Landesbank Baden-Wuerttemberg, which has ousted Canada’s Desjardins Group as the most-accurate currency forecaster, says traders are underestimating the dollar by misjudging how quickly the U.S. will raise interest rates.
Germany’s biggest state-owned lender, which topped Bloomberg’s rankings for the four quarters ended June 30, predicts the greenback will climb more than 4 percent by year-end to $1.30 per euro, compared with a median survey estimate of $1.32. LBBW, which rose from second place in the January through March period, says the Federal Reserve may lift rates as soon as the first quarter of 2015 as the world’s largest economy recovers.
“We expect the interest-rate hike in the U.S. will be earlier than currently expected by the market,” Julian Trahorsch, who’s part of the six-strong team of forecasters responsible for LBBW’s victory, said in a July 2 phone interview from Stuttgart. “All indicators point to a very strong recovery in the U.S. and to a faltering recovery in the euro zone. In the first quarter, the Fed could already raise. This is not priced into the euro-dollar exchange rate.”
Dollar bulls received a boost last week when a Labor Department report showed U.S. job creation exceeded economists’ forecasts in June, while the unemployment rate tumbled to the lowest since 2008. Employment and inflation are the factors that Fed Chair Janet Yellen says she’ll take into account when starting to raise rates, which she pledged last month to keep near zero for a “considerable time.”
With expectations for rate increases pushed back, the dollar failed in the first half to get the traction analysts predicted from the Fed winding down its bond-purchase program, known as quantitative easing, and the European Central Bank’s own currency depreciating stimulus.
Like LBBW, second-placed Westpac Banking Corp. is optimistic the dollar will rally for the rest of this year, foreseeing a gain to $1.30 per euro by Dec. 31, from $1.3604 as of 1:53 p.m. in New York.
“There are reasons for that, including the perception that interest rates are going to go up in the U.S. before they go up in the euro zone,” James Shugg, a senior economist at Westpac in London, said by phone on July 3. “Expectations that the ECB embarks on a QE program involving asset purchases” would also support the greenback, he said.
Desjardins, the Montreal-based credit union that dropped to third place from first in the previous Bloomberg forecaster rankings, agrees that additional European stimulus will weigh on the euro.
“We’re expecting further intervention by the ECB and that will help widen monetary policy in Europe and monetary policy in the U.S.,” Hendrix Vachon, a senior economist at Desjardins, said by phone on July 3.
The best forecasters in Bloomberg’s rankings were identified by averaging individual scores on margin of error, timing and directional accuracy across 13 currency pairs during the past four quarters. Companies had to be ranked in at least eight of the 13 pairs to qualify for the overall placing, with 51 making the grade.
LBBW, which traces its origins to a regional savings bank set up by Queen Catherine of Wuerttemberg in 1818, had the top score for overall forecasting, with 63.95 out of 100. Westpac had 63.67, followed by Desjardins with 62.86.
Westpac, Australia’s second-biggest bank, also topped rankings for euro-pound and euro-Swiss franc forecasts. It sees sterling strengthening to 78 pence per euro this year, making it more bullish than the 79-pence median estimate of about 50 strategists surveyed by Bloomberg. The pound traded at 79.41 pence per euro and $1.7133 versus the greenback today.
Intesa Sanpaolo SpA, Italy’s second-biggest lender, led rankings for forecasting the pound versus the dollar. The company sees Britain’s currency appreciating to $1.72 by year-end, compared with a median survey estimate of $1.68.
“The main driver” will be whether the Fed or Bank of England raises interest rates first, Asmara Jamaleh, an economist at Intesa Sanpaolo in Milan, said July 3 by e-mail.
There’s speculation that last week’s jobs report will help bring forward an increase in U.S. borrowing costs. While the economy shrank 2.9 percent in the first quarter, the most since 2009, payrolls jumped a greater-than-forecast 288,000 in June, while the jobless rate fell to 6.1 percent, from 6.3 percent the prior month.
Carefully watching the Fed’s signals is how sixth-placed Wells Fargo & Co., back in the top 10 of the overall forecaster rankings for the first time in about a year, accounts for its improved performance. It’s less bullish than the median estimate in Bloomberg’s survey for the dollar versus the euro, predicting a gain to $1.33 by year-end.
“One of the reasons our performance has improved and our forecasts have become more accurate is we’ve monitored very closely the market’s reaction to the Federal Reserve policy adjustment,” Nick Bennenbroek, Wells Fargo’s New York-based head of currency strategy, said July 2 by phone. “For most of the year, the dollar is just going to be relatively underwhelming.”