www.danskeresearch.com FX Forecast Update 15 November 2012 Weaker dollar, yen and sterling in 2013 but mind the cliff Arne Lohmann Rasmussen Chief Analyst, Head of Rates, FX and Commodities Strategy Kasper Kirkegaard Stefan Mellin Stanislava Pravdova Senior Analyst Senior Analyst Analyst Morten Helt Lars Christensen Christin Tuxen Vladimir Miklashevsky Senior Analyst Chief Analyst Senior Analyst Analyst www.danskebank.com/research Bloomberg: DRFX <GO> Important disclosures and certifications are contained from page 33 of this report.
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FX Forecast Update 15 November 2012 Weaker dollar, yen and sterling in 2013 but mind the cliff Arne Lohmann Rasmussen Chief Analyst, Head of Rates, FX and Commodities Strategy Kasper Kirkegaard Stefan Mellin Stanislava Pravdova Senior Analyst Senior Analyst Analyst
Morten Helt Lars Christensen Christin Tuxen Vladimir Miklashevsky Senior Analyst Chief Analyst Senior Analyst Analyst www.danskebank.com/research Bloomberg: DRFX <GO>
Important disclosures and certifications are contained from page 33 of this report.
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Main forecast changes • This month we would like to highlight our one-month forecasts, which can be found on page 28-31. In general, we expect the
current weak risk picture to continue throughout December. The combination of fiscal cliff concerns, scaling back on risk positions ahead of year-end and continued uncertainty about whether Spain will ask for ECB support do not bode well for risk appetite over the next six weeks. Therefore, we forecast that EUR/USD will fall to 1.26 on a one-month horizon, that EUR/NOK and EUR/SEK will tend to move higher ahead of year-end (one-month targets, EUR/SEK 8.75 and EUR/NOK 7.40, respectively) and that commodity, cyclical and EM currencies will face further headwinds ahead of year-end.
• We expect the current risk-off environment to be temporary and we still look for 2013 to provide an improvement in risk appetite. The US numbers have improved, there are signs that the recovery has gained momentum in Asia and the Fed – through its open-ended easing – is adding cheap USD liquidity to the market. The latter, combined with an expected low-volatility environment, bodes very well for carry strategies in 2013. Hence, in 2013 we forecast a weaker USD, a weaker JPY and a weaker GBP. Commodity currencies, the Scandies and emerging market currencies are, on the other hand, forecast to strengthen, not least during the first six months of 2013.
• The ECB has reduced tail risks in Europe and the Fed has secured an historic easing commitment in the US. Relative monetary policy is now clearly favouring EUR/USD upside. Relative growth is favouring the USD, however, and should continue to reduce the impact of relative monetary policy. The US fiscal cliff is USD positive short term, which is reflected in our one-month forecast for EUR/USD at 1.26, but going into 2013 we expect renewed upside in EUR/USD. We have revised our three and six-month EUR/USD forecasts to 1.30 (1.35) and 1.33 (1.35) respectively, while keeping our 12-month forecast unchanged at 1.30. The revisions primarily reflect a better growth outlook for the US relative to the eurozone.
• We expect the upcoming election in Japan and a rising risk of recession to lead to increased pressure on the Bank of Japan to ease monetary policy further. We are now even more negative on JPY and have moved forward our expectation of further JPY weakness. We now target USD/JPY at 81 (79) in one month, 83 (80) in three months, 84 (82) in six months and 85 (83) in 12 months.
• For the commodity currencies we expect fiscal woes to prove a headwind vis-à-vis the USD ahead of New Year but the improvement in the cyclical environment that we look for should prove a positive early in 2013 together with healthy risk appetite fuelled by central bank easing. However, beyond the six-month horizon, a challenging environment with focus on low growth for long, questioning of the Chinese growth potential and weaker commodity prices should weigh.
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Forecast: 1.30 (3M), 1.33 (6M) and 1.30 (12M) • Growth: The US is once again outperforming Europe, which remains caught in a zero-growth environment.
• Monetary policy: ECB and not least Fed action over the past couple of months has clearly been euro positive and dollar negative. Relative monetary policy should remain a support factor for EUR/USD going into 2013.
• Flows: The US runs a sizeable current account deficit, which should amplify the currency-negative effects of the Fed’s open-ended easing. We look for a positive carry environment which should weigh on the dollar.
• Valuation: EUR/USD is trading around neutral levels according to long-term models (PPP estimate is 1.28).
• Risks: There are three key risk factors to EUR/USD over the next couple of months: (i) the US fiscal cliff, which could trigger a market sell-off (USD positive), (ii) whether Spain applies for a EFSF/ESM programme (if not, EUR negative), and (iii) ECB rate cuts – a deposit rate cut would make relative monetary policy much less of a EUR/USD support factor.
EUR/USD – US fiscal cliff delivers temporary dollar support
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Conclusion: The ECB has reduced tail-risks in Europe and the Fed has secured a historical easing commitment in the US. Relative monetary policy is now clearly favouring EUR/USD upside.
Relative growth is favouring the dollar, however, and should continue to reduce the impact from relative monetary policy. The US fiscal cliff is dollar positive, but going into 2013 we expect renewed upside in EUR/USD.
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
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EUR/USD – important issues to watch • A clear trend reversal in relative monetary policy...
− For more than a year, relative monetary policy has been supporting a euro downtrend as the ECB was catching up with the Fed. This trend was broken in September.
− Even though it is too early to dismiss further ECB easing, it appears highly unlikely that the ECB will be able to match the Fed’s open-ended commitment to monetary easing.
• ...but relative growth lowers the FX impact
− US economic data has surprised strongly to the upside recently, while European data remains weak. If this growth differential is sustained beyond the US fiscal cliff, it is likely to reduce the EUR/USD positive effects from relative monetary policy.
• US fiscal cliff is dollar positive – not negative
− The US fiscal cliff is a major tail-risk for both the US economy and for the US sovereign credit rating. For most other countries this would translate into an increased tail-risk on its currency. However, the dollar is the world’s main reserve currency and is thus seeing support from increased market uncertainty.
EUR/GBP – Bank of England on hold for now • Growth: The first estimate of Q3 GDP indicated that
the UK is technically out of recession with a rise of 1.0% q/q. The seemingly strong number for Q3 comes partly from a rebound in activity following the Jubilee holiday related disruptions in Q2. PMIs point to a more downbeat picture ahead.
• Monetary policy: The Bank of England left both the base rate and the asset purchase target unchanged at 0.5% and GBP375bn, respectively in November. However, there is no doubt in our minds that the MPC stands ready with additional QE if the outlook for the UK economy deteriorates further.
• Debt risks: Focus is on the downgrades in the eurozone but could shift to negative focus on the UK, which runs a bigger deficit than most eurozone members, including Italy, Spain and France.
• Valuation: From a long-term perspective, sterling is undervalued (PPP around 0.77). A regime shift has probably happened though and EUR/GBP, in our view, belongs above 0.80 over the next six months.
• Risks: The close correlation with the US dollar has been less pronounced lately. We think it will return and it should weigh on sterling in 2013.
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Conclusion: We expect the combination of a weaker dollar and the risk of further easing by the BoE to weigh on sterling over the next six months. However, for the coming month we expect EUR/GBP to move lower, reflecting a weak risk environment and the latest move lower in EUR/USD, which is not reflected in EUR/GBP. Our 1M forecast for EUR/GBP is 0.79.
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
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EUR/GBP – important issues to watch • The BoE starts to ease again − BoE is currently on hold with further monetary
easing. However, if the UK economy does not continue to improve a new round of QE certainly cannot be ruled out. It would be a surprise move and weigh on GBP.
• BoE engages in open-ended easing − There is also the possibility that the BoE will move
in the same direction as the Federal Reserve and introduce a form of open-ended easing. The probability of such a move has fallen lately, as UK numbers have improved somewhat. However, if this happens, the GBP should suffer significantly.
• Dollar link to fade − The correlation between GBP and USD is still
relatively strong. Hence, sterling is still in the hands of the dollar. In particular, the six- and 12-month forecasts for EUR/GBP are very reliant on our USD view. However, note that the latest move lower in EUR/USD has not been reflected in EUR/GBP moving lower.
GBP/USD correlation using EUR as numeraire (3M rolling)
10Y average
Correlation coefficient
Source: Reuters EcoWin, Danske Bank Markets
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Forecast: 83 (3M), 84 (6M) and 85 (12M)
USD/JPY – election and recession to add pressure on BoJ • Growth: Japan’s GDP in Q3 contracted 3.5% q/q AR.
The weakness was driven mainly by a sharp fall in exports and weak private consumption. We expect Japan’s GDP to contract by another 1.5% q/q AR in the current quarter, so technically Japan is in recession.
• Monetary policy: The Bank of Japan (BoJ) expanded its asset purchase programme by JPY11trn to JPY66trn at its meeting on 30 September. We expect the asset purchase programme to be expanded further by at least an additional JPY15trn. While we expect the BoJ to be on hold in November, we believe the next move from the BoJ could come as soon as December.
• Election: A general election, which is expected to be held on 16 December, is likely to result in a new government led by the LDP. The LDP leader Shinzo Abe has been rather critical of the BoJ for not fighting yen strength and suggested that the inflation target could be raised to 2-3% and thus lead the BoJ to ease further.
• Risks: If the Bank of Japan fails to deliver enough monetary easing to counter aggressive Fed easing, it could cause USD/JPY to move lower.
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Conclusion: While the US fiscal cliff and renewed concerns about Greece may limit the upside potential in USD/JPY in the near term, we expect the upcoming election in Japan and a rising risk of recession to lead to the pricing of even more aggressive monetary easing from the BoJ. This would weaken the yen and we have raised our targets on USD/JPY a bit due to a higher likelihood of further aggressive action by the BoJ. We now see USD/JPY at 81 in 1M, 83 in 3M, 84 in 6M and 85 in 12M.
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
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USD/JPY – important issues to watch • We expect further monetary easing from BoJ
− In the past two months, the BoJ has expanded its asset purchase programme by JPY21trn. This is equivalent to close to 4.5% of GDP. The pace of asset purchases in Q4 12 is equivalent to about 8% annually, which is quite aggressive. For comparison, the Fed’s monthly purchase of USD40bn of mortgage bonds is equivalent to about 3% of GDP on an annual basis.
− We expect the asset purchase programme to be expanded further by at least an additional JPY15trn and our view remains that monetary policy in Japan, in addition to gradually improving risk sentiment in financial markets, will support a weaker JPY on a three- to six-month horizon.
• Investors are net short JPY again
− According to IMM, non-commercial positioning has turned net short JPY again, with levels now close to one standard deviation below the historical mean. While not yet at stretched levels, USD/JPY upside potential at least now looks somewhat reduced from a positioning point of view. However, improved risk sentiment and low volatility are normally good conditions for carry trades and we still consider the JPY as an obvious funding currency candidate for both EUR- and USD-based investors.
EUR/SEK – upside risks dominate through year end • Growth: We project sub-trend growth and higher
unemployment in 2013, with GDP averaging1.5% and unemployment peaking at 8.3% – slightly less optimistic than the Riksbank on both. Compared with Euroland, Sweden looks relatively good though.
• Monetary policy: The Riksbank remains reluctant to lower the repo rate further. For December, we expect a final 25bp, which is by and large priced in already (22bp). Market is pricing in 45bp over the next four meetings; a bit aggressive, in our view.
• Fundamentals: Sweden’s stable triple-A status is unique in a generally debt-laden world. Large CA surplus and low public debt are firmly in place. These are underlying SEK-supportive factors.
• Flows: Quality-based reallocation flows have taken a pause after the summer but could easily come back in a scenario where euro zone jitters re-escalate.
• Valuation: Fundamental medium-term equilibrium estimates (FEER , PPP) suggest EUR/SEK is dear.
• Risks: Upside risks from negative domestic macro news and Riksbank rate cuts. Downside risks from renewed eurozone turmoil and associated EUR sell-off.
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Conclusion: The near-term outlook is dominated by upside risks for EUR/SEK; we expect the Riksbank to cut 25bp in December, which could weigh a little further on the SEK even though most of it is already priced in. PPM flows and risk off are also potential SEK negatives before year end. The medium-term outlook, however, remains constructive for the SEK, hence we expect EUR/SEK to grind lower in 2013.
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
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EUR/SEK – important issues to watch December rate cut then done higher EUR/SEK short-term
• Low inflation, sub-trend growth and a weak labour market combined with a low-rate stumbling global economy should be enough for the Riksbank to ease further. That is what we believe and what the market is pricing in. However, the Riksbank (majority) remains genuinely reluctant, clearly manifested after the last policy meeting. Ingves et al argues that household indebtedness could potentially do more harm to the Swedish economy than the current cyclical slowdown. Hence, it will probably take a substantial deterioration for the Riksbank to cut beyond 1.0%. We look for 25bp (market 22bp) in December which could weigh on the SEK near term.
PPM flows to hit the market in weeks to come
• The PPM money is a recurrent end-of-the-year f low story in the Swedish market. This year the money will be distributed on 10 December. The exact sum is still not set but we expect it to be close to last year’s SEK32bn. Under the assumption that part of the foreign investments are hedged, we estimate that 10-12bn will hit the SEK. If anything, the market has pre-traded on this information in recent years. So any PPM-induced weakness in the SEK is likely to come before, not after, the PPM date.
EUR/NOK – still support from monetary policy • Growth: Norwegian numbers continued to be on the
strong side over the autumn. In September, retail sales rose 0.7% m/m, the credit indicator rose 6.9% and the Norges Bank survey painted a relatively positive picture. However, manufacturing production fell 0.8% in September and the PMI indicator fell to 58.7 in October. We forecast that mainland GDP will grow 3.5% and 3.3% in 2012 and 2013, respectively. Oil investments add approximately 0.8pp to mainland GDP growth in 2013.
• Monetary policy: Norges Bank kept the policy rate unchanged at 1.5% at the October policy meeting. Norges Bank says that rates should be kept at today’s level into next year, followed by a gradual increase towards a more normal level. However, very low inflation and the currency point in the other direction.
• Flows: Norges Bank surprised the market by saying that it will purchase no foreign currency in November and most likely none in December too.
• Valuation: NOK has become expensive (PPP 7.79).
• Risks: Unwind of safe-haven positions and stretched positioning a risk on the upside for EUR/NOK.
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Conclusion: We expect EUR/NOK to decline towards 7.20 in six months supported by relative rates and an improved risk appetite in financial markets. We expect Norges Bank eventually to raise rates despite the strong NOK underlining that Norwegian monetary policy is out of sync with the rest of the world. However, there is a risk of a higher EUR/NOK on a 1M horizon due to the weaker SEK and poor risk sentiment. Our 1M forecast EUR/NOK is 7.40.
EUR/NOK – important issues to watch • Safe-haven flows could change
If safe-haven flows intensify together with speculative flows, the NOK might appreciate strongly. However, there is also a pronounced risk of a reversal of these flows. If the SEK comes under even more pressure than we forecast, it could also weigh on the NOK short term. The weekly flow data from Norges Bank indicates that foreign banks, which we see as a proxy for speculative money, have built long NOK positions over the last month.
• No FX purchases in November Norges Bank surprised the market somewhat announcing that no purchases of foreign currency will be conducted in November. In theory purchases could be resumed in December but we doubt it. The lack of foreign currency purchases adds downside risk to EUR/NOK over the next two months.
• Rate changes by Norges Bank Given our FX forecasts, further rate cuts cannot be ruled out, which could lead to a weaker NOK. However, rate hikes might also enter the agenda more quickly than expected given the very strong Norwegian economy and red-hot housing market.
EUR/CHF – reduced euro tail risks means upside potential • Growth: The Swiss economy is somewhat under
pressure from the strong Swiss franc and weaker foreign export demand.
• Monetary policy: The SNB left monetary policy unchanged at its September meeting and pledged to continue defending the 1.20 minimum target.
• Flows: Underlying flows (current account surplus) remain CHF supportive, but unwinding of European tail-risk hedges has opened a window for temporary EUR/CHF upside. SNB intervened for a significantly lower amount in September compared with Q2. We estimate that intervention here in October was very limited.
• Valuation: The Swiss franc remains overvalued by about 13% against the euro according to the Danske Bank General PPP model.
• Risks: When the SNB judges deflation risks to be history, a move back to a free-floating currency should be expected. However, this policy shift is, in our view, unlikely to take place during the coming quarters.
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Conclusion: The 1.20 minimum target is likely to remain in place going into 2013. This should secure EUR/CHF above 1.20. We doubt that the Swiss franc will re-emerge as a global funding currency, but see potential for a reduction in European tail-risk hedges (i.e. unwinding of long CHF positions) to temporarily lift EUR/CHF over the coming months.
EUR/CHF – important issues to watch • This is not a currency peg − SNB’s minimum target on EUR/CHF is technically no
different from the interventions it conducted from March 2009 to mid-2010, although this time the SNB has announced the level that it will defend. It is important to note that this is not a currency peg in the traditional sense. The SNB has not expressed any view on how long it intends to keep the exchange rate floor in place, or as to whether it intends to move the target.
• Will the Swiss franc re-emerge as a funding currency? − The move higher in EUR/CHF after the strong
response by the ECB and Fed has seen some analysts argue that the Swiss franc has re-emerged as a global funding currency, and that this should lift EUR/CHF further.
− A funding currency should offer a low and stable interest rate, attractive valuation, and be backed by low inflation. The Swiss franc offers that.
− However, given the losses faced by investors who were funded in francs going into the financial crisis, we doubt that the Swiss franc will re-emerge so soon as a global funding currency. The policy risks, and associated tail-risks, also remain too high for that.
EUR/DKK – moving towards central parity • The negative Danish deposit rate and less demand
for safe-haven assets has taken away the appreciation pressure on DKK and since July EUR/DKK has moved from 7.43 to just below 7.46. Recently EUR/DKK has somewhat surprisingly been allowed briefly to trade marginally above the central parity.
• After the latest move higher in EUR/DKK, Nationalbanken (DN) intervened for a modest DKK500m in October to support DKK. Further intervention is likely at or just above the current level, which should limit the upside for EUR/DKK.
• The reaction function of DN will in our view be fully symmetrical and the adverse effects of the negative policy rate will not be taken into account. Hence, first DN will intervene and subsequently policy rates will be hiked. Intervention of approximately DKK10-20bn is likely to trigger an independent Danish rate hike. The Danish deputy governor Callensen underlined in a Bloomberg interview on 2 November that the reaction is in fact symmetrical and he underlined that ‘policy makers won’t be swayed by financial industry complaints to depart from their goal of defending the krone peg’.
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Conclusion: DN has been successful in taking away the strong appreciation pressure in Q2 and the inflow into DKK has come to a halt. EUR/DKK is now trading just below central parity. We think that EUR/DKK will – helped by intervention and rate hikes – be kept at the current level for the next couple of months. Hence, the potential for further upside in EUR/DKK is limited, as DN is still expected to favour EUR/DKK marginally below central parity. An escalation of the euro crisis could push EUR/DKK slightly lower.
EUR/DKK forwards – to tighten further in 2013 but widen short term • The forward discount in EUR/DKK has in general
tightened since June, as Danish rates have risen relative to euro rates as the rates market has started to price in independent Danish rate hikes and the cross-currency basis has moved in favour of DKK. To a certain degree the move reflects the ongoing normalisation in financial markets. We believe this normalisation will continue in 2013.
• However, there is a pronounced risk that the forward discount will widen ahead of year-end. First of all, one should be aware of a potential turn effect in forwards. There is a risk of forwards moving to the left, primarily in December, when banks tend to demand foreign currency (higher forward discount in EUR/DKK). Second, we believe that short term the market will price out imminent rate hikes from Nationalbanken given the current weak risk sentiment and latest move lower in EUR/DKK. Note that the up-coming ‘flex-auctions’ might work in the other direction, as hedging might tend to push Danish cita and swap rates higher.
Forward discount in EUR/DKK to tighten further (pips)
USD/CAD – hawkish BoC to cap upside • Growth: Canadian data has deteriorated somewhat
over the past month with notably August GDP contracting and employment figures dismal.
• Monetary policy: The Bank of Canada (BoC) has maintained its overnight lending rate at 1.00% for the past two years. Although the BoC has suggested that rates will need to be hiked at some point, we look for the bank to be on hold for the foreseeable future.
• Flows: While it has come off a little, positioning still looks stretched in CAD. Canadian public finances are healthy though and CAD stands to be supported by the country’s solid triple-A rating as US fiscal cliff concerns weigh on the greenback.
• Valuation: CAD is expensive on PPP measures, albeit less so than e.g. AUD.
• Commodities: We look for oil prices to stay elevated in the near term supporting Canada’s terms of trade. But we see weakness in oil prices in 2013 as the market looks set to stay well-supplied.
• Risks: BoC has stressed that “the evolution of imbalances in the household sector” will play a role in setting policy – a new reaction function?
Conclusion: Focus on the US fiscal cliff will weigh on risk appetite ahead of year-end but improvements in the global business cycle and relief when fiscal cliff is handled should be a positive early 2013. BoC will be a lone rider among central banks with its tightening bias and CAD could thus continue to attract investor interest next year. Although downward pressure should materialise on oil prices, we look for oil prices to stay above USD100, still a decent price for Canada. This should cap USD/CAD upside next year.
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
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Forecast: 1.07 (3M), 1.09 (6M) and 1.06 (12M)
AUD/USD – 3M potential intact as China recovers • Growth: Australian data has become less bleak lately with
decent employment growth and retail sales. Notably, Q3 inflation surprised on the upside.
• Monetary policy: The Reserve Bank of Australia (RBA) maintained its cash target rate at 3.25% in early November, contrary to market expectations. We still think the RBA will stay in easing mode in the near future and deliver two cuts on a 12-month horizon.
• Flows: Speculative longs in AUD have risen lately but positioning is less stretched than is the case for e.g. CAD. Government finances are vigorous and Australia has a higher sovereign rating than e.g. New Zealand.
• Valuation: AUD/USD remains overvalued by PPP measures and an eventual end to the resource boom highlights the downside risks.
• Commodities: Terms of trade should stay favourable in the near term as we expect metals to be in for a rebound as China bottoms out. But the end to the structural commodities super-cycle is moving closer.
• Risks: A hard landing in China seems less likely than was the case just one month ago but should the stabilisation fail to materialise, AUD would suffer.
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Conclusion: A stabilisation in China should prove a positive for AUD in Q4 but US fiscal woes will take some of the cheer out of AUD. Although the RBA is in easing mode still, the current environment of major central banks easing should stay a positive for carry trades and hence benefit AUD. However, end 2013 looks challenging as focus will probably turn to “low growth for long” issues and the risk of structural slowdown in Asia. Thus AUD/USD could come under pressure towards year-end.
NZD/USD – room for RBNZ easing to be priced • Growth: The data flow out of New Zealand has
generally been OK recently apart from a marked rise in the unemployment rate (from 6.8% to 7.3%) in Q3.
• Monetary policy: The Reserve Bank of New Zealand (RNBZ) has kept rates at 2.50% since the earthquake-related cut early in 2011. We think RBNZ may start to signal rate cuts over the coming year. However the new RBNZ governor Wheeler has explicitly said that he “wishes to see a lower exchange rate”, and listed a set of conditions to be met for RBNZ to consider intervention.
• Flows: Speculative longs have been reduced a little of late but continue to hover around stretched levels.
• Valuation: NZD is heavily overvalued in PPP terms.
• Commodities: Livestock prices have surged recently as the past rise in grain prices start to feed through.
• Risks: Recent talk about conditions for intervention underlines the risk that RBNZ may be looking to weaken NZD if circumstances prove favourable. Also, if RBA cuts more aggressively than we currently project, RBNZ may follow suit.
Conclusion: In the near term, NZD could suffer as safe-haven flows look towards USD. Also, there is now some uncertainty regarding RBNZ policy with the new governor looking at the monetary policy toolbox with an open mind; we think the risk on RBNZ is tilted in a dovish direction. While NZD could benefit from carry positions and decent risk appetite early 2013, we think the kiwi will have a hard time moving much higher on a six- to 12-month horizon as the threat of RBNZ intervention will loom.
EUR/PLN – we remain bullish on short-term horizon • Growth: The euro crisis is now clearly having an impact
on the Polish economy. Furthermore, domestic worries are adding to a relatively negative outlook for the Polish economy. We now forecast GDP growth of 2.4% y/y in 2012 and 1.9% y/y in 2013, but the risk is that the slow-down could be even worse. In particular, the relatively sharp slowdown in domestic demand is worrying.
• Monetary policy: The Polish central bank (NBP) has finally initiated an easing cycle and has started to cut interest rates. We expect further interest rate cuts and the next cut is likely to come already in December. Looking further ahead, the NBP should continue monetary easing in early 2013 and we now expect the key policy rate to be cut to 3.50% over the coming six months.
• Valuation: The zloty is trading close to its fair value level, so valuation is unlikely to pose any significant hindrance to its continued near-term appreciation.
• Risks: The major risk to the zloty remains the euro crisis. A major escalation of the crisis would be likely to hit the zloty hard – as was the case in late 2011.
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Conclusion: Despite the fact that we now expect frontloaded rate cuts, we remain fairly upbeat on the zloty as the markets have already priced fairly aggressive rate cuts. Furthermore, the zloty continues to provide attractive carry and overall we have little concerns about Polish macroeconomic fundamentals. So even though we expect the zloty to weaken slightly in the coming 12 months, we would expect a better performance than what is implied by FX forwards.
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
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Forecast: 2.80 (3M), 2.80 (6M) and 2.80 (12M)
EUR/HUF – attractive carry supports HUF • Growth: Growth remains lacklustre in the Hungarian
economy. We expect Hungarian GDP to contract by 2% in 2012 and 1% in 2013. This is not very supportive for the long-term outlook for the forint.
• Monetary policy: At the latest meeting of the Hungarian central bank’s (MNB) Monetary Council, the MNB cut its key policy rate by 25bp and continued its monetary easing. It is pretty clear that the doves on the Monetary Council are now in more or less full control of monetary policy. Consequently, we expect the MNB to continue the easing of monetary policy in coming months despite the fact that inflation is more than double the level of the MNB’s official inflation target of 3%.
• Valuation: That the MNB continues to ease monetary policy means inflation is likely to remain elevated in the medium term. From a longer term perspective, this is not good news in terms of forint valuation.
• Risks: Excessive monetary easing combined with political worries and the euro are the key risks to the forint.
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Conclusion: In the short run – three to six months – we expect continued fairly attractive carry on the forint and improved global risk appetite to be supportive of the Hungarian forint. That said, we are certainly not confident that it is happy days for the forint given Hungary’s serious structural and political problems.
EUR/CZK – intervention risk is imminent • Growth: The economy remains in recession, as domestic
demand has collapsed. With exports likely to suffer further from the economic slump in euroland, GDP in the past two quarters is likely to be even more dismal than in H1. We expect the economy to shrink around 1.3% y/y this year, but the downside risks to our forecast are quite high. Recovery next year is likely to be only moderate.
• Monetary policy: The Czech central bank (CNB) cut the key policy rate by 20bp to 0.05% in November. In the statement, the CNB reiterated that it may use the CZK exchange rate as a policy tool if further easing is needed. We expect the CNB to weaken the CZK as more easing is warranted. Timing is uncertain –January next year appears likely – but we cannot rule out December if the economy shows more pronounced signs of slowdown.
• Debt risks: Debt risks are low. The Czech government forecasts the public finance deficit at 3.2% of GDP this year and below 3% next year. Further austerity measures are planned for next year.
• Valuation: On a long-term perspective, CZK is undervalued (fair value is around 22.4).
• Risks: Intervention risks in connection with further monetary easing, sharp deterioration in the eurozone crisis.
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Conclusion: The risk of a significantly weaker CZK has increased markedly. The CNB said clearly that it is ready to use the CZK as a tool for further easing given that standard monetary policy tools have been exhausted. Therefore, the question is not if the CNB will intervene to weaken the CZK but rather when. On the back of the intervention risks, which are imminent, we are bearish on the CZK on all forecast horizons.
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
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Forecast: 40.70 (3M), 39.10 (6M) and 41.20 (12M)
EUR/RUB – economic slowdown to impact the RUB • Growth: Russian economic growth is slowing on weaker
agricultural production and shrinking demand for Russia’s main exports. Q3 12 growth was 2.9% y/y versus 4.0% y/y in Q2 12. Yet, Russia is performing well compared with its peers although sustaining this pace could be challenging in the long term. We expect 2012 growth to stay around 4%.
• Monetary policy: Bank Rossii left its main policy rates unchanged on 9 November as inflation fears have eased. The refi rate stays at 8.25%, back at the November 2011 level. We had expected a 25bp hike as the central bank’s hawkish stance remained strong. However, Bank Rossii sees that the September hike has been efficient ‘moderating inflation expectations’.
• Flows: The current account balance holds a strong surplus on high oil prices, although it shrank a bit in Q3 12 versus previous years. Capital outflows remain high and we expect them to climb around USD70bn in 2012 versus almost USD81bn in 2011.
• Valuation: EUR/RUB is trading above its YTD average of 39.86.
• Risks: Strong risk-off sentiment amid escalation of eurozone problems are the most probable factors that could tear down the rouble.
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Conclusion: Bank Rossii sees ‘some cool down in the economy’ during previous months but ‘consumption and production growth remain at the same level’. The central bank points out that it will consider medium-term inf lation and economic growth in its decision making. Thus, we believe Bank Rossii may stay on hold during its next meeting in the first 10 days of December which should be neutral for the RUB.
Vladimir Miklashevsky, Economist, [email protected], +358 10 546 75 22
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
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EUR/RUB – important issues to watch • Better flexibility, higher volatility
− The rouble’s volatility remains high, allowing the Russian currency to depreciate more than before on oil price falls and to strengthen more on oil price rises. The band-widening policy is likely to continue, allowing the corridor to expand by one rouble every six months. Next expansion is expected in January-February 2013.
− As expected, Bank Rossii is diminishing its currency interventions and keeping a close eye on market liquidity in the uncertain global environment.
− Eurozone woes and the slowdown of the Chinese economy could affect energy demand, dampening Russian exports and the RUB FX rate.
• Eye on seasonality − If Brent crude stays above USD100/bbl on average
during the next six months, we do not expect any significant downside pressure on RUB through the current account. We expect a stronger rouble early 2013.
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36
38
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lower border upper border RUBBASK Currency
Rouble trading band against the dual currency basket
Source: Bank Rossii, Bloomberg
Vladimir Miklashevsky, Economist, [email protected], +358 10 546 75 22
25 www.danskeresearch.com
Forecast: 1.80 (3M), 1.85 (6M) and 1.95 (12M)
USD/TRY – valuation continues to weight on TRY • Growth: Turkish economic growth remains moderate as
inflation accelerates, domestic demand stays weak and monetary policy remains tight. The economy expanded by 2.9% y/y in Q2 12 versus 8.5% growth in 2011.
• Monetary policy: Consumer prices grew less than expected, up 7.8% y/y in October versus a 9.2% increase in September. However, inflation remains far above the medium-term target of 5%. Yet, concerns about the cooling-down economy forced the central bank to cut its overnight lending rate by 50bp to 9.50% on 18 October as the markets expected. The benchmark repo rate remained unchanged at 5.75% and it seems that high inflation does not provide enough room for repo rate cut in Q4 12.
• Flows: The current account deficit is expected to widen to USD3bn in September from USD1.2bn in August as the boost in exports earlier was just a one-off event related to increased gold sales abroad, and its effect has vanished.
• Valuation: USD/TRY is merely trading at the fair level, but there is room for a weaker TRY by the end of 2012.
• Risks: Risk-off sentiment risk remains. New escalation of eurozone woes could trigger a run from assets in emerging markets.
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Conclusion: The TRY strengthened in early November on improved macro data and the Fitch upgrade to BBB-, as the agency saw ‘favourable growth prospects’. Yet, the USD/TRY came to its YTD average as investors realise that major risks are here to stay. We expect high energy prices, a widening current account deficit and external risks to keep USD/TRY within a 1.80-1.84 band until the end of 2012.
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
Vladimir Miklashevsky, Economist, [email protected], +358 10 546 75 22
26 www.danskeresearch.com
Forecast: 8.80 (3M), 8.90 (6M) and 9.10 (12M)
USD/ZAR – socioeconomic problems weigh on ZAR • Growth: Given several strikes and labour unrest, which
halted production in mining again in Q3 and spread beyond the mining sector, GDP growth looks set to be hit hard in Q3. On the back of domestic socioeconomic problems and a gloomy outlook for the eurozone, the South African economic performance is likely to be weak this year. We expect the economy to grow by around 2.2% y/y in 2012E.
• Monetary policy: At the MPC meeting in September, the central bank (SARB) left the door open for further rate cuts. Nonetheless, intensifying socioeconomic problems, which threaten the stability of the financial system in South Africa, limit room for the SARB to manoeuvre at this moment. Even though further monetary easing is warranted, the current deterioration in financial conditions and the strong sell-of in the rand are likely to prevent the SARB from cutting interest rates at its MPC meeting in November.
• Debt risks: Debt risks slightly higher. The South African government raised the projected budget deficit to 4.8% in 2012/13 (from 4.6%) and plans to reduce the deficit to 3.1% of GDP in 2015/16E.
• Valuation: From a long-term perspective, the ZAR remains overvalued (fair value around 9.90).
• Risks: Loss of investor confidence due to intensifying labour unrest, further downgrade by the rating agencies.
Conclusion: The rand is extremely volatile and vulnerable in the current risk-off environment. Triggered by the violent labour strikes and political uncertainty, two rating agencies, S&P and Moody’s, cut South Africa’s rating recently. The risks are poised for a further downgrade, as all three main rating agencies changed to a negative outlook. Considering the domestic economic and social problems in combination with the continued fundamental overvaluation of the rand, we continue to be bearish on the rand, especially on a 12M horizon.
USD/CNY – fast moving towards a floating exchange rate • Growth: We expect the Chinese economy to recover
moderately in the coming months supported by stronger domestic demand. The property market has improved since May and the tail risk of a collapse in the property market has declined substantially.
• Monetary policy: Despite low inflation, we do not expect the PBoC to cut its leading interest rates further and a cut in the reserve requirement also looks increasingly unlikely.
• FX policy: The daily trading band has been widened and PBoC has been reluctant to intervene in the FX market. China is quickly moving towards a floating exchange rate and convertible currency. Expect more two-way volatility in the exchange rate.
• Valuation: CNY is, in our view, now only slightly undervalued (about 7%).
• Risks: China could allow its currency to depreciate in a hard-landing scenario . Liberalisation of capital flows out of China could add to depreciation pressure.
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Conclusion: Fundamentally, CNY is only slightly undervalued and with more two-way volatility now allowed, USD/CNY should in the future be less of a one-sided bet and more dependent on market f lows. We still expect CNY to be on a moderate appreciation trend but see a possibility of temporary weakness in Q1 when China’s trade surplus is usually small.
Disclosure This presentation has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are Kasper Kirkegaard (Senior Analyst), Stefan Mellin (Senior Analyst), Stanislava Pravdova (Analyst), Morten Helt (Senior Analyst), Lars Christensen (Chief Analyst) and Vladimir Miklashevsky (Analyst).
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