Forex Quantitative Analysis: BNP Paribas CLEER™ forecasting model: Beyond the Fed
BNP Paribas CLEER™ (CycLical Equilibrium Exchange Rate) provides a fair value for a currency based on the relative economic fundamentals including inflation, productivity, terms of trade, balance of payments, output gap, inflation gap and interest rates.
- BNPP CLEER™ provides projections for exchange rates based on current and forecasted economic fundamentals.
- USDJPY is modelled to respond the most to Fed rate hikes, but this is contingent on Japanese investor hedge ratios on foreign asset purchases remaining low.
- EURUSD is projected to decline to 0.99 in 2017.
- For GBPUSD we model three scenarios: Base-case at 1.31, best-case at 1.37 and worst-case at 1.13.
- The AUD has the best prospects in the commodity bloc.
- EURSEK is projected to decline to 8.90 over 12-18 months.
We updated our macro-based fair-value model, BNP Paribas CLEER™, following the update of our economists’ outlook Q2 2017: The upswing is here. BNPP’s growth and inflation forecasts are above consensus expectations, resulting in a more hawkish outlook for the Fed. This has bullish implications for the USD, although prospects for changing policy stances elsewhere and changing investor behaviour (especially in Japan) could limit the scope for substantial USD strength.
CLEER projects EURUSD declining to 0.99 based on fundamentals at the end of 2017. As the FX market is forward looking, spot can move to this level before the end of the year according to CLEER.
USDJPY is projected to rise above 130 on Fed rate hikes. The high sensitivity of the pair to US rates is likely due to the low hedge ratio of Japanese investor purchases of foreign debt in recent years. In an alternative scenario of Japanese investors increasing their hedge ratio, the end-18 CLEER is much lower at 115.
The outlook for the UK’s macroeconomic variables has elevated uncertainty ahead of the exit from the EU. Scenario analysis using our CLEER™ framework suggests that a lot of, but not all, negative news has been priced into the GBP. The ‘worst-case level’ for GBPUSD, taking into account our latest Fed view, is 1.13. For EURGBP, the worst -case level is 0.92.
The CLEER™ for AUDUSD has been supported by rising commodity prices, but offset somewhat by higher US yields. The CLEER is expected to remain supported around 0.78 AUDUSD, as the Australian rates market starts to price policy tightening from the central bank. Meanwhile, NZDUSD is projected to decline towards 0.67. USDCAD is projected to rise to 1.37 on relative policy divergence.
Sweden’s robust growth and the expected change in Riksbank policy suggest EURSEK could decline towards 8.87 by the end of 2018. In Norway, persistently high inflation has eroded EURNOK fair value, but rising NOK rates should see EURNOK drift downwards to 8.70 according to CLEER™.
government now expects GDP growth to be a full 1pp lower at 3.8% y-o-y.