Top Currency Forecaster's Doubts on Fed Shape Outlook for 2016by and
Bayerische Landesbank sees U.S. raising rates once in 2016
German lender led Bloomberg's 4th-quarter currency rankings
The world’s top currency forecaster is pinning its outlook for 2016 on just one interest-rate increase from the Federal Reserve.
After leading Bloomberg’s foreign-exchange rankings in a year when the U.S. central bank raised borrowing costs for the first time in almost a decade, Bayerische Landesbank now sees limited appreciation for the greenback. To economist Manuel Andersch, that means no advance beyond parity with the euro and support for the currencies of commodity-producing nations, which were among the biggest losers in the past 12 months.
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It’s a view that puts the German lender at odds with the U.S. central bank’s own forecasts. Fed Vice Chairman Stanley Fischer said Wednesday that policy makers’ prediction of four rate increases this year was “in the ballpark” of what’s likely, while adding that China’s economic slowdown and the other sources of turmoil that have greeted 2016 make it difficult to predict policy.
“We’re very, very cautious when it comes to the Fed,” said Munich-based Andersch, who compiles BayernLB’s forecasts with colleague Wolfgang Kiener. He described the bank’s bet on a single U.S. rate increase as “quite rare” in the market, saying that “we don’t see a big further appreciation of the dollar -- it will go probably toward parity with the euro” but stay below it.
As well as topping Bloomberg’s overall currency forecast rankings for the four quarters ending Dec. 31, BayernLB also led the pack on euro-dollar projections. In the previous quarter, it didn’t make the top 10 in either category.
Andersch credited the bank’s success on correctly judging European Central Bank policy and the euro’s new-found status as a haven currency, which tends to strengthen it in times of market turmoil.
“We got some stuff right on central-bank policy,” he said. “It’s still guiding us throughout our forecast horizons.”
While the haven bid will continue to provide sporadic support for the euro, the ECB’s commitment to quantitative easing will be its main driver in 2016, Andersch said.
He sees the shared currency extending last year’s 10 percent decline by dropping to $1.02, from $1.0854 as of 11:30 a.m. in New York on Thursday. The median year-end estimate of more than 60 strategists surveyed by Bloomberg is for $1.06. Thirteen project the euro falling to or below parity with the dollar by year-end.
The derivatives market is pricing in about two Fed rate increases this year, with the benchmark rate estimated at about 0.83 percent in a year’s time, compared with a range of 0.25 percent to 0.5 percent now. In the minutes of the Fed’s December meeting published Wednesday, officials cited the dollar’s strength as a risk to their objective of boosting inflation toward the 2 percent goal.
The dollar rose against all 16 of its major peers in 2015, supported by the prospect of tighter Fed policy. After the Brazilian real, the currencies that posted the biggest losses -- including South Africa’s rand, Norway’s krone and the dollars of Canada, New Zealand and Australia -- were from nations reliant on exporting raw materials.
Those currencies will have an easier time of it this year, BayernLB’s Andersch said. He sees oil prices stabilizing after Brent crude sank to a more than 11-year low this week on a global supply glut.
Andersch forecasts that the krone will rally more than 1 percent and the Aussie 4 percent. Canada’s loonie will retrace about half of the 16 percent loss it posted in 2015, he forecasts.
BayernLB isn’t alone in predicting the greenback can’t rise much further. Second-ranked forecaster National Bank of Canada says the U.S. will struggle to sustain job creation, paving the way for less aggressive policy tightening and a less bullish greenback. It sees the Canadian currency strengthening to C$1.31 per U.S. dollar in 2016, making it more optimistic than the C$1.33 median estimate in a Bloomberg survey.
“If we’re right, it sets the stage for a tamer Fed, which will help our dollar call,” said Stefane Marion, chief economist in Montreal at NBC, who predicts the euro will strengthen to $1.10 this year. “It’s one of the reasons we might warm up to commodities and the Canadian dollar in the second half. We might be going against consensus here -- that’s the risk we’re taking.”
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 pairs to qualify for the overall placing, with 66 making the cut.
For Warsaw-based TMS, the dollar’s strength following years of appreciation will cap its gains by holding the Fed back from raising rates too quickly. The Polish brokerage, which topped the forecaster rankings in the third quarter, sees the euro ending the year about 5 percent weaker at $1.03.
“Everyone wants to predict what the Fed wants to do -- it gives us a lot of volatility,” said TMS strategist Konrad Bialas. “We expect the U.S. economy can do well in 2016,” but that the impact of the stronger dollar “will be so vast it will discourage the Fed.”