Dec 31: Following the dollar's worst year in more than a decade, foreign-exchange strategists see few signs of optimism for the US currency in 2018. Yet they remain divided as to which of its major peers to be bullish on.
While most say monetary policy is set to drive FX movements in the months ahead, just how that translates into market performance remains a matter of debate.
The following is a selection of views from strategists outlining why they're optimistic - or not - about the prospects for various major developed currencies.
Yen: median end-2018 survey forecast 112 to the dollar.
The Bank of Japan "is probably the next to signal some kind of regime shift," says Mark McCormick, Toronto Dominion Bank's North American head of FX strategy. Dollar-yen will probably see a transition "where 115 is the peak and we're headed back to 100 next year."
Juan Prada, a foreign-exchange strategist at Barclays, also expects the yen to strengthen amid "strong activity and gradually, slowly increasing core inflation" that could prompt the BOJ to change its monetary policy stance in the second half of 2018. He forecasts USD/JPY at 105 by the end of next year.
Others say not so fast. "If you look over the course of 2018, the BOJ seems to be lagging those global tightening cycles," Credit Agricole's Vassili Serebriakov says. Wells Fargo's Nick Bennenbroek agrees, saying the Bank of Japan isn't following the lead of other central banks in making a significant change to policy, meaning there's not much of a catalyst for the yen to strengthen.
Euro: median end-2018 forecast 1.21 to the dollar.
"We tend to think kind of as a general picture, Europe does best, followed by North America, followed by Asia," says Credit Agricole's Serebriakov, who sees the euro strengthening to 1.23 against the dollar by the end of 2018.
"The ECB is tapering its QE. We see continuous strong equity inflows into Europe on the back of strong growth. The European yield curve can probably steepen a bit, which will probably help the euro."
He expects investors will start to contemplate the pace of tightening in the eurozone as the second half of 2018 gets nearer.
"The euro is still very much a pro-cyclical currency," says Bipan Rai, a foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce. He says the current length of the European cycle is still short of the average length of prior cycles, whereas the US cycle is more mature, and he expects euro-dollar to end 2018 around 1.25. "Our expectation is that towards the middle part of the year the ECB will potentially be looking towards amending their guidance, and we expect once the current programme ends in September, they'll start announcing tapering which could wrap up in January 2019, all of which would support the currency."
Scandinavian currencies: Swedish krona currently 9.8692 per euro; median end-2018 forecast 9.30 per euro; Norwegian krone, median end-2018 forecast 9.20 per euro.
The "best performers could be the European satellites, the Swedish krona and Norwegian krone," Barclays' Prada says, citing strong European activity, his expectation of a stronger euro and the Scandinavian countries' more advanced cyclical position. He expects EUR/SEK to trade at 9.30 by end-2018 and EUR/NOK at 9.20.
Daragh Maher, HSBC's US head of FX strategy, says Sweden's current policy mix of negative interest rates and a big balance sheet "doesn't really sit neatly with an economy that next year is going to grow about 2 per cent."
He sees EUR/SEK at 9.20 by the end of next year and EUR/NOK at 9.10.
Canadian dollar : median end-2018 forecast 1.23 per US dollar.
The Bank of Canada "is probably going to be one of the more active central banks," Wells Fargo's Bennenbroek says. "The economy is doing OK, maybe CPI inflation in Canada is moving very gradually higher, but what has also been extremely helpful is the rise in oil prices, close to $60 a barrel." He forecasts USD/CAD at 1.18 in 12 months.
A strong growth outlook and pickup in inflation is set to boost the loonie in 2018, Credit Suisse Group foreign-exchange strategist Alvise Marino says. Add to that prospects for the survival of the North American Free Trade Agreement, a net international investment surplus, and a pickup in immigration that will bolster aggregate demand and limit the likelihood of a large housing market correction, and USD/CAD should be trading around 1.20 by the end of next year, he says.
Macquarie Bank's Thierry Wizman isn't so sure. He warns that the fundamentals might not be that supportive for the Canadian dollar. "We just don't see many structural drivers for growth in Canada apart possibly from oil prices continuing to stay high, but that's not something you want to depend on," Wizman says.
The Australian and New Zealand dollars: Aussie median end-2018 forecast 0.80 against the dollar; NZ dollar, median end-2018 forecast 0.72 to the dollar.
Emergency monetary policy settings are no longer needed in Australia and New Zealand, and there's been a pickup in labor markets and commodity prices, so "central banks will pivot to the exit" in both nations, says HSBC's Maher. "For a normalisation story, the macro backdrop is pretty straightforward." He forecasts AUD/USD will reach 0.84 at the end of 2018, and sees NZD/USD at 0.75.
"We do think the RBA is going to hike next year but that's probably a story for the second half," CIBC's Rai said. The Australian dollar is likely to see "a slow grind higher" before reaching the firm's forecast of 0.85 versus the US dollar by the end of 2018. CIBC is also optimistic on the New Zealand dollar and sees market positioning on the currency as overly bearish. It recommends shorting the Aussie versus the kiwi. -The Washington Post