UBS: FX Forecasts For 2018

The Dollar will trade mixed, the Euro is to rise, the Pound to fall and the Yen to fall in 2018, according to the latest forecasts from Swiss investment bank UBS.

UBS characterises the Dollar's performance in 2018 as "dispersed" as they forecast it to weaken versus the Euro, end the year unchanged versus the Pound, strengthen versus the Yen and rise against the commodity currencies (AUD, NZD, CAD).

The main restraint to Dollar growth in 2018 is a lack of inflation, which will steadily sap at expectations of the Federal Reserve raising interest rates, and whilst they probably will raise them some more, the 'terminal' or end-rate is likely to be disappointingly low.

Interest rates a major driver for FX as when they are high they attract more inward flows of foreign capital drawn by the promise of higher interest returns.

The Euro will continue to rise as the recovery story in the Euro-area continues and the European Central Bank (ECB) turns off its printing presses.

UBS consider EUR/USD grossly undervalued and forecast it to make up ground, rising to 1.25 in 2018, and then 1.30 in 2019.

The Pound is at risk of weakening due to Brexit risks and the balance of payments deficit, due to it importing more than it exports, leading to lower net demand for the Pound.

Finally, the Yen is forecast to underperform due to the re-election of Prime Minister Abe, who will probably continue to advocate an accommodative monetary policy strategy, which means one in which interest remain at historic lows and the Bank of Japan continues printing money.

Summaries:

British Pound

"Our bearish GBP view remains intact as a decelerating economy compounds uncertainty around Brexit negotiations. The BoE's hawkish shift does not change our sterling views as it is taking place against the backdrop of weaker rather than stronger macro fundamentals."

US Dollar

"What matters for the USD is not the timing of the next hike. It is about how far the Fed is likely to tighten over the cycle, and the market already expects a fair amount.

"We expect the USD to decline vs the EUR next year as the Eurozone and US cycles re-converge. We expect a more dispersed performance for the dollar against the rest of G10. This year offers evidence that Fed hikes against a backdrop of low inflation and flatter curves cannot provide a sustainable boost to the dollar."

Euro

"EUR yields remain too low given solid Eurozone growth momentum, which is likely to extend. As a result, the ECB is likely to have increasing space to normalise monetary policy, boosting EUR yields higher. A steeper EUR curve vs persistent US curve flatness is likely to support EUR/USD convergence to its long-term fair value."

Japanese Yen

"PM Abe's super-majority bolsters the chances that the BoJ maintains its accommodative stance. This suggests higher USD/JPY in 2018. As inflation rises, the yield curve target will likely be adjusted upwards, stabilizing the yen and ultimately leading it stronger."

Candadian Dollar 

"The Bank of Canada (BOC) is too hawkishly priced, as the market is pricing too much 'read-across' from the Fed. As a result, we think risks to CAD remain tilted to the downside and we expect USD/CAD to reach 1.33 by end-18."

Australian Dollar 

"We remain of the view that AUD should continue to be supported by a positive global backdrop. The combination of solid global growth, low inflation and low back-end yields has been supportive thus far in 2017. We expect this to continue in 2018, forecasting AUD/USD at 0.81 at end-2018."

New Zealand Dollar 

"NZD has been held back by rising political uncertainty following the formation of the new government after recent general elections.

"Markets have focused on two potential sources of risk from the new government.

"One relates to changes in the RBNZ's mandate via the introduction of an employment component and potentially a rate-setting committee.

"On their own, these changes are not novel or unprecedented and in fact they may not amount to much in terms of policy.

"Markets, however, may continue to worry about the preservation of the central bank's independence."