April 2021 - Monthly Economic Outlook

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Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.
High: 1.2096 / Low: 1.1712 / Variation: -2.54%

The euro is in free fall against the US dollar. In all likelihood, the decline is not over yet and could take the euro/dollar pair (EUR/USD) to around the 1.16 mark. For once, monetary policy is not the differentiating factor. Indeed, on both sides of the Atlantic, monetary policy has been switched to autopilot mode and is expected to remain so for the next several months at least.

With that in mind, faster and stronger economic recovery in the US, resulting from an effective vaccination programme and major fiscal stimulus package, has led to the massive recycling of foreign capital inflows on the US market.

This results in a stronger dollar. In contrast, the short-term outlook for the eurozone remains rather gloomy, with foreign investors tending to withdraw their assets, a negative factor for the single currency’s exchange rate.

High: 0.8651 / Low: 0.8490 / Variation: -1.75%

The euro’s downward trend against the British pound was again confirmed in March. An orderly Brexit and, above all, much lauded management of the vaccination programme in the UK (which enables the UK economy to reopen more quickly) are major factors contributing to the rise in the pound. All the evidence suggests that, in the short term, the currency should continue to outperform the euro.

Indeed, based on the current rate of UK vaccination, nearly 75% of the population is expected to have received a first dose of the vaccine by mid-June, a target that the eurozone is expected to reach only several months later. This gap will manifest itself in economic growth. For the foreign exchange market, this will result in a more pronounced decline in the euro/pound sterling pair (EUR/GBP) over the coming months.

It is worthy of note that no changes in monetary policy are likely to affect the pair in the short term. At its March meeting, the Bank of England confirmed that its key interest rate will remain unchanged, at 0.1%, and that its QE (quantitative easing) programme, totalling £895 billion, will continue.

High: 130.47 / Low: 128.28 / Variation: +0.91%

The euro/Japanese yen pair (EUR/JPY) fluctuated significantly throughout March, evolving in line with US budget announcements and news on the development of the pandemic in Europe. From a policy point of view, the Bank of Japan published the conclusions of its strategic review a few weeks ago.

The main decisions made are as follows: the central bank will continue to intervene heavily in the equity market, but it will allow for greater flexibility in ten-year bond yields. In addition, it plans to further support the banking sector, which has been negatively impacted over the last few years by a negative interest rate policy.

Fundamentally, these measures are unlikely to greatly influence the trajectory of the Japanese yen. The currency continues to be mainly influenced by the change in risk appetite/aversion, which remains the key barometer for understanding the EUR/JPY.

High: 1.1152 / Low: 1.003 / Variation: +0.29%

Throughout March, the euro/Swiss franc pair (EUR/CHF) fluctuated in a chequered manner, within a very narrow band of just 150 pips. Unsurprisingly, the Swiss National Bank (SNB) kept its monetary policy unchanged, with its key rate at -0.75%.

In addition, it confirmed that direct interventions on foreign exchange will continue in the medium term, in a bid to curb the Swiss franc’s appreciation. Under these conditions, our year-end target of 1.15 for the EUR/CHF remains valid.

The global economic rally expected in the second half of the year, which should support a more significant return of risk appetite to the foreign exchange market, coupled with the SNB’s purchases of euros, is expected to lead to a more substantial rise in the EUR/CHF pair in the coming months.

High: 1.5285 / Low: 1.4720 / Variation: -3.35%

The Canadian dollar (CAD) was supported by two main factors in March. Firstly, the rise in energy commodity prices continued (with a sharp acceleration over the last week or so).

Secondly, the Bank of Canada is the only central bank in developed countries to consider an imminent reduction in economic support, which is a driver of local currency appreciation. The Deputy Governor of the central bank indicated that it will suspend or discontinue certain programmes to provide liquidity to the financial markets, from early April to May.

The central bank believes that the economy is doing well enough, which will undoubtedly lead to the gradual withdrawal of certain emergency measures. Conversely, the key rate, which currently stands at 0.25%, is expected to remain at this level at least until the end of 2022.

High: 1.5609 / Low: 1.5269 / Variation: -0.13%

High volatility for the euro/Australian dollar pair (EUR/AUD) in March, within a range of nearly 350 pips. The decline in the euro is mainly due to the deterioration of the eurozone’s short-term economic outlook, owing to the spread of Covid-19 across Europe.

On the central bank front, the Reserve Bank of Australia kept its monetary policy unchanged in March, with a key rate still anchored at a historic low of 0.1%. The members of the central bank confirmed that the rate would remain at this level while inflation remains below the target of between 2% and 3%.

In practical terms, a rate hike is only likely to be implemented in 2024 at best. As is the case in many developed countries, the Australian central bank is on autopilot.

High: 7.8285 / Low: 7.7018 / Variation: -1.02%

The clear discrepancy in economic outlook between the eurozone and China in the short term continues to be one of the drivers of the single currency’s depreciation. In March, the euro/yuan pair (EUR/CNH) fell by almost 1.22% month on month.

Given the uncertainties weighing on economic momentum in the European Union and restrictions that will undoubtedly be tightened to deal with the third wave of the pandemic, it seems clear that the euro is very likely to continue its downward trend over the coming months.

High: 369.20 / Low: 361.05 / Variation: -0.79%

The euro/forint pair (EUR/HUF) almost returned to its starting point at the beginning of March. Month on month, the pair remained almost stable. The Hungarian central bank meeting did not reveal any surprises for forex market operators.

Instead, a kind of status quo is expected to be upheld in terms of monetary policy, though inflation is expected to rise temporarily in the second quarter (due to the base effect on energy commodities, among others). After having dealt with the pandemic’s initial development in a somewhat haphazard manner, the Hungarian government has ultimately implemented a rather effective vaccination programme. Significant acceleration has been achieved in recent weeks, to the extent that the country is now one of the top performers in the EU.

From a currency market perspective, we expect the pair to remain stable in the immediate future. If the Hungarian currency were to weaken excessively against the euro and inflation reached a level that was difficult to tolerate, the central bank could decide to raise rates in the short term. That said, we have not reached that point just yet.