downward pressure on the Euro/US dollar exchange rate.

US Dollar/Japanese Yen Exchange Rate Forecast

Japanese Yen interest rate expectations have remained relatively unchanged through the past several months of trading, and clear deterioration in US Federal Reserve rate forecasts means that markets predict that the USD-JPY yield differential will shrink by 4 basis points in the year ahead. Yet the Japanese Yen is far more likely to move on developments in global risky asset classes; if we see global equity markets continue to decline, the Japanese Yen will likely continue strengthening against the US Dollar.

British Pound/US Dollar Exchange Rate Forecast

Deterioration in UK economic conditions and a dovish central bank have forced continued declines in Bank of England rate expectations and likewise led to British Pound declines. Interest rate markets forecast that the British Pound - US Dollar interest rate differential will shrink by a substantial 128 basis points (1.28 percent) in the coming year of trading-nearly halving the GBP's interest rate advantage against the USD. If such market forecasts come to fruition, we could see the British Pound fall further against the US dollar.

US Dollar/Swiss Franc Exchange Rate Forecast

Dimmed outlook for Swiss economic growth has led interest rate traders to forecast a cumulative 10 basis points in SNB rate cuts through the year ahead-a clear shift from previous forecasts for rate hikes. A similarly forceful correction in US interest rate outlook leaves markets expecting almost-unchanged rates for the US dollar, but we nonetheless note that traders predict that US Dollar interest rates will gain 7 basis points against their Swiss counterparts. This leaves a very modestly bullish bias on the USDCHF-at least as far as interest rates are concerned.

US Dollar/Canadian Dollar Exchange Rate Forecast

Interest rate markets predict that the Bank of Canada will cut interest rates by more than the US Federal Reserve will in the coming year-dealing a blow to the Canadian dollar. Yet we see that the difference in rate expectations has actually narrowed substantially through recent trade, and rate forecasts are not nearly as ominous for the Canadian dollar as they once were. In terms of interest rate differentials, traders predict that the US-Canadian yield spread will narrow by 66 basis points-almost exactly half of previous forecasts for a 116 basis point change. Such forecasts give a modestly bullish bias to the USDCAD pair, but other factors may prove of more importance in setting the US Dollar/Canadian dollar exchange rate.

Australian Dollar/US Dollar Exchange Rate Forecast

The highly yield-sensitive Australian Dollar has fallen significantly through recent months of trading, as interest rate traders now forecast noticeably lower Australian interest rates through the year ahead. Current Credit Suisse interest rate quotes show expectations of 153 basis points in RBA cuts, while the US Federal Reserve is predicted to cut by a modest 3 basis points through the same period. Such rate changes would leave the Australian Dollar-US Dollar yield differential 1.50 percentage points lower, and the highly yield-sensitive AUDUSD pair may suffer as a result.

New Zealand Dollar/US Dollar Exchange Rate Forecast

New Zealand's interest rate outlook is quite similar to that of Australia, and the New Zealand dollar stands to lose a substantial portion of its interest rate advantage against the US dollar and other forex counterparts. Indeed, the NZD-USD yield differential is predicted to shrink by 1.60 percentage points in the coming year-that which would leave the highly yield-sensitive NZD at a clear disadvantage through the medium/long term. Outlook for the New Zealand dollar remains bearish from an interest rate perspective.

Written by Jamie Saettele, Senior Strategist and David Rodriguez, Quantitative Analyst
Article Source - Monthly Forecasts for US Dollar - June