Weaker yen lifts TMS Brokers to the top

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TMS Brokers topped last week's one-month currency forecast table with three on-target calls regarding the appreciation of the euro and the dollar against the yen, and a steady pattern for cable.

The Polish broker correctly forecast EUR/JPY and USD/JPY to rise to 138 and 125, from 135 and 124, respectively, over the course of the last month.

"We are targeting USD/JPY at 128 in December," says Konrad Bialas, a foreign exchange strategist at TMS Brokers. "We think this week's GDP data from Japan will eventually push the Bank of Japan (BoJ) to expand its monetary easing, probably in October after the Federal Reserve moves."

He adds: "Right now, there's too much political pressure not to weaken the yen, so the BoJ might wait for another batch of data that could support the decision."

The liberalisation of the yuan is not a big deal and won't drag away the Fed from hiking

September Fed hike expected

Despite last week's unexpected decision by China to devaluate its currency, Bialas still expects the Fed to hike in September.

"The liberalisation of the yuan is not a big deal and won't drag away the Fed from hiking. In our opinion, data from the US is relatively strong and should convince the Fed to start a policy normalisation, [although] even after the first rate hike it will continue to keep its policy extremely loose," he says.

Even if the Fed goes ahead with a rate hike at its September meeting, Bialas warns the central bank will probably adopt a cautious stance and implement successive rate hikes, depending on the rate of the dollar's appreciation.

"We are not sure that December will be the next date for another hike. It's likely it could wait until next year," he adds.

TMS Brokers was also close with its EUR/USD prediction of 1.10, just shy of the 1.11 level the pair closed at last week. Bialas has a target of 1.04 by the year end, mostly due to monetary divergence between the Fed and the European Central Bank (ECB). While he sees the cross on a descending path, he doesn't expect parity to be reached any time soon.

More easing possible

"We can't rule out that Mario Draghi will sound very dovish at the next ECB meeting in September, trying to talk down the euro. We think disinflation pressure from appreciation of the euro versus the yuan is increasing the risk that the quantitative easing programme will be extended beyond September 2016," says Bialas.

Stability in cable was the key for TMS Brokers' success in its third on-target forecast: GBP/USD remained steady at 1.56 – a behaviour that Bialas expects to continue.

"We expect the first BoE rate hike sometime in the first quarter of 2016," he says. "We think the market will be pricing in the normalisation of the monetary policy earlier. Therefore, cable will end the year at 1.55."