GBP forecast “Our historical analysis [of the past six budgets] suggests that financial markets’ short-term reaction to the annual budget announcement is muted […]. This year’s “two-pronged transitional” budget on 3rd March will be no different, in our view.” [Transitional UK budget unlikely to rattle markets, 1 March 2021].
Outcome The Sterling NEER and FTSE 100 gained only 0.6% and 0.5%, respectively, between 2nd and 8th March. The two-year Gilt yield rose only 4 basis points.
USD forecast “The Dollar NEER has weakened about 0.9% since 4th February and its inverse correlation with the S&P 500 (+1.2%) has re-established itself. We think this is a short-term correction, with another prolonged Dollar downtrend still a couple of months away.” [Dollar’s recent weakness – Blip, not new trend, 12 February 2021].
Outcome The USD NEER appreciated 1.3% in the following month.
NOK forecast “The Krone may still be “cheap” relative to current price of Brent crude oil (about $75 per barrel). Based on historical relationship between Krone NEER and Brent crude oil price we estimate that Krone NEER is currently about 7.5% weaker than where it should be trading all other things being equal. This gap in the past 8.5 years has rarely been larger, with the exception of March 2020.” [Dollar’s recent weakness – Blip, not new trend, 12 February 2021].
Outcome The Krone NEER appreciated 1.8% in the following month to a 14-month high.
CHF forecast “As a result the Swiss Franc may appreciate far less in January 2021 than it has typically done in the month of January (0.8% in 2010-2019 and 1.2% in 2020) or even depreciate.” [Monthly currency seasonality: Down and out?, 4 January 2021].
Outcome The average Swiss Franc NEER in January 2021 was about 0.1% lower than in December 2020. End-month to end-month the Swiss Franc NEER depreciated about 0.2%.
CNY forecast “We think the PBoC will at the very least try to keep the Renminbi Nominal Effective Exchange Rate broadly stable in coming weeks, with the risk tilted towards the central bank weakening the Renminbi NEER.” Far more to Renminbi than USD/CNY cross, 8 December 2020].
Outcome The Renminbi NEER weakened 0.1% between 8th and 25th December
USD/EM forecast “We would expect the Dollar to continue depreciating but at a still very slow pace, with EM currencies prone to sharp sell-offs (even if short-lived). […] Asian central banks are unlikely to allow rapid currency appreciation given the still very uncertain global outlook.” [Emerging Market currencies: Hopes and Realities, 2 December 2020].
Outcome US Dollar NEER depreciated only 1.3% between 2 December 2020 and 6 January 2021. GDP-weighted basket of Asian currencies (excluding Japanese Yen and Chinese Renminbi) appreciated only 1.1% versus US Dollar. A number of EM currencies, particularly in Latin America (including Colombian and Chilean Pesos), which appreciated rapidly following the US elections, traded sideways in December 2020 and weakened sharply between early January and early March 2021.
BRL forecast “Cheap EM valuations. EM currencies are still down versus the Dollar year-to-date, including all high-yielders […] or have recorded only marginal gains. Caveat: The Brazilian Real has appreciated 9.6% versus the Dollar since 3 November, with USD/BRL cross currently at its lowest levels since late-July 2020.” [Emerging Market currencies: Hopes and Realities, 2 December 2020].
Outcome Brazilian Real depreciated about 3.4% versus Dollar between 2 December 2020 and 11 February 2021, the weakest performance of any major currency.
GBP forecast “Sterling’s sustained appreciation since mid-September suggests to us that markets are already pricing in a reasonably high probability of such a scenario. If this assumption is correct, Sterling’s near-term reaction to a free-trade deal being reached may only be modestly positive.” [Time is priceless but has a steep cost, 25 November 2020].
Outcome The Sterling NEER appreciated 0.8% on 23rd December after British and EU officials announced that agreement on a free trade deal was imminent and rose only a further 0.4% on 24th December when both sides officially announced that a Trade and Cooperation Agreement had been reached. Sterling then weakened about 0.5% in the following three sessions to the middle of a narrow 2-week range.
CNY forecast “We think the PBoC will at the very least try to keep the Renminbi Nominal Effective Exchange Rate broadly stable in coming weeks, with the risk tilted towards the central bank weakening the Renminbi NEER.” [Far more to Renminbi than USD/CNY cross, 8 December 2020].
Outcome The NEER weakened 0.1% between 8th and 25th December.
CNY forecast “This has led to growing speculation that the People’s Bank of China (PBoC) could take (potent) measures to reverse the Renminbi’s climb. We have greater sympathy with the more benign near-term view that the PBoC is more likely in a first instance to slow the pace of Renminbi appreciation and ultimately arrest the currency’s climb. ” [PBoC Likely to Keep Renminbi on Tight Leash, 22 October 2020].
Outcome The pace of month-on-month appreciation in the Renminbi NEER slowed from about 1.8% in the four weeks to 22 October to about 1.1% in the four weeks to 16 November 2020 before turning negative in early December. The Renminbi NEER was broadly stable in a 1.3% range between 22 October and 7 December.
Global forecast “Back in November 2019 we correctly predicted that “global FX volatility would rise in coming weeks, with the potential for a volatility spike in mid-December”. We once again think the risk is biased towards FX volatility rising in coming weeks, particularly given the still very uncertain outcome of US elections to be held in just 26 days.” [Event Risk and Market Volatility: Partners in Crime, 8 October 2020].
Outcome Global FX volatility in a turnover-weighted basket of 32 major currency pairs against the Dollar – measured by the 3-day standard deviation in the daily percentage change in the spot (closing) price – doubled from 0.25 on 8th to about 0.5 in the wake of the 3rd November US elections and rose to a 13-week high of 0.89 on 9 November 2020.
EUR forecast “Our core scenario is that the ECB will not explicitly try to jawbone the Euro weaker. We think its policy statement will make no reference to the Euro […]. This would at most constitute verbal intervention “light”. Our main argument is that the NEER has only appreciated 1.8% since the ECB’s last policy meeting on 16th July and has thus had a negligible deflationary impact. Moreover, the Euro’s rise occurred in the second half of July […]. Since then the Euro has treaded water in NEER terms.” [Brazen ECB Verbal Intervention Against Euro Unwarranted and Unlikely, 9 September 2020].
Outcome President Lagarde in her press conference introductory statement resorted to verbal intervention “light”. She said that the ECB would assess future currency developments while acknowledging that the Euro’s appreciation was only one factor behind low Eurozone inflation and that ultimately the ECB and Eurozone faced more pressing challenges, namely “the elevated uncertainty about the economic outlook [which] continues to weigh on consumer spending and business investment”. Moreover, the ECB left its CPI-inflation forecasts for 2020 unchanged while revising up (not down) its inflation forecasts for 2021. The Euro NEER was marginally stronger in a narrow range in the following three weeks.
GBP forecast “The economy faces a potential quadruple whammy in coming months of fiscal stimulus measures being unwound, a no-deal Brexit, higher taxes and a re-tightening of national lockdown measures in the event of the number covid-19 cases rising sharply during the winter months. This leaves Sterling vulnerable, in our view, particularly in the context of relatively elevated long Sterling speculative positions.” [UK & Sterling facing potential quadruple whammy, 4 September 2020].
Outcome Sterling NEER weakened 3.8% in the following week to its lowest level since 29 June.
USD forecast “We do not think that FX price action in the past couple of months […] points to the beginning of a structural and permanent shift in the currency composition of central banks’ FX reserves. […]. Current forecasts of the Dollar’s demise as the world’s number one reserve currency are at best extremely premature, at worst unfounded in our view.” [Warnings about US economy and USD overblown, 4 August 2020].
Outcome Dollar DXY index was broadly unchanged five weeks on, trading in a narrow 2.4% range.
THB forecast “In particular the Thai Baht NEER has appreciated over 2% in the past three weeks to a five-month high which may invite central bank FX intervention to slow, cap or even reverse this trend in order to maintain Thai export competitiveness, in our view.” [Risk aversion, not panic, in face of uncertainty, 1 July 2020].
Outcome THB NEER weakened 1.3% in following week to four-week low.
CNY forecast “based on precedent, a resumption of the trade war with the United States would likely result in Chinese policy-makers retaliating by weakening the Renminbi, in our view.” [Conservative FX markets testing (some) extremes, 7 May 2020].
Outcome CNY NEER weakened nearly 3% in following five weeks to four month-low.
GBP, EUR forecast “Sterling has also dropped this week, to a 5-week low, and history points to a fall in elevated long speculative positioning and further Sterling depreciation. Conversely, the unwinding of short Euro positions has seen the currency hit a 12-week high. We expect the Euro to trend higher but for weak Eurozone macro data to cap the pace of appreciation.” [Virus, volatility and valuations, 27 February 2020].
Outcome GBP and EUR NEERs respectively weakened 8.8% and appreciated 5.5% in following three weeks to their weakest and strongest levels in least a decade.
IDR forecast “The Rupiah NEER has returned to the upward sloping range which prevailed in 2019 but is still only 2.7% from the 31-month high recorded on 20th February. We thus think the risk is biased towards the Rupiah weakening further near-term in the face of growing concerns about the amplitude and impact of the coronavirus on the domestic and regional economies.” [Virus, volatility and valuations, 27 February 2020].
Outcome IDR NEER weakened 6.6% in the following three weeks to its weakest level since early November 2018.
THB forecast “The fact that China is Thailand’s largest export destination (12% of total merchandise exports) and source of tourists (29% of total) will have likely weighed on current account inflows into Thailand and exacerbated capital outflows […] While the Bank of Thailand may try to slow the pace of Baht depreciation it is not obvious to us that it is close to putting a hard floor under its currency” [What next for Asian currencies, 31 January 2020].
Outcome THB NEER recovered in first half of February before weakening to an 8-month low in late-February.
CNY forecast “We expect PBoC set its daily fix higher on 3 February in line with the move higher in USD/CNH spot […]. We think it will avoid fixing USD/CNY materially higher to void the risk of markets pricing in further significant currency weakness and stoking significant capital outflows from China. [What next for Asian currencies, 31 January 2020]
Outcome PBoC fixed USD/CNY at 6.9249 and 6.9823 on 3rd February on 5th February, up only 0.54% and 1.4%, respectively, from fix on 23rd January. In comparison, Shanghai Composite Index fell 5.3% between 23rd January and 5th February.
Global forecast “The risk for global currency volatility is clearly tilted to the upside in coming weeks and months.” [Depressed FX volatility allows for few surprises, 22 November 2019]
Outcome Global FX volatility in a turnover-weighted basket of 32 major currency pairs against the Dollar – measured by the 10-day standard deviation in the daily percentage change in the spot (closing) price – rose from 0.24 on 22 November 2019 to a 13-week high of 0.38 in early January 2020.
EUR forecast “Whether or not Draghi cuts ECB policy rates and/or re-starts QE in the next three months, we expect the Euro to remain range-bound.” [Draghi’s ECB legacy – stable Euro, weak inflation, 10 July 2019]
Outcome Euro NEER in following three months remained in a narrow 2.2% range. On 10 October 2019 Euro NEER (97.8) was broadly at the same level it was on 10 July 2019 (97.65) according to ECB data.
GBP forecast “Near-term, we expect Brexit convolutions, a more dovish Bank of England and unfavourable seasonal patterns to keep a volatile Sterling under modest pressure.” [Looking beyond perfect Sterling Storm, 26 June 2019]
Outcome Sterling NEER weakened 3.9% in the following six weeks to a decade low.
CNY forecast “The risk near-term is that the Renminbi weakens further.” [Renminbi depreciation true to form, 6 June 2019].
Outcome The Renminbi NEER weakened a further 0.5% between 6 June and 28 June (start of G20 summit) and a further 2.2% between 8 June and end-August.
KRW forecast “In the EM space, we are bullish the Korean Won at current levels and point to the recent acceleration in foreign purchases of domestic bonds.” [More to FX markets than US-China trade war, 24 May 2019]
Outcome In the following month the Korean Won was the second best performing Asian currency (after Thai Baht), appreciating 2.7% versus Dollar
CNY forecast “However, unless the US and China quell this trade war and/or Chinese economic growth rebounds in the very near-term – which we think is unlikely – the risk is that the Renminbi resumes its downward path.” [Renminbi depreciation – Case of déjà vu, 16 May 2019]
Outcome Renminbi NEER weakened a further 1.1% between 16 May and 6 June 2019
GBP forecast “Thus, while Sterling may occasionally spike higher or dip lower intra-day, it will likely remain largely directionless near-term, in our view” [Brexit and Sterling going nowhere, fast, 18 April 2019]
Outcome Sterling NEER traded in a narrow 2% range in the following month and in level terms was broadly unchanged from 18 April 2019 to mid-May.
CNY forecast “If this scenario pans out, the PBoC could conceivably slow or even temporarily reverse the Renminbi’s appreciation, irrespective of the pace of progress in trade negotiations with the US.” [Politics and geopolitics driving currencies, central banks in stasis…for now, 5 March 2019]
Outcome Renminbi NEER, which had appreciated 3.5% in the two months to 5 March 2019, traded in a narrow 1% range in the following two months before starting to depreciate.
Asia FX forecast “However, NJA economies have so far shown a degree of resilience […]. Going forward, the sharp fall in global energy prices in Q4 and stimulative growth-policies in NJA should […] in turn reduce any pressure on these economies’ currencies or at least fade their central banks’ incentives to allow or generate a weakening of their currencies”. [Chinese growth slowdown – project fear, 30 January 2019]
Outcome A GDP-weighted basket of NJA currencies (excluding CNY) remained in a narrow 1.2% range versus the Dollar in the subsequent 3 months.
GBP forecast “A potential path, even if tortuous, leading to the UK remaining in the EU […] would ultimately result in significant Sterling appreciation” [Theresa May has won battle, but will lose war – Sterling positive medium-term, 13 December 2018].
Outcome Sterling NEER appreciated about 4% between 13 mid-December 2018 and early March 2019. Markets became more confident that the UK could remain in the EU or at least not leave without a deal in place after Prime Minister May promised that the House of Commons would be given votes on whether UK should leave EU without a deal and on whether to extend Article 50 negotiations with the EU beyond 29th March.
CNY forecast “[…] This could in turn see the Renminbi NEER push higher but we think the PBoC will want to keep a tight leash on its currency.” [Black Friday Currency Sale: Bargaining Hunting, 23 November 2018]
Outcome Renminbi NEER gradually appreciated 3% between 2nd December 2018 and 1st March 2019.
USD forecast “But we also maintain our view that as markets head into 2019 the Dollar could become more vulnerable.” [see Black Friday Currency Sale: Bargain Hunting, 23 November 2018]
Outcome Dollar NEER depreciated 2.3% from mid-December 218 to mid-January 2019, hitting a 15-week low.
GBP forecast “Should the cabinet today approve the draft deal we would expect Sterling to extend its recent gains. However, the uncertainty of whether Parliament would vote in favour of such a deal, not to mention the underlying weakness of the UK economy and a “neutral” Bank of England monetary policy stance, would likely cap any Sterling upside, in our view.” [Brexit Mayday: Living on a Prayer, 14 November 2018]
Outcome The cabinet on 14th November approved the draft Withdrawal Agreement. The Sterling NEER appreciated 1.1% between 14 and 18 November before giving back all of these gains.
USD forecast “Near-term, the relative strength of the US economy and market pricing of Fed rate hikes will provide a decent floor under the Dollar” [see Crunch time for currencies ahead of pivotal Q4, 24 September 2018]
Outcome Dollar NEER appreciated 0.6% in the week following the Federal Reserve’s policy meeting on 26th September at which, in line with expectations, the FOMC hiked rates 25bp.
ZAR forecast “Indeed, markets are seemingly targeting currencies of economies which meet a number of the following criteria: […] 3. Weak GDP growth with economy unable to grow itself out of debt overhang (e.g. South Africa, Brazil); 4. Central bank unwilling and/or unable to tighten monetary policy via rate hikes and/or FX intervention (e.g. South Africa, Brazil and more recently Turkey); and 5. Idiosyncratic risks (e.g. threat of land re-appropriation in South Africa […]. The South African Rand – down only 0.8% versus the Dollar in the past fortnight – will struggle to rebound in a sustainable fashion [Herd instinct giving way to phased FX approach, 31 August 2018]
Outcome South Africa GDP contracted 0.6% qoq in Q2 (vs expectations of +0.7%) according to official data released on 4th September. Rand NEER subsequently weakened by about 3.5% in the following two trading sessions.
EM Forecast “Fears of [emerging market currency] contagion, however, have been overdone in our view.” [Lira collapse post-mortem: Contagion lite, 17 August 2018]
Outcome A GDP-weighted basket of emerging market currencies (including and excluding the Chinese Renminbi) was broadly stable versus the US Dollar between 17thAugust and end-September 2018, according to our calculations.
CNY Forecast “The risk, in our view, is that the PBoC continues to push USD/CNY higher and that the Renminbi NEER weakens further near-term”. [Renminbi devaluation “lite”: Tool and weapon, 29 June 2018]
Outcome Renminbi weakened a further 3% versus the Dollar and in NEER terms in the month to 1st August.
USD Forecast “In this scenario, the Dollar’s five-week old rally may extend a little further near-term”. [Every which way but tight, 24 May 2018]
Outcome Dollar NEER appreciated a further 2.3% between 24 May and early July to within a touching distance of a 13-month high.
EM Forecast “Rising Dollar-funding costs, an appreciating Swiss France and a historically strong Euro increase emerging market economies’ foreign currency debt servicing costs and are in turn likely to keep emerging market currencies under pressure for now, particularly in Latin America, Emerging Europe and Africa , in our view” [Every which way but tight, 24 May 2018]
Outcome In the following month a basket of EM currencies (excluding CNY) weakened about 1.5% vs USD. Latam currencies weakened about 3%.
NOK Forecast “[…] a weaker Krone will, albeit with a lag, feed through to higher imported and headline inflation and boost the competitiveness and exports of the non-oil sector. The long Krone trade, which has seemingly fallen out of favour, may once again get a look-in later in 2018” [Bond market bang, major currency whimper, 21 December 2017]
Outcome Norwegian headline CPI-inflation rose to a 10-month high of 2.2% yoy in February while growth in the NOK-value of mainland exports remained near multi-year highs. The Krone was the best performing major currency in Q1 2018, with the NEER appreciating about 5%.
EUR Forecast “Capital inflows into the eurozone allied to a 2% of GDP current account surplus, a pick-up in economic activity and receding political risks following the French presidential elections are likely to extend the Euro’s current rally near-term […]. After all Euro NEER is only 1.3% stronger than the average level recorded since early 2016. ECB appears comfortable with the common currency’s modest appreciation, perhaps unsurprising given that hawkish ECB Council members – led by Bundesbank – would like to see a tightening, even if modest, of eurozone monetary policy.” [Politics suspected of interfering with economics and markets, 19 May 2017]
Outcome President Macron’s La Republique en Marche party in alliance with MoDem won 350 seats in the 577-seat National Assembly in the 18 June election, further dispelling the risk of nationalist parties dictating the political narrative. ECB tweaked its language on forward guidance at 8th June policy meeting and announced a reduction in its monthly asset purchases (as of 2018) at its 26th October policy meeting. EUR/USD and EUR/GBP appreciated 5.7% and 4.2%, respectively, between 19 May and late-July 2017.
EUR Forecast “I am also sticking to my forecast that Macron, who is leading Le Pen by 22 percentage points in the polls, will win the 7th May run-off to become President, which would in turn likely lead to a further albeit modest rally in the euro. […]. French opinion polls, historically accurate in “predicting” the outcome of the first and second round of presidential elections, have Macron comfortably winning the second round.” [7 reasons why Macron will become President and market implications, 25 April 2017]
Outcome Macron won the second round with 66% of the popular vote, broadly in line with opinion polls which had Macron winning about 62%. The Euro NEER appreciated about 1.5% in the month following 25 April 2017.
EUR & GBP Forecast “I am sticking to my core scenario that […] Emmanuel Macron will fill one of the top two spots to make it to the 7th May run-off, which in my view would be welcomed by French financial markets and the euro even if markets remain jittery over the next fortnight. At the same time, the ever-changing political scene in the UK can do little near-term to avert the headwinds to GDP growth stemming from falling real wages and retail sales. With this in mind, I see the risk to GBP/EUR biased to the downside in coming weeks.” [French politics, UK macro data and possible GBP/EUR downside, 21 April 2017]
Outcome Macron won the first round of the French presidential elections (24% of the vote) and GBP/EUR weakened 1.9% in the following three trading sessions. Following the UK general election on 8 June which saw the ruling Conservatives lose their parliamentary majority, GBP/EUR weakened a further 1%. GBP/EUR fell 4.3% between 21 April and mid-June from 1.19 to 1.1385.
Global forecast “As a simple rule of thumb we think EM central banks with a high real policy rate and stable/appreciating currencies are more likely to cut their policy rates in coming weeks. On this basis central banks in India, the Philippines and Taiwan seemingly have room to cut rates. We also think that the South African Reserve Bank will cut rates at its policy meeting on 19th March, as long as the Rand remains broadly stable as it has been in the past week” [Emerging market central banks playing catch-up, 17 March 2020]
Outcome South Africa, Philippines and Taiwan central banks cut policy rates 100, 50bp and 25bp, respectively, at their scheduled meetings on 19th March and Reserve Bank of India cut rates 75bp on 27th March.
Asia forecast “However, we think the overall pace and magnitude of [central bank] policy rate cuts in Non-Japan Asia will be modest, for two reasons.” [Asian central bank policy rates – Scalpel not knife, 7 February 2020]
Outcome In the month following 7th February only Bank Indonesia and Bank Negara Malaysia cut their policy rates (each by 25bp).
UK forecast “We think the risk is biased towards UK CPI-inflation […] falling in coming months, partly due to the disinflationary impact of a stronger Sterling and a slowdown in nominal wage growth […]. A rate cut at the BoE’s policy meeting on 30th January remains very unlikely, in our view […]. If this proves correct, we would expect Sterling […] to continue treading water” [Bank of England’s dovish warning bells ring true, 10 January 2020]
Outcome CPI-inflation fell sharply in December to 3-year low and markets were pricing in a 50/50 probability of a 25bp rate cut at 30 January meeting. But the MPC kept its policy rate unchanged at 0.75% and Sterling NEER remained in a 2% range in the following three weeks.
Global forecast “Scope for central bank monetary policy surprises […]. Material data surprises could therefore easily translate to central banks changing tact, markets repricing rate cut expectations and ultimately greater currency moves.” [Depressed FX volatility allows for few surprises, 22 November 2019]
Outcome Central banks in Malaysia and South Africa cut rates 25bp in January 2020 (vs strong consensus forecasts of no cut) and Reserve Bank of India left rates on hold in December (vs 25bp rate cut consensus forecast). Market pricing for Bank of England rate cuts also rose significantly in January (see above).
Global forecast “Our view is that central banks, in both developed and EM economies, have room to cut their policy rates further in coming months […]. In most economies, central banks’ “real” policy rates are indeed still high relative to history and relative to global GDP growth […]. We expect global core and headline CPI-inflation to stabilise and then rise in the next six months […] but this does not negate further modest rate cuts.” [Room and need for more central bank rate cuts, 25 September 2019]
Outcome Since 25 September, central banks in Australia, Chile, India, Indonesia, Korea, Malaysia and United States have cut their policy rates 25bp. Mexico, Philippines and Thailand have cut their policy rates 50bp, Russia 75bp, Brazil 125bp and Turkey 525bp. China has cut its 1-year Loan Prime Rate 5bp. The global (nominal) central bank policy rate has fallen 22bp to 2.11% (as of early February 2020) to its lowest level in 27 months.
Global forecast “In this context, we maintain our view that few, if any, major central banks will policy hike rates in the foreseeable future. Specifically, we expect most major central banks, including the Federal Reserve, Bank of England, European Central Bank, Reserve Bank of Australia and Reserve Bank of New Zealand to keep rates unchanged in coming months.” [Politics and geopolitics driving currencies, central banks in stasis…for now, 5 March 2019]
Outcome The RBNZ only started cutting rates in May 2019, the RBA in June, the Fed in July and ECB in September while the Bank of England as of 19 September 2019 had not cut its policy rate.
ECB forecast “The far more acute slowdown in Eurozone growth has dragged the Euro to a 7-month low, and the risk in our view is biased towards the ECB delaying its planned start to the rate-hiking cycle.” [Forecast Update: Brexit, FX, central banks & GDP growth, 18 January 2019]
Outcome ECB announced at its policy meeting on 7th March that “The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019”.
Global Forecast “If our forecasts of lower global economic growth and CPI-inflation in 2019 prove correct, we would expect the pace of central bank rate hikes to slow on the whole. Some developed and EM central banks may of course continue (or even start) to hike policy rates, to stabilise under-pressure currencies and/or lean against rising inflationary pressures. However, the risk is biased towards central banks slowing or even pausing their rate hiking cycles, in our view. Policy rate cuts, which have all but disappeared since the spring, may yet resurface in the second half of 2019”. [Global central bank rate hikes: part solution, part problem, 21 December 2018].
Outcome Since end-April 2019 central banks have cut their policy rates as follows:
Turkey 1,275bp; Brazil 225bp; Russia 150bp; Chile: 125bp; Indonesia, Mexico and Philippines: 100bp; India: 85bp; Australia, New Zealand, Thailand and US: 75bp; Korea, Malaysia and South Africa: 50bp; China: 16bp; Eurozone: 10bp. GDP-weighted global central bank policy rate has fallen 58bp over that period to 2.11% (27-month low). Since 21 December 2018 only three major central banks (Czech, Norway and Sweden) have hiked their policy rates in net terms (by 50bp, 50bp and 25bp, respectively).
Global Forecast “The Federal Reserve will likely hike at least twice more before year-end and the Canadian and Norwegian central banks may each deliver one 25bp rate hike. But central bank policy rates in the Eurozone, Australia, New Zealand and Sweden are likely to remain on hold until 2019 and the ECB may well extend its QE program beyond September” [Every which way but tight, 24 May 2018]
Outcome Fed hikes three times between 24 May and end-2019, Canada twice and Norway once. Eurozone, Australia and New Zealand kept rates on hold. ECB announced at its June 2018 policy meeting that it would extend QE till end-2018.
BoE Forecast ” It is possible, in my view, that the BoE’s rate hiking cycle could mirror the Fed’s with the BoE only delivering one (or perhaps two) hikes in 2018, in which case markets may need to further reduce their expectations of a February 2018 rate hike”. [Bank of England – Trick rather than treat, 3 November 2017]
Outcome Bank of England hiked its policy rate once in 2018 (by 25bp), on 2 August
Fed Forecast “However, very skinny market pricing of 8-9bp of [Fed] hikes for the remainder of the year may not sit that well with the FOMC. I would therefore expect some kind of verbal intervention by Chairperson Yellen and other FOMC members to push up market pricing closer to around 15bp to help keep the odds of a December rate hike alive.” [We know what you did last summer, 1 September 2017]
Outcome Market pricing of rate hikes for the remainder of 2017 dipped to as low as 6.5bp in early September but then gradually rose to 13.5bp and jumped to 16bp following the Fed’s 20th September policy meeting.
EM Forecast “Bank Indonesia (BI) cut its policy rate 25bp both in September and October but may stay on hold until market conditions stabilise […]. Reserve Bank of India (RBI) has twice cut its policy rate this year but may stay on hold until market conditions stabilise.” [Fast and Furious – Market drift, 15 November 2016]
Outcome RBI left its policy rate unchanged on 7 December 2016, contrary to the consensus forecast that it would cut rates 25bp, and did not cut again until August 2017.
UK forecast “While mass vaccination is a game-changer medium-term it not does not preclude a further tightening of UK social distancing measures in coming weeks, in our view” [Sunday Bloody Sunday, 11 December 2020]
Outcome Prime Minister Johnson officially declared third national lockdown on 6th January 2021.
Global forecast “We expect global risk appetite to remain reasonably buoyant in coming months thanks to the not-so-distant prospect of one or multiple vaccines coming on line and the very high likelihood of Joe Biden fully assuming the US presidency on 20th January.” [Emerging Market currencies: Hopes and Realities, 2 December 2020].
Outcome The UK approved the Pfizer Covid-19 vaccine on 2nd December (the first country to do so). The S&P 500 and All-Country World Equity Index rallied 6.7% and 8.3% respectively between 2 December 2020 and 10 February 2021.
Global forecast “Allowing households to socialise over Christmas – a laudable goal – amounts to “selling” a bit time. This could force governments, including in Europe, into “buying” disproportionately far more time in the new year (i.e. enforcing a third round of lockdowns).” [Time is priceless but has a steep cost, 25 November 2020]
Outcome Sharp rise in Covid-19 cases resulted in third national lockdown being introduced for England on 6th January 2021. Other European countries further tightened social distancing measures in January, with France considering introduction of third national lockdown.
UK forecast “In the United Kingdom, the further fall in the Composite PMI in October-November points to GDP having once again contracted.” [Time is priceless but has a steep cost, 25 November 2020]
Outcome UK GDP contracted 2% in October-November.
UK forecast “GDP growth slowed to 6.7% mom in July from 8.7% mom in June and we estimate that it halved in August […]. This suggests that UK GDP growth may have slowed to a trickle in September.” [Global growth: Collapse, Recovery, Slowdown…repeat?, 24 September 2020]
Outcome UK GDP growth slowed from 6.3% mom in July to 2.2% mom in August and 1.1% mom in September.
UK forecast “The economy faces a potential quadruple whammy in coming months of […], higher taxes […].We think Sunak is in part being driven by the negative optics of a Conservative government running a persistently very high budget deficit” [UK & Sterling facing potential quadruple whammy, 4 September 2020]
Outcome Chancellor of the Exchequer Sunak delivered annual budget on 3rd March 2021 which included a number of explicit and implicit tax increases. The Office for Budget Responsibility estimated that overall UK tax burden would rise to 35% of GDP by 2025-26, the highest ratio since the late-1960s.
UK forecast “This would still imply that GDP in June was at the level which prevailed in late-2009 and that UK GDP contracted a record 20.6% qoq in Q2 according to our estimates.” [Retail Sales Key to UK Economic Growth Recovery 30 July 2020]
Outcome UK GDP contracted 20.4% qoq in Q2, according to ONS data released on 12th August 2020
UK forecast “The correlation between retail sales and GDP growth likely remained strong in June but may weaken slightly in July given the partial re-opening of the hospitality, leisure and entertainment service industries and pick-up in outbound travel from the UK.” [Retail Sales Key to UK Economic Growth Recovery 30 July 2020]
Outcome Volume of UK retail sales rose 13.9% mom, a key driver of 9.1% mom GDP growth. GDP growth hit 6.7% mom in July despite retail sales growth slowing sharply to 4.0% mom.
UK forecast “Medium-term risk of Prime Minister Johnson’s government having to both slash spending and hike taxes to cut its deficit-to-GDP ratio to single-digits, despite its borrowing requirements being largely met by the Bank of England’s asset-purchase program.” [United Kingdom: Anatomy of economy on lockdown life-support, 18 June 2020]
Outcome Chancellor of the Exchequer Sunak delivered annual budget on 3rd March 2021 which included a number of explicit and implicit tax increases. The Office for Budget Responsibility estimated that overall UK tax burden would rise to 35% of GDP by 2025-26, the highest ratio since the late-1960s.
UK forecast “The UK Composite PMI would rise to 47.0 in June from 30.0 in May (Figure 2)” [United Kingdom: Anatomy of economy on lockdown life-support, 18 June 2020]
Outcome UK Composite PMI rose to 47.6, far higher than consensus forecast of 41.0.
Global forecast “[…] Global economic activity will likely recover further in June, in our view. However, the global PMI – which fell by 5.4 percentage points in Q1 2020 (the largest contraction since Q4 2008) – is still very likely to fall far more sharply in Q2. Even if the global PMI rises another 10pp in June, it will have fallen nearly 10pp in Q2” [Shape of Recovery: Square Root & Hockey Stick, 5 June 2020]
Outcome The global PMI composite output index rose 11.4 percentage points in June but was still down 9.1 percentage points in Q2 from Q1.
US forecast “The relative stability in US financial market and macro indicators, at least in the past 4-6 months, has arguably been self-reinforcing […]. Notably, domestic US political events and geopolitical developments in recent weeks have so far had little discernible impact on the Dollar or US government yields […]. The market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle, in our view. [Lack of US market & macro volatility both reassuring and troubling, 17 January 2020]
Outcome Spread of coronavirus in February-March caused US equity markets and government bond yields to collapse and Dollar to surge to multi-decade high.
US forecast “The slowdown in disposable income growth this year (due to weaker growth in “other incomes” and rising tax take), rising share of disposable income saved and recent fall in US consumer confidence do not bode well for PCE growth in Q4 and beyond.” [The key quartet: US income, confidence, net worth and consumption, 18 October 2019]
Outcome Annualised PCE growth (adjusted for inflation) slowed to 1.8% qoq seasonally-adjusted in Q4 2019 from 3.2% in Q3 and 4.6% in Q2 according to Bureau of Economic Analysis.
US forecast “Moreover, the recent fall in US consumer confidence, slowdown in income and wage growth and jitters in US equity markets suggest that Personal Consumption Expenditure (PCE) growth remained weak in September. We estimate that quarter-on-quarter seasonally adjusted annualised growth in PCE slowed to 2.7% in Q3 from 4.6% in Q2” [US consumer – From king to prince, 8 October 2019]
Outcome PCE growth slowed to 3.2% in Q3 according to Bureau of Economic Analysis while real retail sales growth slowed to about 0.5% in Q4 from 4.1% in Q3.
Global forecast “The IMF […] in its July World Economic Outlook forecast growth to slow to a 10-year low of 3.2% from 3.6% in 2018. We think the IMF’s forecast is still too optimistic and will be revised down again before end-year. Our own forecast is that GDP growth will slow to about 2.9% in 2019, with average quarter-on-quarter growth in the second half of the year slowing to about 0.6%.” [Global growth is slowing, not in recession, 29 July 2019]
Outcome In its 15th October Outlook IMF revised down its GDP growth forecasts for 2019 and 2020 to respectively 3.0% and 3.4% from 3.2% and 3.5% in its July Outlook.
Global forecast “As we have consistently predicted in previous reports, global economic growth continues to gradually slow, with both developed and emerging economies experiencing slower GPD growth. We are sticking to our core scenario that global growth will weaken further in coming quarters, to below 3% yoy, with the 60bp increase in the global central bank policy rate in 2018 weighing on borrowing and investment growth and tepid real wage growth in developed economies holding back household spending.” [Politics and geopolitics driving currencies, central banks in stasis…for now, 5 March 2019]
Outcome Global GDP growth slowed from about 3.3% yoy in Q4 2018 to about 2.9% yoy in Q2 2019.
Global forecast “The lagged and inverted relationship between the global “core” real policy rate and global GDP growth suggests that even slightly less stimulative interest rate policy could, in a leverage world, drag already slowing GDP growth lower in coming quarters. Moreover, higher international import tariffs could drive global inflation even higher and require further policy rate hikes while at the same time depressing global trade and GDP growth”. [Problematic central bank tracking of rising headline CPI-inflation, 29 October 2018].
Outcome Global GDP growth, year-on-year, slowed from 3.5% in Q3 to 3.3% in Q4 and 3.1% in Q1 2019 while headline CPI-inflation rose to a six-and-a-half-year high of about 2.87% yoy in October from 2.76% yoy in September, according to our estimates. Central banks in Mexico (twice), Sweden, the United States, Russia, South Korea, Israel, South Africa, Indonesia and the Czech Republic hiked their policy rates between 29 October and 31 December 2018.
US Forecast “The Atlanta Fed’s GDPNow is forecasting GDP growth of 4.1% qoq annualised. Based on the historical relationship between a weighted average of the manufacturing and non-manufacturing ISM PMI indices and US GPD growth, we estimate GDP growth at about 3.4% qoq annualised in Q3. Similarly, based on the historical relationship between a simple average of the Philadelphia and New York Fed manufacturing indices and US GPD growth, we estimate GDP growth at about 3.6% in Q3.” [When great is not quite good enough, 5 October 2018]
Outcome US GDP growth slowed to 3.5% in Q3 2018.
UK Forecast “With this backdrop and likely slowdown in imported inflation, UK core and headline CPI-inflation may be close to peaking, in my view” [Bank of England – Trick rather than treat, 3 November 2017]
Outcome UK headline CPI-inflation peaked at 3.1% yoy in November 2017 and then fell to 3.0% yoy in December-January and 2.4% yoy in Q2 2018.
US Forecast “My core reasoning is that US inflation may not rise as fast expected, due to lags in the implementation of Trump’s planned fiscal policy loosening and immigration curbs, residual slack in the US labour market and disinflationary impact of higher US yields and a stronger dollar.” [Hawkish pendulum may have swung too far, 21 December 2016]
Outcome US core CPI-inflation gradually slowed to 1.9% yoy in April 2017 from 2.1% yoy in Q4 2016 and GDP growth slowed to a 3-year low of 0.7% qoq (annualised) in Q1 2017.
China Forecast “I have a somewhat different take, namely that markets are rightly discounting some of the more extreme and perverse scenarios, including: […] Capital outflows from China ultimately forcing policy-makers into accepting a Renminbi collapse and shocking a corporate sector with significant dollar-debt.” [Black swans and white doves, 8 December 2016]
Outcome Capital outflows remained sizeable in December at about $90bn but the PBoC continued to intervene in the FX market, with its FX reserves falling about $41bn (or $33bn adjusting for estimated currency-valuation effects). Capital outflows fell sharply in Q1 2017 to only $29bn from $160bn in Q4 2016 and $210bn in Q3 2016. CNY NEER was range-bound in December 2016-January 2017.
China Forecast “Likely further rate cuts, slowing growth, flip-flopping of policies to accentuate FX outflows. This will put CNY under pressure and PBoC will intervene in the FX market to slow (but not stop) CNY depreciation. Sizeable FX reserves will thus continue to fall further. Currency depreciation is still more likely than shock-and-awe devaluation.” [What to expect in 2016 – Same, same but worst, 19 January 2016]
Outcome Capital outflows of about $640bn in 2016 kept Renminbi under pressure but NEER weakened only 6.4% and was at end-2016 still 7% stronger than in mid-2014. PBoC intervened to slow Renminbi depreciation and its FX reserves fell about $320bn in 2016 (or $293bn adjusting for estimated currency-valuation effects).
Brexit Forecast “The critical question remains whether the United Kingdom and European Union can reach agreement on a free-trade deal in the next week or so. The past 4.5 years suggest that negotiations will go to the wire but on balance of probability we think that a trade deal will be reached.” [Time is priceless but has a steep cost, 25 November 2020]
Outcome The UK and EU formally announced on 24th December that a trade deal had been reached, only seven days before the end of the transition period on 31st December.
Brexit Forecast “We expect the outcome of this critical vote to be closer than on 15th January when an all-time high majority of 230 MPs voted against the deal. However, our core scenario is that a majority of the 634 voting MPs will again vote against the deal […]. In the event of the HoC voting against a “no-deal” Brexit next week, MPs would ultimately have little choice but to vote in favour of seeking a time-extension which the European Council would then approve, in our view.” [Brexit: Another 48 hours, 8 March 2019]
Outcome on 12th March, 391 MPs voted against and 242 voted in favour – a smaller but still sizeable majority of 149. On 13th March a majority of MPs voted against a no-Brexit deal and on 14th March voted in favour of an Article 50 time extension, which the European Council agreed to on 21st March.
Brexit Forecast “In conclusion we think that in total about 417 MPs – i.e. a significant majority of close to 100 MPs – will vote against the Brexit and that 222 will vote in favour.” [Tuesday 11th December: Brexit D-Day, 4 December 2018].
Outcome In a vote rescheduled to 15th January 2019, 432 MPs voted against and 202 voted in favour – a discrepancy of only 4% versus our forecasted outcome
Brexit Forecast “Our core scenario is that UK and EU will reach a mutually-acceptable deal of some form in the next two months […]. However, of the two sides, the EU has both the strongest bargaining position and institutional capacity to negotiate (and implement) a deal, in our view. At the margin this is more likely to sway the terms and conditions of a final deal in the EU’s favour, which in turn could further dent popular and political support within the UK for such a deal.” [Final Twist in Brexit Plot, 14 September 2018].
Outcome UK and EU negotiators announced on 13 November 2018 that they had reached agreement on a draft Brexit deal covering the Withdrawal Agreement. A number of cabinet secretaries and ministers subsequently resigned and in the following months, parliament three times voted against this Brexit deal.
Germany Forecast “Option (2) [another grand coalition between the CDU-CSU and the SPD] may thus be the least unappealing for the normally pragmatic Chancellor, while the SPD and Schulz may have more to lose from new elections than the FDP and Greens.” [Euro impervious to eurozone’s political pantomime, 24 November 2017]
Outcome SPD members on 4th March 2018 voted 2 to 1 in favour of the SPD and CDU-CSU forming a grand coalition, paving the way for Chancellor Merkel to form a government almost six months after federal elections were held.
France Forecast “Nevertheless, I am sticking to my core scenario that Macron will make it to the second round which he would win regardless of whom he faces given his strong cross-party political support and reasonably high popularity amongst voters […].” [The Ultimate Guide to the 2017 French Elections – Part IV, 13 April 2017]
Outcome Macron won the first round of the French presidential elections with 24% of the vote.
France Forecast “Opinion polls accurately predicted the outcome of the 2012 and 2007 presidential elections and the eventual winner of the 2002 election […]. Le Pen and Macron still look on track to fill the top two spots in my view” [The Ultimate Guide to the 2017 French Elections – Part III, 5 April 2017]
Outcome Macron and Le Pen came first and second in first round with respectively 24% and 21% of popular vote, with Fillon and Mélenchon third and fourth respectively on 20% and 19%. Opinion polls very accurately predicted candidates’ ranking and share of national vote.
Germany Forecast “German general elections scheduled for September may well lead to a more divided parliament, making it harder to form a majority coalition government. But it is difficult at this stage to see who will realistically challenge Chancellor Merkel who is striving for a fourth consecutive election victory.” [Paradox of acute uncertainty and strong consensus views, 3 January 2017]
Outcome CDU/CSU again won the largest number of votes and seats in 24th September election and Merkel will for the fourth time likely lead a ruling coalition. However, CDU/CSU is 109 seats short of a parliamentary majority, in part due to an unprecedented six parties winning seats in the Bundestag. The CDU/CSU will either have to re-form an alliance with the SPD or align itself with the Greens and FDP in the first ever 3-way government.
Europe Forecast “If, as I expect, the eurozone economy starts to benefits from the Euro’s depreciation and US yields stabilise or fall, this yield spread may no longer be sufficient to push the EUR/USD cross lower […]. Finally, the risk of European nationalist parties acceding to the highest echelons of power has been over-stated, in my view […]. It may be premature to go long EUR/USD but this may well be the trade to consider, particularly in the run-up to the French presidential elections in April-May 2017.” [Hawkish pendulum may have swung too far, 21 December 2016]
Outcome EUR/USD slowly pushed from a multi-year low of sub-1.04 on 21 December 2016 to 1.08 in mid-March 2017 (contrary to widespread market expectations that the cross would fall below parity), and above 1.16 in late July.
Italy Forecast “The more likely political, financial and economic outcome from a “no” vote is perhaps less dramatic, in my view, and financial markets, including the euro, have been reasonably well behaved in the run-up to the (Italian) referendum.” [Renzi referendum frenzy – Storm in a brittle tea cup, 2 December 2016]
Outcome Euro appreciated, Italian 2, 5 and 10-year government bond yields fell and Italian banks stocks rallied in the wake of the Italian referendum “no” note.