1. society
2. work
3. unemployment

FX Forecast Update
13 May 2015
Caution: ‘speed bump’ - but USD strength to return
Thomas Harr
Global Head of FICC Research
Stefan Mellin
Senior Analyst
Jens Nærvig Pedersen
Senior Analyst
Kristoffer Lomholt
Analyst
Morten Helt
Senior Analyst
Christin Tuxen
Senior Analyst
Vladimir Miklashevsky
Analyst
www.danskebank.com/research
Investment Research
www.danskebank.com/CI
Important disclosures and certifications are contained from page 32 of this report.
Main forecast changes part I
• EUR/NOK: We expect EUR/NOK to edge higher in the coming month on more monetary-policy easing being
priced in ahead of the Norges Bank decision on 18 June. After the latest significant rise in oil prices we see risks
as more symmetrically balanced short term, and thus we do not expect the oil price to be a one-way NOK
supportive factor in the near term. We still target EUR/NOK at 8.55 in 1M, 8.40 in 3M, 8.25 in 6M and 8.15 in
12M.
• EUR/SEK: Awaiting further stimulus from the Riksbank, we keep our forecast profile intact targeting a weaker
krona in the next few months and SEK strength over the 12M horizon. We lift our 1M target to 9.40 (from 9.30).
• EUR/DKK: We have revised up our forecasts for EUR/DKK. We now expect EUR/DKK to stay elevated in the
near-term at 7.4620 on 1M and 3M before dropping to 7.4550 on 6M and 12M supported by two DN unilateral
rate hikes, see FX Edge: Danish rate hike not on the cards until H2,13 May 2015.
• EUR/USD: In last week’s FX Strategy: Deflation deceleration - an early warning for EUR/USD , 7 May 2015, we
revised our near-term EUR/USD forecast higher: we still think EUR/USD will bottom in early autumn but now project
1.08 in 3M and 1.02 in 6M, with the possibility of undershooting towards parity. We still maintain a 12M target at
1.08 – a rebound driven by the ECB-Fed disconnect starting to fade.
• EUR/GBP: GBP has rallied following the surprise general election result with a Conservative majority
government now in place. Looking further ahead, we expect the combination of additional EUR weakness caused
by the ECB’s ‘hot potato effect’ coupled with re-pricing of the BoE to keep EUR/GBP under pressure in the
coming months targeting 0.71 and 0.69 in 3M and 6M, respectively. In the short term, however, further
liquidation of short EUR/USD positions might counter some of the EUR/GBP downside potential. We target
EUR/GBP at 0.7300 in 1M.
www.danskebank.com/CI
2
Main forecast changes part II
• USD/JPY: We continue to see divergence between BoJ and Fed policy acting as a driver of USD/JPY upside
targeting the cross at 125 and 126 in 3M and 6M respectively. In the short term, however, it is unlikely to be
more BoJ easing that will push USD/JPY out of its narrow trading range so far in 2015. Instead, we expect the
next increase to be supported by rising US interest rate expectations.
• EUR/CHF: We have left our EUR/CHF forecasts unchanged as we continue to see the cross stuck below 1.05
near term. SNB will likely react with a 10bp cut in June, but in our view it is not until EUR weakness fades more
fundamentally that EUR/CHF will manage a rebound to 1.10 (our 12M target).
• AUD/USD: As a result of the latest USD correction we lift our forecasts but maintain the profile. We now target
0.78 in 1M (previously 0.75) and expect a Fed re-pricing to drive the cross down towards RBA governor Stevens
‘unofficial target’ of 0.75 (0.74) in 3M. We expect AUD/USD to stabilise in 6-12M, when a Fed hiking cycle has
been priced and the ‘Aussie’ economy recovers. We still target the cross at 0.73 in 6M and 12M.
• NZD/USD: We have lowered our near-term forecasts a little and see the cross hitting 0.69 in 6M (prev. 0.71). On a
12M horizon we do, however, expect USD strength to fade, and with upside risks to agricultural prices from a
structural point of view, we expect NZD/USD to stabilise around the 0.70 mark and we keep our 12M forecast
unchanged at this level.
• USD/CAD: We have kept our 6- and 12M forecasts unchanged but now see USD/CAD at 1.22 (from 1.27) and
1.24 (1.28) in 1M and 3M, respectively .
• USD/RUB: We expect stronger levels in the Russian rouble than previously as stabilizing oil price support the
currency and as in the short-run geopolitical woes have left the newsfeed. Yet, we see declining trend for the
rouble especially in the long-run as macro fundamentals remain weak and geopolitics may return into the main
picture any moment. We expect USD/RUB to climb to 53 (prev. 56)) in 1M, 60 in 3M, 63 (65) in 6M and 70 in
12M.
www.danskebank.com/CI
3
EUR/NOK – Norges Bank to send cross temporarily higher
• Growth. Since the March release of the Norges Bank Monetary Forecast: 8.55 (1M), 8.40 (3M), 8.25 (6M), 8.15 (12M)
Policy Report 1-15, economic figures have on average roughly been
in line with expectations signalling a slowdown in economic activity.
While inflation and wage growth indications have been marginally on
the weaker side of expectations, credit growth and private
consumption have held up well. The oil price, however, is
significantly above the forward curve projection from the March
Monetary Policy report (see next slide), which has been an
important driver in sending the import weighted NOK (I44) to a
stronger level than what Norges Bank has in its projections.
• Monetary policy. As expected Norges Bank left the sight deposit
rate unchanged at 1.25% at the May monetary policy meeting. The
accompanying statement included the phrase that ‘developments in
the Norwegian economy have so far been broadly in line with the
March projections’, suggesting that the bank’s rate path from March
is still relevant. In addition, Governor Olsen was very dovish both at
the press conference and later in his comments to local media.
• Flows. NOK sentiment has improved considerably in the past month
in tandem with the higher oil price. According to Norges Bank’s FX
transactions statistics, foreign banks (proxy for speculative flows)
have net bought the Norwegian currency in five of the last seven
weeks worth a total of almost NOK24bn.
• Valuation. Our PPP models put EUR/NOK at c.8.40, suggesting that
the NOK is fundamentally cheap at levels above 8.50. According to
our FX short-term financial model, EUR/NOK is oversold.
• Risks. Short-term risks are that EUR/NOK undershoots on higher oil
price, light positioning. Medium term, the risks are that the lagged
effects of the oil price collapse have a more severe impact on the
Norwegian economy.
Kristoffer Kjær Lomholt, Analyst, [email protected], +45 45 12 85 29
9.50
EUR/NOK
9.25
9.00
8.75
8.50
8.25
8.00
7.75
7.50
May-14
Aug-14
75% conf. int.
EUR/NOK
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Jan-16
Danske fcst
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
8.55 (76%)
8.40 (51%)
8.25 (37%)
8.15 (34%)
Fwd. / Consensus
8.42 / 8.50
8.44 / 8.52
8.47 / 8.47
8.52 / 8.37
50% confidence int.
8.26 / 8.54
8.16 / 8.65
8.08 / 8.75
7.98 / 8.89
75% confidence int.
8.17 / 8.66
8.01 / 8.87
7.87 / 9.06
7.68 / 9.32
Source: Danske Bank Markets
Conclusion. As argued in the Norges Bank Review we think that
markets heavily underestimate the risk of Norges Bank cutting the
sight deposit rate in June. We think that the message from
Governor Olsen was very clear at the press conference and we still
expect Norges Bank to cut the sight deposit rate in June by 25bp.
Our economic projections are close to those of Norges Bank and we
think a drastic positive shift in the economic outlook (not just a
further increase in the oil price) is required for Olsen to stay
sidelined in June. In sum, we think that EUR/NOK will edge higher in
the coming month on more monetary policy easing being priced in
ahead of the Norges Bank decision. Post June we think the end of
Norges Bank easing together with ECB QE will drag the cross lower.
We still target EUR/NOK at 8.55 in 1M, 8.40 in 3M, 8.25 in 6M and
8.15 in 12M.
www.danskebank.com/CI
4
EUR/NOK – important issues to watch
• Norges Bank rate path includes a 25 bp rate cut in Q2 15. At the
March meeting Norges Bank presented a revised rate path for the
sight deposit rate, which included a 25bp rate cut in Q2 with an implied
50/50 percent implied division between the 7 May and 18 June
meeting. The path is conditioned on economic conditions materialising
in line with Norges Bank’s projections.
• Market participants don’t trust Governor Olsen, we do. At the May rate
announcement Norges Bank left the sight deposit rate but also stated
that ‘developments in the Norwegian economy have so far been
broadly in line with the March projections.’. Despite further dovish
comments from Olsen at the press conference and later in the local
press, markets initially put only a 20% probability of a June cut,
indicating the very high weight that the oil price has in the mind of
speculators with respect to Norwegian rates and currency. Since the
decision, markets have priced in a slightly higher probability of a Norges
Bank June cut, yet a full 25bp cut is not priced. We strongly believe that
Norges Bank will cut rates on 18 June by 25bp and consequently, we
expect a re-pricing of Norges Bank to send EUR/NOK higher in the
coming month.
Norges Bank rate path includes a 25bp rate cut
in Q2, yet markets don’t trust Norges Bank
1.40%
1.25%
1.20%
Norges Bank Pricing*
-12
-25
-29
1.00%
-27
-30
0.80%
0.60%
0.40%
0.20%
0.00%
May15
Aug15
*Approx. from stripped FRAs /
Nov15
Feb16
May16
indicate Norges Bank's planned rate decisions in 2015
11/05/2015 14:07
Source: Macrobond Financial, Norges Bank, Danske Bank Markets
The oil price is significantly higher than what
Norges Bank assumed in March
• The oil price. The oil price has risen significantly in the past month and
currently trades above Norges Bank’s projections from March. This
recovery has also driven a NOK strengthening, which increases the
probability of a June rate cut as the import weighted NOK (i.e. the I44
index) is now stronger than what Norges Bank projects. In addition,
while the oil market is very volatile, we do see risks as more
symmetrically balanced after last month’s rise; hence we do not
expect the oil price to be a one-way NOK supportive factor in the
near term.
Kristoffer Kjær Lomholt, Analyst, [email protected], +45 45 12 85 29
Source: Danske Bank Markets
www.danskebank.com/CI
5
EUR/SEK – monetary policy keeps it range bound
• Growth. The Swedish economy is expected to grow above trend
in 2015 and to outgrow euroland. The growth outlook coupled
with a global economic recovery will, in our view, support a
rebound in the krona over the medium term.
• Monetary policy. The Riksbank continues to target the krona and
says it will not accept a too rapid appreciation of the currency. In
our view, relative monetary policy will keep EUR/SEK in a range
for most of the year, with the upside capped by relative
fundamentals and the ECB, and the downside protected by the
Riksbank. Inflation, inflation expectations and the krona could, in
combination, probably prompt at least another 10bp rate cut,
perhaps even before the July meeting. On the back of the latest
low inflation print it may act as early as May.
• Flows. The commercial flow outlook is slowly improving and we
expect to see more hedging activity among companies with EUR
and not least USD incomes. Swedish asset managers are likely to
start hedging more and more of their foreign exposures during
2015.
• Valuation. The krona is significantly undervalued against the EUR
and the trade-weighted KIX index. These misalignments are likely
to persist for longer given the Riksbank commitment.
• Risks. Direct currency interventions on the part of the Riksbank
would send EUR/SEK higher than forecast. A ‘Grexit’ would send
EUR/SEK lower than forecast.
Stefan Mellin, Senior Analyst, [email protected], +46 8 568 805 92
Forecast: 9.40 (1M), 9.40 (3M), 9.20 (6M), 9.00 (12M)
10.25
EUR/SEK
10.00
9.75
9.50
9.25
9.00
8.75
8.50
May-14
Aug-14
75% conf. int.
EUR/SEK
Nov-14
50% conf.int.
Mar-15
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
9.40 (70%)
9.40 (65%)
9.20 (46%)
9.00 (37%)
Fwd. / Consensus
9.31 / 9.31
9.31 / 9.26
9.31 / 9.17
9.30 / 8.98
50% confidence int.
9.16 / 9.43
9.05 / 9.51
8.95 / 9.57
8.80 / 9.66
75% confidence int.
9.08 / 9.56
8.92 / 9.72
8.75 / 9.87
8.52 / 10.08
Source: Danske Bank Markets
Conclusion. EUR/SEK is in the hands of central banks. We
expect the pair to continue trading within a broad range of
9.00-9.60 for the next couple of months. While gravity
(fundamentals) unambiguously suggests that the krona will
appreciate over time versus the EUR, we think the pair will
stay elevated for longer given the fact that the Riksbank wants
it that way. We lift our 1M EUR/SEK forecast to 9.40 from
9.30 (see above), targeting a weaker krona in the next few
months and a rebound over the 12M horizon.
www.danskebank.com/CI
6
EUR/SEK – important issues to watch
The Riksbank is not done yet
− Swedish monetary policy and how it is perceived by
investors will continue to be the dominant driver for
EUR/SEK in the near term and the main (only) reason why
the krona is not outperforming the EUR.
− The ultra-soft Riksbank is likely to keep up steam ahead of
next year’s huge wage round as it tries to lift inflation and
inflation expectations closer to the 2% target, especially
expectations
among
labour
market
participants.
Yesterday’s inflation print was a shocker and potentially
enough for further action next week. The quarterly Prospera
survey (11 June) will be closely watched.
− Another 10bp rate cut (at least) will be needed during the
next few months, either because of inflationary
disappointments (like yesterday) or because of an unwanted
SEK appreciation.
− In our view, there is no EUR/SEK pain threshold under which
the Riksbank will step in. Rather it may do so if the krona
were to appreciate too fast. We do not think that the
Riksbank is under any significant ‘currency stress’ as long
as the pair continues to fluctuate between 9.20-9.40.
Come summer, come seasonality
− Over the last ten years, the SEK has tended to depreciate
versus the EUR in June and appreciate versus the EUR in
July.
Inflation expectations too low for the Riksbank’s taste
Source: Macrobond Financial, Danske Bank Markets
EUR/SEK
Source: Macrobond Financial, Danske Bank Markets
Stefan Mellin, Senior Analyst, [email protected], +46 8 568 805 92
www.danskebank.com/CI
7
EUR/DKK– flows are reversing, rate hike is looming
• FX. EUR/DKK moved above 7.4700 in late March, to the
highest level since the euro was introduced in 1999, as record
dividend payments from Danish corporates weakened the
DKK. It has stayed above the central rate since, with Danmarks
Nationalbank (DN) needing to sell DKK33.9bn in FX
intervention in April to cap upside. We expect EUR/DKK to
stay elevated in the near-term at 7.4620 on 1M and 3M
before dropping to 7.4550 on 6M and 12M supported by two
DN unilateral rate hikes.
Spot
3M Forward (ann. carry, bp)
6M Forward (ann. carry, bp)
12M Forward (ann. carry, bp)
12/05/2015
7.4631
7.4524
(-57)
7.4475
(-42)
7.4404
(-30)
1M
7.4620
7.4525 (-51)
7.4475 (-39)
7.4400 (-29)
3M
7.4620
7.4525 (-51)
7.4475 (-39)
7.4400 (-29)
6M
7.4550
7.4475 (-40)
7.4425 (-34)
7.4375 (-23)
12M
7.4550
7.4475 (-40)
7.4425 (-34)
7.4375 (-23)
• Rates. DN raised banks’ current-account limits twice in March,
effectively raising interest rates as banks can now place
additional excess liquidity on the current account at 0.00%
interest, which would otherwise be placed in certificates of
deposits at minus 0.75% interest. We expect DN to raise the
rate of interest on certificates of deposits (CD rate) by 15bp on
3M and 10bp 6M to minus 0.50% following an additional
decline in the FX reserve.
• Liquidity. The suspension of government bond purchases will
add liquidity to the DKK money market over the course of the
year as the budget deficit will be funded by a drawdown of
government deposits at the central bank. We estimate the
total effect at around DKK70bn. We expect issuance of
government bonds to be resumed in Q4, when government
deposits are set to drop below DKK100bn.
Jens Nærvig Pedersen, Senior Analyst, [email protected], +45 4512 8061
Source: Macrobond Financial, Danske Bank Markets
• Flows. The Danish current account (CA) surplus is above
6% of GDP – the highest since 1875, excluding WWI and
WWII. This supports a stronger DKK. The large surplus is
broadly expected to prevail in the coming years.
• Conclusion. EUR/DKK is set to trade close to the central
rate on 12M with downside risks owing to the uncertain
situation regarding Greece’s debt situation, further impact
from the ECB’s bond purchases and a possible rate cut
from SNB.
www.danskebank.com/CI
8
EUR/USD – deflation deceleration as an early warning on upside
• Growth. The data surprise gap, which moved firmly in favour of
the eurozone versus the US at the start of the year, has
started to correct in favour of a lower EUR/USD. This has
happened mainly as a result of weaker euro activity, with US
numbers continuing on a soft note. However, we look for strong
private consumption in the US in Q2. Further out, we see
eurozone inflation pick up during the autumn.
• Monetary policy. Weak US data and an uptick in commodity
prices have led markets to question the Fed’s normalisation
intentions and the ECB’s commitment to QE, respectively. We
maintain, however, that the Fed-ECB asynchronisation has
further to run in terms of EUR/USD downside from relative rates,
with the short end of the eurozone yield curve kept in check by
ECB determinedness to carry out its QE buying through
September 2016, and the US curve set for a level shift and
steepening as the Fed delivers on policy tightening with a first
hike in September. An ECB exit discussion should flare up in H2
though and limit the euro-zone versus US disconnect.
• Flows. During the early May cross-asset correction investors
exited some of the consensus ‘long USD’ trades but we think the
liquidation of USD longs may run further near term. At the same
time the euro equities sell-off may cause foreign investors to
unwind FX hedges (EUR short covering).
• Valuation. PPP is around 1.23, suggesting the cross is
undervalued. Our short-term models suggest 1.13 as ‘fair’.
• Risks. The Fed hesitating on rate hikes due to USD strength.
Christin Tuxen, Senior Analyst, [email protected], +45 45 13 78 67
Forecast: 1.13 (1M), 1.08 (3M), 1.02 (6M), 1.08 (12M)
1.40
EUR/USD
1.30
1.20
1.10
1.00
0.90
May-14
Aug-14
75% conf. int.
EUR/USD
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
1.13 (52%)
1.08 (20%)
1.02 (11%)
1.08 (27%)
Fwd. / Consensus
1.13 / 1.09
1.13 / 1.06
1.13 / 1.05
1.13 / 1.04
50% confidence int.
1.10 / 1.15
1.09 / 1.17
1.08 / 1.18
1.07 / 1.21
75% confidence int.
1.08 / 1.17
1.06 / 1.19
1.03 / 1.22
1.00 / 1.25
Source: Danske Bank Markets
Conclusion. Fundamentals still favour a lower EUR/USD on a 3-6M
horizon in our view, with the outlook for a first Fed hike earlier than
priced, and an ECB committed to an aggressive easing scheme.
Relative rates will thus in our view again start to weigh on EUR/USD
ahead of the summer. In FX Strategy: Deflation deceleration - an early
warning for EUR/USD, 7 May 2015, we updated our forecasts. We still
think EUR/USD will bottom in early autumn and now project 1.08 in
3M and 1.02 in 6M, with the possibility of undershooting towards
parity. But once eurozone (headline) inflation starts edging up in H2,
the re-pricing of the Fed has come to an end, and an eventual ECB QE
exit moves to the fore, EUR/USD should start its journey towards the
(higher) levels warranted by medium- to longer-term fundamentals. We
still project the cross at 1.08 in 12M.
www.danskebank.com/CI
9
EUR/USD – important issues to watch
Deflation deceleration warns of EUR/USD upside later...
− Stretched positioning in terms of ‘long USD’ made the
ground fertile for correction, and as investors reassessed deflation trades, USD was vulnerable in an
environment of deflation deceleration.
1. Since mid-January, low crude-oil prices have quietly
ticked higher, and base-metal prices are now following.
In our view the OPEC price war is over and price risks
are becoming more two-sided (versus down previously).
2. Markets appear increasingly willing to buy into the
effectiveness of past central-bank actions. Break-even
inflation rates have edged higher in Japan and in the UK,
and yield curves have steepened from the long end in the
euro area and the US, pointing to the pricing of a less
dire growth outlook.
... but still too early for a wider pricing of ‘re-flation’
1. Markets need to get clearer confirmation that eurozone
inflation has bottomed out, and that a turn is not solely
led by the base effects; an uptick in core inflation and
wage growth will be required as well.
2. Draghi will be keen to emphasise the ECB’s commitment
to the QE scheme, including its open-ended nature, and
thus do his best to dampen any discussion of the ECB
starting to taper purchases prematurely.
 EUR weakness to stay near term – and we still believe a
first Fed hike will spur USD strength over the summer.
Christin Tuxen, Senior Analyst, [email protected], +45 45 13 78 67
Deflation fears decelerate somewhat...
Source: Macrobond Financial, Danske Bank Markets
...but inflation pressure subdued in a historical context
Source: Macrobond Financial, Danske Bank Markets
www.danskebank.com/CI
10
EUR/GBP – more sterling strength in store
• Growth. GDP growth slowed in Q1 15 to 0.3% q/q from 0.6% q/q in
•
•
•
•
Q4 15. We do not expect the election outcome to affect the
economic outlook in the short-run. Hence our main scenario is still
that growth will pick up in the coming quarters. This is mainly due to
two factors. First, increasing employment and positive real wage
growth for the first time since 2009 should support private
consumption ahead. Second, it seems growth is accelerating in the
rest of Europe, which should increase foreign demand for UK goods.
Higher activity in UK export markets should more than offset the
negative impact of the stronger GBP in recent months.
Monetary policy. We expect the MPC to hike in November this
year. Although headline inflation is likely still to be low at this
point, we think that the MPC members will judge that the
medium-term inflation outlook calls for tighter monetary policy. It
is important to remember that the low inflation is mainly due to
falls in energy and food prices, which should begin to drop out at
the end of this year. We still expect the BoE to increase interest
rates at a very modest pace, taking the Bank Rate to 1.5% by the
end of 2016. However, if we are right about the hike in Q4 15,
BoE is still priced much too dovishly (first hike set for April
2016).
Flows. Positioning is not stretched at present in our view.
Valuation. PPP around 0.76 for EUR/GBP.
Risks. As the Conservatives won an absolute majority in
parliament, it is very likely that the UK will have an in/out EU
referendum before the end of 2017. This is a medium- to longterm risk factor for the UK economy and GBP.
Morten Helt, Senior Analyst, [email protected], +45 45 12 85 18
Forecast: 0.73(1M), 0.71(3M), 0.69 (6M) and 0.71 (12M)
0.85
EUR/GBP
0.80
0.75
0.70
0.65
May-14
Aug-14
75% conf. int.
EUR/GBP
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
0.73 (71%)
0.71 (36%)
0.69 (22%)
0.71 (39%)
Fwd. / Consensus
0.72 / 0.72
0.72 / 0.72
0.72 / 0.71
0.73 / 0.70
50% confidence int.
0.71 / 0.73
0.70 / 0.74
0.69 / 0.75
0.69 / 0.76
75% confidence int.
0.70 / 0.74
0.68 / 0.75
0.67 / 0.77
0.65 / 0.79
Source: Danske Bank Markets
Conclusion. In the short term, further liquidation of short
EUR/USD positions might counter some of the EUR/GBP
downside potential and we target EUR/GBP at 0.7300 in 1M.
Looking further ahead, the combination of additional EUR
weakness caused by the ECB’s ‘hot potato effect’ coupled with repricing of the BoE should keep EUR/GBP under pressure in the
coming months and we target EUR/GBP at 0.69 in 6M.
On a six- to 12-month horizon, we expect EUR/GBP to stabilise
and to eventually move higher as the eurozone recovers and as
eurozone inflation is set to pick up significantly. This should cause
EUR downside to fade and we target the cross at 0.71 in 12
months.
www.danskebank.com/CI
11
EUR/GBP – important issues to watch
Brexit: a market theme and long-term risk factor
− As the Conservatives have won an outright majority it also
seems highly likely that we will have an in/out EU referendum
before the end of 2017. The referendum will most likely be
held following a renegotiation with the EU on the
membership terms.
− This will be a market theme for the coming years and
although it is too early to predict the outcome of a possible
referendum, it is indeed a factor that has made the economic
outlook in the medium term and long term more uncertain.
− While uncertainty about the UK's EU membership is too far
away for the markets to digest right now, the lesson learned
from the Scottish referendum in 2014 is that you should
never underestimate the risk associated with this kind of
referendum - especially as people tend to vote for all kinds of
reasons not necessarily related to the actual question.
Britons are divided on the EU question
UK's EU
membership (%)
Remain in the EU
Leave the EU
Would not vote
Don't know
Current
terms
46
36
3
15
Renegotiated
terms
57
22
4
17
Note: The answers were collected on 22-23 March
Source: YouGov
GBP volatility low relative to other major currencies
Risk premiums priced out of GBP after the election
− FX option volatility on GBP crosses has dropped sharply
after the election, with 3M implied EUR/GBP and GBP/USD
volatility now trading generally lower relative to other major
FX crosses.
− Hence, the political risk premium was almost immediately
priced out of GBP as the Conservative win reduces the risk
of drawn-out negotiations, which polls leading up to the
election indicated.
Morten Helt, Senior Analyst, [email protected], +45 45 12 85 18
Note: GBP volatility is calculated as the average of 3M EUR/GBP and GBP/USD at-the-money
volatility. Other G10 currency volatility is calculated as the average of 3M EUR/USD, AUD/USD,
USD/CAD, USD/JPY and NZD/USD volatility
Source: Bloomberg, Danske Bank Markets
www.danskebank.com/CI
12
USD/JPY – waiting for the Fed trigger
• Macro outlook. Economic data out of Japan have disappointed
•
•
recently, suggesting that the recovery is fragile. We expect GDP
growth to have accelerated slightly to 0.5% q/q in Q1 from 0.4%
q/q in Q4 14, mainly on the back of stronger investment demand
and a less negative contribution from inventories, while private
consumption is expected to have slowed to just 0.2% q/q in Q1.
The outlook indicators in the Tankan survey suggest that GDP
growth will slow further in Q2.
Monetary policy. We do not expect the Bank of Japan (BoJ) to
expand its QE programme further as inflation seems to be
bottoming, wage growth is picking up and as there is no imminent
political pressure for more easing. However, the recent weakness
in Japanese data has indeed increased the likelihood of another
policy response from the BoJ which represents an upside risk
factor to our forecast. Moreover, it will be difficult to reach the 2%
inflation target within the next year, which also suggests that
further easing cannot be ruled out.
Flows. The Japanese current account flipped into a deficit last
year, but has improved recently. The trade balance turned positive
in March for the first time since 2012. While this was mainly due
to a rebound following reduced activity in February in connection
with Lunar New Year, exports are on a rising trend.
• Valuation. Our USD/JPY PPP estimate is around 99.
• Risk. Speculators remain short JPY, albeit at the least bearish
level since the introduction of Abenomics according to the IMM
data. Hence, USD/JPY could still be hit by short covering on a
larger scale – especially as speculators remain significantly long
USD.
Morten Helt, Senior Analyst, [email protected], +45 45 12 85 18
Forecast: 120 (1M), 125 (3M), 126 (6M) and 127 (12M)
135
USD/JPY
130
125
120
115
110
105
100
May-14
Aug-14
75% conf. int.
USD/JPY
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Jan-16
Danske fcst
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
120.00 (52%)
125.00 (86%)
126.00 (82%)
127.00 (80%)
Fwd. / Consensus
119.98 / 120.63
119.98 / 122.17
119.98 / 124.20
119.97 / 126.00
50% confidence int.
118.21 / 121.54
116.72 / 122.70
115.17 / 123.84
113.00 / 125.11
75% confidence int.
116.92 / 123.00
114.53 / 125.40
111.93 / 128.00
108.40 / 131.25
Source: Danske Bank Markets
Conclusion. We continue to see divergence between BoJ and Fed
policy acting as a driver of USD/JPY upside. In the short term,
however, it is unlikely to be more BoJ easing that will push USD/JPY
out of its narrow trading range so far in 2015. Instead, we expect
the next increase to be supported by rising US interest rate
expectations which we expect to unfold in the coming months
following a recovery in US macro data. We still target USD/JPY at
126 in 6M but expect the next rally to be succeeded by another
period of range trading towards year-end as it becomes clear the
BoJ is done for now. Additional BoJ easing could be a catalyst of
more yen weakness, which combined with a less bearish yen
positioning has increased risks of our 6- and 12-month targets
being reached earlier than we project.
www.danskebank.com/CI
13
USD/JPY – important issues to watch
Political pressure for additional BoJ has eased
− The political discussion in Japan has become increasingly focused
on the weak yen and especially its negative impact on small
businesses and consumption which in particular are hit through
higher import costs.
− The yen is indeed the most undervalued currency in the G10
sphere. However, according to our general G10 PPP estimates,
USD/JPY could increase up to 140 before valuation becomes
significantly stretched and even a 2 sigma deviation should not be a
barrier for short-term FX movements.
Missing inflation target is a risk to additional BoJ easing
− BoJ revised its GDP and inflation forecast lower but overall these
were small downward revisions that do not signal any imminent
easing. The inflation forecast (CPI excl. fresh food) for FY 2015 was
revised lower to 0.8% (previously 1.0%) and the inflation forecast
for FY 2016 was revised lower to 2.0% (previously 2.2%). Hence,
BoJ still expects to be able to reach its 2% inflation target at some
stage in 2016, which is a bit late compared to the two-year time
horizon BoJ gave itself to reach the 2% inflation target in early
2013.
− In our view, it will be difficult to reach the 2% inflation target within
the next year. Hence, further monetary easing cannot be ruled out.
However, it would probably require a substantial downward
revision of the inflation forecast for FY 2016. Markedly below 2%
would probably be necessary to trigger additional easing from BoJ.
Morten Helt, Senior Analyst, [email protected], +45 45 12 85 18
USD/JPY is overvalued – but not yet significantly
Source: Bloomberg, Danske Bank Markets
Difficult for BoJ to reach its 2% inflation target
Danske Bank
forecast
Source: Bloomberg, Danske Bank Markets
www.danskebank.com/CI
14
EUR/CHF – SNB to be forced deeper into negative rates
• Growth. Data out of Switzerland has deteriorated markedly
of late after a decent run at the start of the year. Notably
CPI inflation dipped deeper into deflationary territory in April
with annual inflation now at -1.1%. Both the PMI and KOF
surveys have made significant turns for the worse as have
notably retail sales. Although the export sector is suffering
from CHF strength, SNB remains complacent about the
positive effects on domestic activity of negative policy rates.
• Monetary policy. Uncertainty regarding SNB policy in the
new floating CHF regime remains high. SNB has been
reluctant to use intervention to keep the CHF from
appreciating on Greek sell-offs, but we think SNB will support
EUR/CHF around the 1.0250 level. That said, recent
communication suggests that the central bank now prefers
rates as an instrument of policy; in mid-April the SNB thus
expanded the set of sight-deposit accounts that are eligible
for negative rates. We expect EUR weakness to return ahead
of the summer and still look for the SNB to cut policy rates by
10bp to -0.85% in June. A foreign-currency asset-purchase
target is also a possibility.
• Flows. Speculators were significantly short CHF ahead of
the SNB move but positioning has moved to net long.
• Valuation. PPP is around 1.26 whereas our short-term
financial models suggest a ‘fair’ level around 1.07.
• Risks. ‘Grexit’ risks are a potential source of CHF strength.
SNB has currently limited tools to fight CHF upside.
Christin Tuxen, Senior Analyst, [email protected], +45 45 13 78 67
Forecast: 1.03 (1M), 1.04 (3M), 1.05 (6M) and 1.10 (12M)
1.25
EUR/CHF
1.20
1.15
1.10
1.05
1.00
0.95
0.90
May-14
Aug-14
75% conf. int.
EUR/CHF
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
1.03 (31%)
1.04 (46%)
1.05 (54%)
1.10 (79%)
Fwd. / Consensus
1.04 / 1.05
1.04 / 1.05
1.04 / 1.06
1.03 / 1.08
50% confidence int.
1.02 / 1.06
1.01 / 1.07
1.01 / 1.08
0.99 / 1.09
75% confidence int.
1.01 / 1.07
0.99 / 1.09
0.97 / 1.10
0.94 / 1.12
Source: Danske Bank Markets
Conclusion. The SNB is on track to undershoot its inflation target
significantly unless CHF weakens from here. However, the SNB
has largely run out of instruments: policy rates (at -0.75%) are
already probably close to a lower bound, and the central bank does
not want its balance sheet to grow much further. With general
EUR weakness set to remain in the near term as the effects of
ECB QE gain traction and Grexit risks linger, EUR/CHF could
remain under pressure near term. We look for the SNB to cut the
sight deposit rate and the Libor target rate by 10bp to -0.85% in
June, which should help limit CHF upside on a 3-6M horizon
despite EUR weakness returning. Further out, the SNB will in our
view get some help from EUR weakness fading which – together
with the outlook for Swiss rates to stay negative for a prolonged
period of time – should foster a gradual uptick in the cross
www.danskebank.com/CI
15
towards 1.10 in 12M.
EUR/CHF – important issues to watch
SNB headaches: reconciling a floating CHF with price stability?
− Price stability remains the prime target for the SNB. In
March the bank revised its conditional inflation forecast
substantially lower: annual CPI inflation is not set to return to
positive territory before early 2017 and this is based on an
unchanged Libor target rate as well as a weaker CHF.
SNB policy: preference shifting away from intervention to rates
− The SNB’s room to manoeuvre is limited by the fact that
policy rates have already moved firmly negative and by the
SNB’s aversion to further expansion of its balance sheet.
− Our base case: policy rates will be cut further to -0.85%
(sight deposit rate and Libor target midpoint) at the June
meeting. At the same time, the SNB may want to adjust the
thresholds on sight deposit accounts to ensure that negative
rates apply chiefly at the margin and thus hit CHF inflows.
− Intervention has remained a verbal threat lately and the SNB
appears now to have largely let go of EUR/CHF. We have had
to amend our view on the SNB in this respect, and now look
for the SNB to refrain from intervening as long as CHF does
not strengthen too rapidly.
− Another possible option would be for the SNB to announce an
asset-purchase target. This would be a way for the SNB to
commit to expanding the monetary base without losing
control of its balance sheet. Our sense, however, is that the
SNB fears that this would not have much of an effect on the
CHF, as past years’ experience suggest only the EUR/CHF
floor was really effective in preventing CHF strength.
Christin Tuxen, Senior Analyst, [email protected], +45 45 13 78 67
SNB inflation outlook cries out for a weaker CHF
Source: Macrobond Financial, Danske Bank Markets
SNB sight deposits suggest little intervention lately
Source: Macrobond Financial, Danske Bank Markets
www.danskebank.com/CI
16
USD/CAD – BoC done as US and oil recover
• Growth. Canadian data has made a significant turn for the better
of late alongside the latest uptick in oil prices. Inflation has edged
higher and despite a meagre employment report, retail sales and
the Ivey PMI point to a marked improvement in sentiment among
consumers and manufacturers alike. We stress that oil risks
have become more two-sided as opposed to dominated by
downside previously and it should be positive for Canada that the
OPEC price war seems to be fading. Canadian activity should
benefit from our call for US growth to recover in Q2.
• Monetary policy. Following its insurance rate cut in January, the
Bank of Canada held rates unchanged in April. Indeed, BoC
appears to have retreated somewhat on its participation in a
global currency war and now sees inflation risks as ‘roughly
balanced’. The April MPR noted that the ‘impact of the oil price
shock on growth will be more front-loaded than predicted in
January, but not larger’, suggesting that Q1 weakness was due to
transitory factors. We expect the BoC to stay on hold in the near
future, waiting for the impact of Fed policy normalisation.
• Flows. Speculative CAD positioning has become less stretched
on shorts.
• Valuation. Our PPP estimate for USD/CAD is around 1.18, while
our short-term financial model points to 1.21 as ‘fair’.
• Commodities. Oil constitutes a substantial part of Canadian
activity and is generally high-cost; Canada thus stands to lose
from a new and lower normal level for the oil price.
• Risks. Risks to our USD/CAD forecasts are skewed to the downside
as oil prices surge again near term.
Christin Tuxen, Senior Analyst, [email protected], +45 45 13 78 67
Forecast: 1.22(1M), 1.24(3M), 1.27(6M) and 1.25 (12M)
1.35
USD/CAD
1.30
1.25
1.20
1.15
1.10
1.05
May-14
Aug-14
75% conf. int.
USD/CAD
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
1.22 (75%)
1.24 (80%)
1.27 (84%)
1.25 (74%)
Fwd. / Consensus
1.20 / 1.23
1.20 / 1.26
1.20 / 1.28
1.21 / 1.26
50% confidence int.
1.18 / 1.22
1.17 / 1.23
1.15 / 1.24
1.13 / 1.25
75% confidence int.
1.17 / 1.24
1.15 / 1.26
1.12 / 1.28
1.09 / 1.32
Source: Danske Bank Markets
Conclusion. While the market retains a slight easing bias for BoC
we believe Poloz and co. are done cutting rates for now provided
that oil prices remain above the USD60/bl for Brent and US
activity recovers. Near term, our outlook for a first Fed hike in
September leaves room for upside to USD rates and greenback
strength in turn. This suggests that USD/CAD should move
another leg higher in coming months. On a 12M horizon, we
nevertheless project that USD/CAD will stabilise again driven by
an oil recovery and the market retreating on the need for further
BoC easing. We have kept our 6- and 12M forecasts unchanged
but now see USD/CAD at 1.22 and 1.24 in 1M and 3M,
respectively .
www.danskebank.com/CI
17
AUD/USD – no more cuts, but downside in store
• Growth. In the past month economic data have generally been
mixed. Labour market statistics for March surprised heavily to
the upside but the latest figures for April were weaker than
expected, showing a rebound in unemployment to 6.2% - close
to a 12.5-year high. At 0.2% q/q (consensus 0.1% q/q) inflation
surprised to the upside, yet at 1.3% y/y inflation remains below
the 2-3%-target of the Reserve Bank of Australia. The fall in iron
ore prices will continue to put pressure on exports.
• Monetary policy. As expected, the Reserve Bank of Australia
(RBA) cut the interest rate by 25bp to 2.00% at the May
monetary policy decision. The cut aims to ease the transition of
a heavily commodity-based Australian economy to a more
diversified model. Markets meanwhile reacted strongly to RBA
leaving out its dovish stance in the statement.
• Flows. According to the latest CFTC IMM data, speculators
have significantly reduced their bearish bets sending AUD
positioning to the least bearish level since September 2014.
This leaves a potential for further bearish builds weighing on
the Australian currency going forward.
• Valuation. Fundamentally, the AUD is overvalued with our
PPP model estimate for AUD/USD at c.0.76.
• Commodities. Iron ore prices recovered in the past month in
tandem with global commodity indices. Weaker Chinese
demand and rising supplies, however, limit the upside
potential.
• Risks. The AUD remains exposed to global risk sentiment
and a further slowdown in China. Recently, the risk of an ‘El
Niño’-caused drought has increased.
Kristoffer Kjær Lomholt, Analyst, [email protected], +45 45 12 85 29
Forecast: 0.78 (1M), 0.75 (3M), 0.73 (6M) and 0.73 (12M)
1.00
AUD/USD
0.95
0.90
0.85
0.80
0.75
0.70
0.65
May-14
Aug-14
75% conf. int.
AUD/USD
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
0.78 (25%)
0.75 (16%)
0.73 (16%)
0.73 (23%)
Fwd. / Consensus
0.80 / 0.77
0.79 / 0.75
0.79 / 0.74
0.78 / 0.73
50% confidence int.
0.78 / 0.81
0.77 / 0.82
0.75 / 0.83
0.73 / 0.84
75% confidence int.
0.76 / 0.83
0.74 / 0.84
0.72 / 0.86
0.68 / 0.87
Source: Danske Bank Markets
Conclusion. Since the previous rate cut in February, we have
maintained the view that RBA would only cut rates once. Hence, after
this month’s 25bp cut we do not expect another rate cut - yet we still
expect more AUD/USD downside to play out. AUD still suffers from
the significant terms of trade shock (iron ore prices are still 55%
below last year’s high) and in an environment of Fed hikes looming,
the fundamentally overvalued AUD is vulnerable. Consequently, we
expect AUD/USD to move lower in the coming month. As a result of
the latest USD correction, we lift our forecasts but maintain the
profile. We now target AUD/USD at 0.78 in 1M (previously 0.75) and
expect a Fed re-pricing to drive the cross down towards RBA governor
Stevens ‘unofficial target’ of 0.75 in 3M. We expect the cross to
stabilise in 6-12M, when a Fed hiking cycle has been priced and the
‘Aussie’ economy recovers. We still target the cross at 0.73 in 6M
and 12M.
www.danskebank.com/CI
18
NZD/USD – RBNZ on high alert as ‘lowflation’ looms
• Growth. Data surprises out of New Zealand have deteriorated
with CPI, employment and the PMI survey disappointing
recently. Dairy prices are softening yet again, putting New
Zealand’s producers under pressure still.
• Monetary policy. The Reserve Bank of New Zealand (RBNZ)
kept its official cash rate unchanged at 3.5% at the April
meeting. However, the policy statement was amended in a
rather dovish direction, saying ‘it would be appropriate to
lower the OCR if demand weakens, and wage and pricesetting outcomes settle at levels lower than is consistent
with the inflation target’ whereas previously the RBNZ
assumed a neutral balance. Close to two 25bp cuts from the
RBNZ are now priced in, and we reckon that a cut could come
as early as June if the data flow continues to sour.
• Flows. NZD positioning is broadly neutral from a historical
perspective.
• Valuation. Fundamentally, the NZD remains overvalued, with
our PPP model suggesting fair value at around 0.67. Our FX
short-term financial model suggests 0.75 as fair.
• Commodities. Dairy product prices have rebounded, but
unconfirmed media reports/threats of contaminated milk
powder could hurt exports.
• Risks. The NZD remains exposed to global risk sentiment.
Should inflation expectations drop suddenly, this could trigger
an easing bias from RBNZ.
Christin Tuxen, Senior Analyst, [email protected], +45 45 13 78 67
Forecast: 0.72(1M), 0.71(3M), 0.69 (6M) and 0.70(12M)
0.90
NZD/USD
0.85
0.80
0.75
0.70
0.65
0.60
May-14
Aug-14
75% conf. int.
NZD/USD
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
0.72 (29%)
0.71 (30%)
0.69 (26%)
0.70 (39%)
Fwd. / Consensus
0.73 / 0.74
0.73 / 0.73
0.72 / 0.72
0.71 / 0.71
50% confidence int.
0.72 / 0.75
0.70 / 0.76
0.69 / 0.76
0.67 / 0.77
75% confidence int.
0.70 / 0.76
0.68 / 0.78
0.65 / 0.79
0.61 / 0.80
Source: Danske Bank Markets
Conclusion. The significant terms-of-trade shock which NZD has
suffered during the course of the past year is now feeding through to the
growth and inflation picture for New Zealand. RBNZ has shifted to a
clear easing bias and the market is pricing Wheeler’s action to a
‘lowflation’ outlook. Crucially, the risk of a rate cut from the RBNZ could
continue to weigh on the NZD near term; on the other hand RBNZ has
seemingly stepped aside on intervention for the time being. As we see
USD strength returning in the near future ahead of a first Fed hike in
September, NZD/USD is set to move lower on diverging monetary policy.
We have lowered our near-term forecasts a little and see the cross
hitting 0.69 in 6M (prev. 0.71). On a 12M horizon we do, however, expect
USD strength to fade, and with upside risks to agricultural prices from a
structural point of view, we expect NZD/USD to stabilise around the
0.70 mark and keep our 12M forecast unchanged at this level.
www.danskebank.com/CI
19
USD/RUB – geopolitical risks remain a rouble worry
• Growth. GDP growth in Russia slowed to 0.6% in 2014 from
1.3% a year earlier. As the monetary contraction continues and
inflation has accelerated in a weak rouble and sanctions
environment, we expect the economy to shrink by 2.7% y/y in
Q1 15.
Forecast: 53 (1M), 60 (3M), 63 (6M) and 70 (12M)
75
70
65
• Monetary policy. On 30 April, the Central Bank of Russia (CBR)
cut the key rate by 150bp to 12.5%. The main reason given by
the central bank for the cut was ‘lower inflation risks and
persistent risks of considerable economy cooling’. We expect
the CBR to ease further during 2015 ending up at 8% in
December 2015.
60
• Flows. According to the CBR’s preliminary estimate, capital
30
outflows in 2014 leapt to USD151.5bn as the weakened rouble
pushed corporations and investors to accumulate hard
currencies. According to the CBR, the Q1 15 outflow slowed to
USD32.6bn.
• Valuation. The oil price has seen a downward level shift in RUB
terms this year due to the stronger rouble despite the oil surge
in USD terms; this is an issue a fiscal point of view. As we expect
oil-prices to stay around these levels near term, the government
should welcome an uptick in USD/RUB from here. Our shortterm models suggest a “fair level” for USD/RUB is around 53.
• Risks: Sudden CBR rate cuts or hikes and juggling with RUB
liquidity; escalation of sanctions and growing ‘fear premium’; oilprice collapse; rating cuts by Fitch will be rouble negative. Faster
than expected rebound in oil price and shrinking imports pose
upside risks for our rouble forecasts.
55
50
45
40
35
May-13
Nov-13
May-14
Nov-14
USD/RUB
May-15
Forward
Nov-15
Forecast
Source: Bloomberg, Danske Bank Markets
• Conclusion. The overall recovery in the rouble since the
start of the year is mostly a result of a stabilisation in global
oil prices and improved sentiment. However, in our view,
the geopolitical situation around Ukraine remains fragile,
making escalation very possible.
Looking ahead, we expect rouble weakness to resume, driven
by significantly higher Russian inflation than in the outside
world and a weak macro situation.
Vladimir Miklashevsky, Economist/Trading Desk Strategist, [email protected], +358 10 546 75 22
www.danskebank.com/CI
20
USD/RUB – important issues to watch
• CBR is less visible on the market
− The RUB is getting support from the continuing oil-price
rebound during the last 30 days, rising 4.6% against the USD.
The CBR has not intervened, but at the same time it increased
the price of FX funding to calm any downside in the USD/RUB
spot rate. We see continuing flows from carry traders and big
yield hunters along with other EM assets as the ECB
continues its QE programme.
− The daily correlation between the oil price and the RUB
remains low. However, we also stress that we the correlation
between the oil price and the rouble will tend to be stronger in
real terms than in nominal terms.
− While it is clear that geopolitical risks seem to have eased
and are much less of a market driver than in 2014, they
could still be a source of rouble volatility.
− We expect the Fed’s likely rate hikes in 2015 to accelerate
the USD/RUB surge, especially in H2 15. However, weaker
than expected economic growth in the US should also
trigger capital flows to EM assets, supporting the RUB.
40
Russian private sector's capital net
f lows, USD bn
20
0
-20
-40
-60
-80
Other sectors
Banks
-100
Source: Bank Rossii, Macrobond Financial, Danske Bank Markets
Vladimir Miklashevsky, Economist/Trading Desk Strategist, [email protected], +358 10 546 75 22
www.danskebank.com/CI
21
EUR/PLN – zloty appreciation to resume
• Growth. We are becoming somewhat more optimistic
about the outlook for the Polish economy – mostly on the
back of the significant improvement in the outlook for the
eurozone. So, while we expect lower GDP growth in 2015
than in 2014, we expect it to pick up during the year and
into 2016. Hence, we now expect growth of 2.9% in 2015
and 3.2% in 2016 and we currently believe that the risks
to our forecasts are mostly on the upside.
• Monetary policy. Polish inflation continues to undershoot
significantly the central bank’s (NBP) 2.5% target and we
are likely to see continued deflation in the coming months.
With the zloty continuing to strengthen, there should be
room for more rate cuts. However, the pick-up in Polish
growth is likely to reduce the feeling of urgency in regard to
further rate cuts.
• Valuation. The zloty is currently trading close to what we
would consider fair value levels.
• Risks. The biggest risks at the moment come from possible
contagion from the Russian crisis and potential renewed
uncertainty about the situation in the eurozone. In addition,
the substantial move higher in German Bunds could trigger
foreign selling of Polish bonds, weakening PLN.
Forecast: 4.10 (1M), 4.10 (3M), 4.05 (6M) and 4.05 (12M)
4.60
EUR/PLN
4.40
4.20
4.00
3.80
May-14
Aug-14
75% conf. int.
EUR/PLN
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
4.10 (50%)
4.10 (49%)
4.05 (38%)
4.05 (39%)
Fwd. / Consensus
4.11 / 4.07
4.12 / 4.05
4.14 / 4.05
4.18 / 4.04
50% confidence int.
4.04 / 4.17
4.01 / 4.21
3.98 / 4.25
3.95 / 4.31
75% confidence int.
3.99 / 4.23
3.94 / 4.30
3.88 / 4.39
3.82 / 4.50
Source: Danske Bank Markets
Conclusion. The zloty has weakened recently after a period of
appreciation. As a result we have lifted our 1M, 3M and 6M
EUR/PLN forecasts moderately. Looking forward, we would
expect the appreciation trend to resume in the coming months.
The currency is supported by both a moderately more positive
outlook for growth and the ECB’s QE programme. Solid
fundamentals support PLN strength.
Thomas Harr, Global Head of FICC Research [email protected], +45 45 13 67 31
www.danskebank.com/CI
22
EUR/HUF – carry keeps the forint attractive
• Growth. Growth has been picking up in Hungary and, after
years of stagnation, it is becoming one of the fastest-growing
economies in central and eastern Europe. However,
structural problems and weak domestic demand continue to
weigh on economic activity. We now estimate real GDP
growth was 4.0% in 2014 – up from 1.2% in 2013. We
expect growth of 3.3% in 2015.
• Monetary policy. The Hungarian central bank (MNB) has
been cutting interest rates in small steps. This has been
justified as there is actually deflation now in Hungary
(despite higher growth) and there is certainly a risk of
further deflation in coming months. This said, we expect
inflation to pick up somewhat – mostly on base effects. This
limits the scope for further rate cuts, although continued
forint appreciation could reopen the door to such action.
• Valuation. The HUF has fairly attractive long-term
fundamentals and the relatively large current account
surplus is particularly helpful.
• Risks. The biggest risk is possible contagion from the
Russian crisis but there is also the continued risk of
missteps in the Hungarian political-economic policy process.
In addition, the sharp move higher in German yields may
trigger foreign selling of Hungarian bonds, weakening the
HUF.
Forecast: 305 (1M), 305 (3M), 300 (6M) and 300 (12M)
340
EUR/HUF
330
320
310
300
290
280
270
May-14
Aug-14
75% conf. int.
EUR/HUF
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Jan-16
Danske fcst
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
305.00 (44%)
305.00 (48%)
300.00 (39%)
300.00 (45%)
Fwd. / Consensus
306.82 / 304.40
306.83 / 303.23
306.84 / 303.27
306.86 / 302.54
50% confidence int.
301.00 / 311.72
297.81 / 313.68
294.18 / 315.10
289.19 / 316.58
75% confidence int.
297.30 / 316.29
292.10 / 321.33
286.94 / 325.92
279.37 / 331.35
Source: Danske Bank Markets
Conclusion. HUF has weakened recently on broader EUR
strength and higher global yields. As a result, we have lifted our
EUR/HUF forecasts moderately. We continue to believe that
Hungary’s fairly strong external position is likely to be supportive
for the HUF in the medium term. Furthermore, fairly strong
growth and an expected pickup in inflation are likely to keep the
carry on the forint relatively attractive. Therefore, we continue
to expect medium-term appreciation of the forint.
Thomas Harr, Global Head of FICC Research, [email protected], +45 45 13 67 31
www.danskebank.com/CI
23
USD/TRY – volatility to rise as elections approach
• Growth. Falling energy prices and the decelerating CPI are yielding
better prospects for the Turkish economy in 2015-17. We expect
the economy to expand by 3.2% y/y in 2015 (previously 2.8% y/y).
Lower oil prices are set to reduce the large Turkish current
account deficit significantly.
• Monetary policy. The Turkish central bank has been under
considerable political pressure to cut interest rates to revive the
economy as the June parliamentary elections approach. However,
the historically weak lira is limiting the ability to cut. All rates were
kept unchanged in April.
• Valuation. A ‘fear premium’ has been priced into TRY spot in our
view due to political pressure from the president on the TCMB to
ease monetary policy. Thus, any easing in the short term would
increase the premium, keeping the TRY at a fair level justified by
improving fundamentals. At the same time, the market is pricing
the Fed’s upcoming rate hike.
• Risks. The strengthening of the US dollar and a Fed rate hike are
clear risks to the TRY versus the dollar, as appetite for emerging
market assets is likely to decrease. The approaching
parliamentary elections could put additional political pressure on
the central bank, which increases ‘regime risk’. A rising oil price
would put renewed pressure on the current account.
Forecast: 2.70 (1M), 2.65 (3M), 2.75 (6M) and 2.75 (12M)
3.50
USD/TRY
3.00
2.50
2.00
May-14
Aug-14
75% conf. int.
USD/TRY
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
2.70 (55%)
2.65 (37%)
2.75 (55%)
2.75 (49%)
Fwd. / Consensus
2.70 / 2.69
2.75 / 2.72
2.81 / 2.75
2.94 / 2.74
50% confidence int.
2.61 / 2.77
2.59 / 2.84
2.57 / 2.92
2.53 / 3.04
75% confidence int.
2.56 / 2.84
2.50 / 2.97
2.44 / 3.12
2.27 / 3.35
Source: Danske Bank Markets
Conclusion. Lira sentiment remains negative and the lira
continues to offer carry. Pressure on the central bank to ease
in 2015 is lira negative in the medium term in our view. We
continue to expect the lira to weaken over the coming year,
while the sell-off may accelerate in autumn if the Fed hikes.
Yet, we expect more moderate weakening than the forward
curve suggest due to improving macro fundamentals of the
Turkish economy.
Vladimir Miklashevsky, Economist/Trading Desk Strategist, [email protected], +358 10 546 7522
www.danskebank.com/CI
24
EUR/CZK – CNB’s EUR/CZK ‘floor’ could come under pressure
• Growth. Czech GDP rose 2.0% in 2014, up from -0.7% in both
2013 and 2012 (but lower than our forecast of 2.6% y/y).
Indicators for the macro economy in 2015 have generally been
positive with unemployment lower and retail sales increasing. This
supports our GDP forecast of 2.7% y/y growth in 2015 and 3.1%
y/y in 2016. We expect GDP to be supported in 2015 by stronger
external demand, low oil prices and expansionary fiscal policy.
• Inflation. Headline CPI growth was 0.5% y/y in April, up from 0.2%
y/y in March. However, the monetary-policy relevant inflation, i.e.
inflation adjusted for the first-round effect of indirect taxes, was
lower than headline CPI (latest: 0.0% y/y in March).
• Monetary policy. The Czech central bank (CNB) has been trying to
curb deflationary pressures by keeping a floor under EUR/CZK at
27. We believe the CNB will defend the floor, but there is also a risk
that political pressure to give it up could mount if there are
substantial inflows into the CZK.
• Valuation. From a longer-term perspective the Czech koruna is
somewhat undervalued, in our view. However, this assumes
continued sub-target inflation. To hit the 2% inflation target, the
CNB will have to keep the koruna undervalued, in our view.
Forecast: 27.5 (1M) 27.5 (3M), 27.3 (6M) and 27.3 (12M)
29.0
EUR/CZK
28.5
28.0
27.5
27.0
26.5
26.0
25.5
May-14
Aug-14
75% conf. int.
EUR/CZK
Nov-14
Mar-15
50% conf.int.
Jun-15
Forward
k
Sep-15
Danske fcst
Jan-16
Apr-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
27.50 (65%)
27.50 (62%)
27.30 (51%)
27.30 (54%)
Fwd. / Consensus
27.42 / 27.47
27.42 / 27.45
27.42 / 27.35
27.42 / 27.25
50% confidence int.
27.17 / 27.60
26.97 / 27.72
26.79 / 27.82
26.54 / 27.92
75% confidence int.
26.98 / 27.84
26.68 / 28.12
26.36 / 28.40
25.96 / 28.71
Source: Danske Bank Markets
Conclusion. Given the undervaluation of the CZK, we are
likely to see EUR/CZK move close to the 27 floor over the next
12 months.
• Risks. The biggest risk is a prolonged and significant test of the
EUR/CZK floor, which could trigger a kneejerk change in monetary
policy.
Thomas Harr, Global Head of FICC Research, [email protected], +45 45 13 67 31
www.danskebank.com/CI
25
USD/CNY – China not targeting weaker CNY despite slowdown
• Monetary policy. The hard data has so far been weaker than we
expected in 2015, suggesting that growth is poised to drop below
the governments 7% target for GDP growth in 2015. Growth is
expected to recover slightly in H2 2015 on the back of monetary
easing Inflation. Inflation is expected to increase to above 2% y/y
in H2 2015 from 1.5% y/y in May as the drop in oil prices
subtracts less but concerns about subdued inflation currently
outweighs concerns about a rebound in inflation.
Forecast: 6.21 (1M) 6.20 (3M), 6.18 (6M) and 6.10 (12M)
• The People’s Bank of China (PBoC) currently has a strong easing
bias. We expect it to cut the reserve requirement by at least
100bp and its leading interest rates by at least another 25bp.
• FX policy. In our view, PBoC is not targeting a weaker CNY to
support growth and we expect the daily trading band (currently
+/-2%) to be stable in the short run. However, the long-term goal
remains a floating exchange rate and a convertible currency.
Hence, intervention will be reduced and the daily trading band
gradually widened further. In the future therefore, there will be
more two-way volatility in the exchange rate and it will
increasingly be difficult to regard CNY as a USD-risk.
• Valuation. Despite the appreciation of CNY in recent years, we do
not regard it as overvalued as 1) China’s market share of global
export markets continues to improve; 2) markedly lower crude oil
and commodity prices represent a substantial terms of trade
gain for China and have increased its trade surplus markedly.
• Risks. If growth slows substantially below 7%, it becomes more
likely that China will start targeting a weaker CNY to support
growth. In the medium term, gradual liberalisation of the capital
account will probably also be negative for CNY.
Source: Macrobond Financial, Danske Bank Markets
Conclusion. It is still our view that China will not allow CNY to
depreciate substantially despite data suggesting that growth
continued to slow in early 2015. In our view, CNY remains well
supported by an increasing trade balance surplus in the wake of
a sharp decline in import prices and China’s relatively closed
capital account that limits capital outflow. China’s ambition to
have CNY included in the SDR later in 2015 also suggest that
China will behave like a responsible stakeholder ahead of the
IMF decision this autumn. We do not expect the daily trading
band to be widened until after the IMF decision. We still expect
a moderate appreciation of CNY within the current trading band
albeit a general stronger USD limits the appreciation potential
in the short run.
Flemming Jegbjærg Nielsen, Senior Analyst, [email protected], +45 45 12 85 35
www.danskebank.com/CI
26
Danske Bank Markets FX forecasts vs EUR and USD
+1m
Forecast
+3m
+6m
1.13
136
0.73
1.03
1.08
135
0.71
1.04
1.02
129
0.69
1.05
1.08
137
0.71
1.10
0.4
0.4
1.5
-0.9
-4.2
0.0
-1.4
0.2
-9.6
-4.8
-4.4
1.4
-4.7
1.7
-2.1
6.7
7.4620
8.55
9.40
7.4620
8.40
9.40
7.4550
8.25
9.20
7.4550
8.15
9.00
0.0
1.6
1.0
0.1
-0.4
1.0
0.1
-2.6
-1.1
0.2
-4.3
-3.2
Exchange rates vs USD
JPY
120.0
GBP
1.57
CHF
0.92
120
1.55
0.91
125
1.52
0.96
126
1.48
1.03
127
1.52
1.02
0.0
-1.1
-1.3
4.3
-2.8
4.5
5.3
-5.5
12.2
6.7
-2.7
12.1
DKK
NOK
SEK
6.63
7.47
8.28
6.60
7.57
8.32
6.91
7.78
8.70
7.31
8.09
9.02
6.90
7.55
8.33
-0.3
1.2
0.6
4.5
3.9
5.4
10.8
7.8
9.4
5.2
0.4
1.6
CAD
AUD
NZD
1.20
0.80
0.74
1.22
0.78
0.72
1.24
0.75
0.71
1.27
0.73
0.69
1.25
0.73
0.70
1.5
-2.0
-1.9
3.1
-5.5
-2.7
5.4
-7.6
-4.7
3.6
-6.8
-1.9
3.5
-0.2
14.5
-0.6
16.5
-1.4
22.8
-3.7
Spot
Exchange rates vs EUR
USD
1.125
JPY
135.0
GBP
0.719
CHF
1.040
DKK
NOK
SEK
7.4631
8.41
9.31
+12m
RUB
50.58
53.00
60.00
63.00
70.00
CNY
6.21
6.21
6.20
6.18
6.10
Note: GBP, AUD and NZD are denominated in local currency rather than USD
Forecast vs forward outright, %
+1m
+3m
+6m
+12m
Source: Danske Bank Markets
www.danskebank.com/CI
27
Danske Bank Markets FX forecasts vs DKK
Spot
+1m
Exchange rates vs DKK
EUR
7.4631
7.4620
USD
6.63
6.60
JPY
5.53
5.50
GBP
10.38
10.22
CHF
7.17
7.24
Forecast
+3m
+6m
+12m
Forecast vs forward outright, %
+1m
+3m
+6m
+12m
7.4620
6.91
5.53
10.51
7.18
7.4550
7.31
5.80
10.80
7.10
7.4550
6.90
5.44
10.50
6.78
0.0
-0.3
-0.4
-1.4
1.0
0.1
4.5
0.2
1.5
-0.1
0.1
10.8
5.2
4.7
-1.3
0.2
5.2
-1.4
2.4
-6.1
NOK
SEK
0.89
0.80
0.87
0.79
0.89
0.79
0.90
0.81
0.91
0.83
-1.5
-0.9
0.6
-0.9
2.7
1.2
4.7
3.5
CAD
AUD
NZD
5.52
5.29
4.88
5.41
5.15
4.75
5.57
5.18
4.91
5.75
5.34
5.04
5.52
5.04
4.83
-1.8
-2.3
-2.2
1.4
-1.2
1.7
5.0
2.4
5.6
1.5
-1.9
3.2
PLN
CZK
HUF
RUB
1.82
0.27
0.24
0.13
1.82
0.27
0.24
0.12
1.82
0.27
0.24
0.12
1.84
0.27
0.25
0.12
1.84
0.27
0.25
0.10
0.3
-0.3
0.8
-3.8
0.7
-0.2
1.1
-9.3
2.4
0.5
3.0
-6.0
3.4
0.5
3.9
-15.8
CNY
1.07
1.06
1.11
1.18
1.13
-0.2
5.1
12.3
9.3
Source: Danske Bank Markets
www.danskebank.com/CI
28
Danske Bank Markets FX forecasts vs SEK
Spot
Exchange rates vs SEK
EUR
9.31
USD
8.27
JPY
6.90
GBP
12.96
CHF
8.95
+1m
Forecast
+3m
+6m
+12m
Forecast vs forward outright, %
+1m
+3m
+6m
+12m
9.40
8.32
6.93
12.88
9.13
9.40
8.70
6.96
13.24
9.04
9.20
9.02
7.16
13.33
8.76
9.00
8.33
6.56
12.68
8.18
1.0
0.6
0.5
-0.6
1.9
1.0
5.4
1.0
2.4
0.8
-1.1
9.4
3.9
3.4
-2.5
-3.2
1.6
-4.8
-1.1
-9.3
NOK
DKK
1.11
1.25
1.10
1.26
1.12
1.26
1.12
1.23
1.10
1.21
-0.6
0.9
1.4
0.9
1.5
-1.2
1.2
-3.4
CAD
AUD
NZD
6.89
6.60
6.09
6.82
6.49
5.99
7.02
6.53
6.18
7.10
6.58
6.22
6.67
6.08
5.83
-0.9
-1.5
-1.3
2.2
-0.4
2.5
3.8
1.2
4.3
-1.9
-5.2
-0.3
PLN
CZK
HUF
RUB
2.27
0.34
0.30
0.16
2.29
0.34
0.31
0.16
2.29
0.34
0.31
0.15
2.27
0.34
0.31
0.14
2.22
0.33
0.30
0.12
1.2
0.6
1.7
-3.0
1.6
0.7
1.9
-8.5
1.1
-0.7
1.8
-7.1
-0.1
-2.9
0.4
-18.6
CNY
1.33
1.34
1.40
1.46
1.37
0.7
6.0
11.0
5.6
Source: Danske Bank Markets
www.danskebank.com/CI
29
Danske Bank Markets FX forecasts vs NOK
Spot
Exchange rates vs NOK
EUR
8.41
USD
7.47
JPY
6.23
GBP
11.70
CHF
8.08
+1m
Forecast
+3m
+6m
+12m
Forecast vs forward outright, %
+1m
+3m
+6m
+12m
8.55
7.57
6.31
11.71
8.30
8.40
7.78
6.22
11.83
8.08
8.25
8.09
6.42
11.96
7.86
8.15
7.55
5.94
11.48
7.41
1.6
1.2
1.2
0.1
2.5
-0.4
3.9
-0.4
1.0
-0.6
-2.6
7.8
2.4
1.9
-3.9
-4.3
0.4
-5.9
-2.3
-10.4
SEK
DKK
0.90
1.13
0.91
1.15
0.89
1.13
0.90
1.11
0.91
1.09
0.6
1.5
-1.4
-0.6
-1.5
-2.6
-1.2
-4.5
CAD
AUD
NZD
6.22
5.95
5.49
6.20
5.90
5.45
6.27
5.83
5.52
6.37
5.90
5.58
6.04
5.51
5.28
-0.3
-0.8
-0.7
0.8
-1.8
1.1
2.2
-0.3
2.8
-3.1
-6.4
-1.5
PLN
CZK
HUF
RUB
2.05
0.31
0.27
0.15
2.09
0.31
0.28
0.14
2.05
0.31
0.28
0.13
2.04
0.30
0.28
0.13
2.01
0.30
0.27
0.11
1.9
1.3
2.4
-2.3
0.1
-0.8
0.5
-9.8
-0.4
-2.1
0.3
-8.5
-1.2
-4.0
-0.8
-19.5
CNY
1.20
1.22
1.25
1.31
1.24
1.4
4.5
9.4
4.3
Source: Danske Bank Markets
www.danskebank.com/CI
30
Danske Bank EMEA FX forecasts
PLN
HUF
CZK
RUB
TRY
12-May-15
+1M
+3M
+6M
+12M
12-May-15
+1M
+3M
+6M
+12M
12-May-15
+1M
+3M
+6M
+12M
12-May-15
+1M
+3M
+6M
+12M
12-May-15
+1M
+3M
+6M
+12M
EUR
Danske
Forward
4.11
4.10
4.11
4.10
4.12
4.05
4.14
4.05
4.18
307
305
307
305
308
300
309
300
311
27.4
27.5
27.4
27.5
27.4
27.3
27.4
27.3
27.4
56.9
59.9
57.6
64.8
58.7
64.3
60.4
75.6
63.6
3.01
3.05
3.04
2.86
3.10
2.81
3.18
2.97
3.34
USD
Danske
Forward
3.65
3.63
3.65
3.80
3.66
3.97
3.67
3.75
3.69
273
270
273
282
273
294
274
278
274
24.4
24.3
24.4
25.5
24.3
26.8
24.3
25.3
24.2
50.6
53.0
51.2
60.0
52.4
63.0
54.1
70.0
57.0
2.68
2.70
2.70
2.65
2.75
2.75
2.82
2.75
2.94
DKK
Danske
Forward
182
182
181
182
181
184
180
184
178
24.3
24.5
24.3
24.5
24.2
24.9
24.1
24.9
23.9
27.2
27.1
27.2
27.1
27.2
27.3
27.2
27.3
27.2
13.1
12.5
13.0
11.5
12.7
11.6
12.3
9.9
11.7
248
245
245
261
241
266
234
251
223
SEK
Danske
Forward
227
229
226
229
226
227
225
222
222
3.03
3.08
3.03
3.08
3.02
3.07
3.01
3.00
2.99
34.0
34.2
34.0
34.2
34.0
33.7
33.9
33.0
33.9
16.4
15.7
16.2
14.5
15.8
14.3
15.4
11.9
14.6
309
308
306
328
300
328
293
303
278
NOK
Danske
Forward
205
209
205
205
205
204
204
201
204
2.74
2.80
2.74
2.75
2.74
2.75
2.74
2.72
2.74
30.7
31.1
30.7
30.5
30.8
30.2
30.9
29.9
31.1
14.8
14.3
14.6
13.0
14.4
12.8
14.0
10.8
13.4
279
280
276
294
272
294
266
274
255
Source: Danske Bank Markets
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Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are Thomas Harr (Chief Analyst),
Stefan Mellin (Senior Analyst), Christin Tuxen (Senior Analyst), Morten Helt (Senior Analyst), Jens Naervig Pedersen (Senior Analyst), Kristoffer Lomholt (Analyst), and Vladimir
Miklashevsky (Analyst).
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analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report.
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Financial models and/or methodology used in this research report
Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security,
issuer and/or country. Documentation can be obtained from the authors on request.
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Date of first publication
See the front page of this research report for the date of first publication.
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