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Julius Baer: US Dollar's Fortunes to 'Change Massively' After Brexit

Julius Baer: US Dollar's Fortunes to 'Change Massively' After Brexit

Wednesday, 06 July 2016 11:30 AM

For currency strategists, the past quarter was all about Brexit and calling the pound correctly. Now, the most-accurate forecaster is counting on a dollar resurgence to stay ahead of the pack.

Julius Baer Group Ltd. topped Bloomberg’s latest major-currency rankings by posting some of the most bearish sterling forecasts in the run-up to the referendum on Britain’s European Union membership. It also beat its competitors in predicting the yen’s advance as a haven -- a mantle, the Swiss lender says, that’s about to be seized by the greenback.

“The dollar is less owned -- or over-owned -- than the yen as a safe-haven currency, and given that this issue of Brexit will be with us for more weeks and months, there’s a natural demand,” said David Kohl, Julius Baer’s Frankfurt-based head of foreign-exchange research. “We used to be proponents of a weaker dollar. For the next three months this could change massively.”

The U.K.’s June 23 decision to leave the EU is a shock that’s reverberating across foreign-exchange markets and beyond, hurting emerging-market currencies, upending forecasts and decimating the pound. Those that were most bearish on sterling -- even if they didn’t see Brexit coming -- are benefiting as the U.K. currency sinks to ever-deeper lows.

Julius Baer, which rose from second place in the first-quarter rankings and didn’t anticipate Brexit, is putting its faith in the underlying strength of the U.S. economy. Kohl expects the nation to bounce back after a year and a half of economic torpor, and says futures traders are underestimating the prospect of an interest-rate increase by the Federal Reserve. That, he said, will help the dollar recover from its worst start to a year versus major peers since 2011.

Euro Losses

Kohl sees the euro falling more than 2 percent to $1.08 by the end of this quarter, from about $1.11 on Wednesday, and the yen, which just had its best first half since 1995, weakening 5 percent to 106 per dollar.

He remains among the biggest pessimists on sterling, predicting a drop to $1.16 by Sept. 30. That’s 9 percent weaker than its low on Wednesday, when it sank below $1.28 for the first time since 1985 after a series of real-estate funds freezes provided hard evidence that confidence in the U.K. economy is evaporating.

Kohl sees the pound ending 2016 at $1.16, too. The median forecast in Bloomberg’s survey is for a level of $1.30 on Dec. 31.

Canadian Imperial Bank of Commerce, the top euro-dollar forecaster in Bloomberg’s second-quarter rankings, also sees this as the quarter where the U.S. currency may recover.

Priced Out

CIBC sees the greenback being driven higher by policy divergence between a Fed that it says is still likely to tighten policy this year and central banks in the U.K., euro zone and Japan that will expand the money supply. Traders have priced out a U.S. rate increase until 2018, according to fed fund futures compiled by Bloomberg. That’s part of the reason for the Bloomberg Dollar Spot Index’s almost 4 percent drop in the first half.

“The consequence of the ongoing uncertainty in markets, where we see two of the big three global central banks still biased toward additional monetary easing, and ongoing uncertainty for the U.K., with potential easing there, is that the dollar is going to be a beneficiary,” said Jeremy Stretch, London-based head of foreign-exchange strategy at CIBC. The bank was also eighth in the overall major-currency rankings.

Stretch says the euro may fall to $1.06-$1.07 this quarter.

‘Significant Uncertainty’

The best forecasters in Bloomberg’s major-currency rankings were identified by averaging individual scores on margin of error, timing and directional accuracy across 13 exchange rates during the past four quarters. They had to be ranked in at least eight of the pairs to qualify for the overall placing, with 62 making the cut.

The International Monetary Fund warned last week of “significant uncertainty” across the global economy because of the Brexit vote. The U.S. is seen doing better than most of its developed peers, with output due to expand 1.9 percent this year, compared with 1.5 percent across the Group-of-Eight nations, according to economists surveyed by Bloomberg.

That, many strategists agree, makes the dollar best placed to take advantage of the increase in global risks. Yet it’s their pound predictions that led to their high second-quarter scores.

Julius Baer wasn’t in the top 10 for pound-dollar predictions, but it did lead the euro-sterling rankings. Germany’s Bayerische Landesbank, which slipped to third in the overall major-currency table from first last time around, scored highly for its sterling estimates.

Overall No. 2 Svenska Handelsbanken AB led the pound-dollar table, with, as of March 30, the most pessimistic mid-year estimate in Bloomberg’s survey, for a slide to $1.34.

The Swedish lender sees sterling losses, and the wider Brexit fallout, as continuing to dominate foreign-exchange markets in the third quarter, and predicts only a modest recovery for the dollar. It estimates the euro will drop to $1.08, with the pound ending the period at $1.32.

“Over the summer, the market will stay focused on sterling and it will be under pressure,” said Nils Kristian Knudsen, a currency strategist at Handelsbanken in Oslo. “That’s more or less a given.”

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For currency strategists, the past quarter was all about Brexit and calling the pound correctly.
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Wednesday, 06 July 2016 11:30 AM
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