Spot-on dollar view puts CIBC top

Fed to raise rates soon after BoE action

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The Canadian Imperial Bank of Commerce (CIBC) topped last week's one-month currency forecast rankings with the view that an improvement in US fundamentals would eventually be reflected in gains for the US dollar against other major currencies.

On July 4, the bank gave a spot-on forecast that GBP/USD and USD/CHF would drop to 1.68 from 1.71 and ascend to 0.90 from 0.89, respectively.

Against the consensus that saw cable keeping its value above 1.70, Jeremy Stretch, head of FX strategy at CIBC, says the pair reached their full valuation and anticipates the US Federal Reserve to follow suit when the Bank of England (BoE) starts hiking rates.

"We think those levels north of 1.70, up to the 1.72 area, look fairly fully valued in terms of its valuation perspective. We also think we are getting into a scenario where markets are becoming both overly long GBP/USD and too aggressive in terms of anticipating an early move in rates. Yes, we think the BoE will move before the Fed, but perhaps only narrowly – thus we think the market is getting a little bit ahead of itself in terms of what timing is priced in," he says.

CIBC sees GBP/USD gradually falling to 1.67 and 1.66 in the short and medium term. Despite the growing geopolitical risks, the supportive dollar dynamic should moderately outweigh concerns and USD/CHF strengthen to 0.92 and 0.93 in the short to medium term, says Stretch.

The bank predicted EUR/USD to drop to 1.33, down from its July 4 trading level of 1.34. This was against the overall consensus from forecast contributors, which saw the pair sticking at 1.35.

"The ongoing disinflationary pressures in the eurozone will keep the pressure on the European Central Bank to do more," says Stretch, who forecasts the pair to fall to 1.31 and 1.29 in one and three months' time, respectively.

Against the yen, the euro is expected to bear the brunt of central bank easing policy, dropping to 134.3 in one month and to 132.2 over three months. However, USD/JPY should remain in the same range, over both the short and long term.

"From a Japanese perspective, there are ongoing concerns about the impact of the sales tax hike on the economy. That continues to lead us to be mindful of the potential for further action by the Bank of Japan – although we're not necessarily expecting it, but there is a risk of that. Allied to the more supportive dollar environment, it will keep USD/JPY supported," Stretch says.

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