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Global Economics & Foreign Exchange Strategy
February 2015
Foreign Exchange Outlook
GLOBAL OUTLOOK
The environment of volatile oil prices, loose monetary policy, building FX volatility and
uneven economic data is driving major and important shifts in global currency markets.
AMERICAS
The USD is expected to appreciate as both fundamentals and flows support the shift
higher. We have adjusted several forecasts this month, including significant revisions to the
CAD and the MXN, incorporating a more aggressive pace of USD strength.
EUROPE
As spillover impacts of European Central Bank policy are flowing throughout Europe, the
European currencies are trading increasingly as a block; we expect ongoing depreciation in
2015, but at a slower pace than what we have seen over the last several months. The GBP
will likely outperform against other European currencies, but still weaken modestly against
the USD.
ASIA/PACIFIC
The JPY will maintain a broad weakening bias, interrupted by brief periods of risk aversion
-driven corrections. A surprise interest rate cut by the Reserve Bank of Australia has added
to downward AUD pressure. The CNY continues to face elevated volatility, yet there
appears to be little change in official currency policy.
Contents
Market Tone & Fundamental Outlook .....................................................................3
United States & Canada .........................................................................................5
Europe ....................................................................................................................6
Asia / Pacific ...........................................................................................................8
Developing Asia ....................................................................................................10
Developing Americas ............................................................................................12
Developing Europe & Africa ..................................................................................14
Global Currency Forecast .....................................................................................16
Contacts & Contributors ........................................................................................17
Foreign Exchange Outlook is available on scotiabank.com and Bloomberg at SCOT
February 2015
Global Economics & Foreign Exchange Strategy
Foreign Exchange Outlook
Core Exchange Rates
Global Foreign Exchange Outlook
February 3, 2015
Scotiabank
Consensus*
Scotiabank
Consensus*
Scotiabank
Consensus*
Scotiabank
Consensus*
Scotiabank
Consensus*
Scotiabank
Consensus*
EURUSD
USDJPY
GBPUSD
USDCAD
AUDUSD
USDMXN
1.50
Spot
1.14
Q1
1.13
1.19
116
121
1.48
1.53
1.28
1.17
0.76
0.81
14.59
14.47
117.6
1.51
1.25
0.77
14.77
2015f
Q2
1.10
1.18
120
122
1.48
1.52
1.31
1.17
0.75
0.80
14.65
14.38
123
EURUSD
Q3
Q4
Q1
1.08
1.17
123
123
1.50
1.52
1.32
1.17
0.73
0.80
14.78
14.31
1.05
1.16
125
123
1.50
1.52
1.33
1.17
0.73
0.79
15.02
14.23
1.05
1.16
128
123
1.51
1.52
1.33
1.17
0.73
0.79
14.97
14.12
2016f
Q2
1.04
1.16
129
123
1.51
1.52
1.32
1.17
0.74
0.79
14.70
13.98
Q3
Q4
1.02
1.16
130
122
1.51
1.52
1.31
1.16
0.75
0.80
14.63
13.84
1.00
1.15
131
122
1.51
1.52
1.30
1.16
0.75
0.80
14.71
13.70
USDJPY
115
1.40
107
1.30
99
91
1.20
83
1.10
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
75
Feb-10
1.28
GBPUSD
1.68
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-12
Feb-13
Feb-14
Feb-15
Feb-12
Feb-13
Feb-14
Feb-15
USDCAD
1.20
1.13
1.58
1.05
1.48
0.98
1.38
Feb-10
1.14
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
AUDUSD
0.90
Feb-10
15.2
Feb-11
USDMXN
14.5
1.04
13.8
0.94
13.1
12.4
0.84
11.7
0.74
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
11.0
Feb-10
Feb-11
(*) Source: Consensus Economics Inc. January 2015
2
February 2015
Global Economics & Foreign Exchange Strategy
Market Tone & Fundamental Focus
Foreign Exchange Outlook
Tuuli McCully 416.863.2859
[email protected]
Camilla Sutton 416.866.5470
[email protected]
Faced with rising uncertainty, building disinflationary pressures and uneven growth, global central banks are shifting course and
foreign exchange markets are reacting. January was marked by surprising turns in central bank policy globally, which drove
volatility higher and supported a further strengthening in the US dollar (USD). We expect this trend to continue.
The USD has appreciated materially against every primary currency (except the Swiss Franc) since June, gaining over 16% on
a trade weighted basis. The rally has been fundamentally led, with relative growth and central bank policies being the core
drivers while flows and technicals have been playing supporting roles. However, massive shifts in financial markets generally —
including low oil prices, suppressed sovereign bond yields, and rising volatility — are likely to have far reaching economic
implications. The adverse impact on the US economy caused by the strong USD (suppressing trade and inflation) is unlikely to
draw a policy response for several reasons. The economic stimulus provided by low oil prices helps to offset the weight of a
stronger dollar. In addition, exports account for less than 15% of US GDP (compared to countries like Canada where they
account for 30%). Finally, the US Federal Reserve (Fed) is expected to look through the temporary impact it will have on
inflation, using a similar thesis to the impact of low oil prices. Accordingly, we maintain our view that the Fed will embark on an
interest rate hiking cycle in mid-year 2015.
The NAFTA currencies have diverged materially from each other. In January, the Canadian dollar (CAD) was the worst
performing primary currency, losing 9% against the USD, while the Mexican peso (MXN) only depreciated by 1.6%. The
divergence partially reflects the Bank of Canada’s decision to cut interest rates, while Banxico has hinted at an interest rate
cycle that shifts in tandem with the Fed. The Bank of Canada has refocused the market on the impact of lower oil prices and
accordingly tied the CAD even closer to oil markets.
Elsewhere in the Americas, the Brazilian real (BRL) is set to maintain its fragile profile in the coming months as the Brazilian
economy faces a multitude of challenges with elevated inflation, weak economic momentum, and mounting fiscal sustainability
concerns. The Peruvian Nuevo Sol (PEN), the Chilean peso (CPL), and the Colombian peso (COP) continue to be impacted by
commodity price fluctuations, particularly base metals, copper, and oil, respectively.
In Europe, the threat of low growth coupled with deflation has led the European Central Bank to implement negative interest
rates and enter an aggressive bond buying program. This, combined with political uncertainty in small but relevant countries like
Greece, has pressured the euro (EUR) materially lower (7% weaker in January alone). The spillover impacts globally are
important. The Swiss National Bank struggled to maintain its EURCHF floor and was forced to abandon it on January 15th, while
the Danish central bank, which maintains a peg with the EUR, has had to cut interest rates three times in January. The central
banks of both Sweden and Norway maintain relatively dovish outlooks, leaving the European currencies increasingly trading as
a block; accordingly, we expect further downside pressure to build on the currency group. The outlook for the British pound
(GBP) is also negative, as the United Kingdom’s economic fundamentals have turned and driven inflation lower, the timing of
the Bank of England interest rate hike is pushed out, and political uncertainty rises into the election. However, these dynamics
are likely to prove somewhat temporary and the GBP is expected to outperform the EUR. The Russian ruble (RUB) will likely
maintain its weakening trend on the back of Russia’s difficult economic outlook characterized by contracting output, accelerating
inflation, and a central bank reversing its tight monetary policy direction unexpectedly.
In Asia, the Chinese yuan (CNY) weakened to eight month lows as trading took on a depreciating and more volatile pattern.
Nevertheless, beyond this there appears to be little change in currency policy. Accordingly, even as China risks losing a
competitive edge against countries undergoing significant currency devaluations we expect some year-over-year CNY
appreciation in 2015. The outlook for the Japanese yen (JPY) continues to be a broad weakening in the currency interrupted by
brief periods of risk aversion driven corrections. Lower oil prices will eventually prove economically supportive but the Bank of
Japan’s drive towards 2% inflation is making limited progress and forcing more aggressive central bank action. A surprise
interest rate cut by the Reserve Bank of Australia has added to downward pressure on the Australian dollar (AUD).
The Indian economic environment portrays a relatively favourable outlook for the Indian rupee (INR), which is expected to face
only a mild depreciating bias against the USD this year. Lower oil prices are translating into an improvement in India’s current
account deficit, the government is proving committed to fiscal consolidation, and economic activity is expected to rebound partly
assisted by the Reserve Bank of India’s decision in January to embark on a monetary easing cycle. Generally speaking, Asia is
a net beneficiary of lower international oil prices, allowing various countries to strengthen their external positions and rationalize
fuel subsidies; stronger economic fundamentals will be reflected in capital flows once the current period of uncertainty subsides.
3
February 2015
Global Economics & Foreign Exchange Strategy
Foreign Exchange Outlook
Camilla Sutton 416.866.5470
[email protected]
Canada
Currency Outlook
In January, the Canadian dollar (CAD) was the worst performing primary currency, losing 9% against the USD and marking the
largest monthly losses since the height of the financial crisis. The first two sessions of February were marked by a violent
reversal, providing some breathing room. Volatility has increased and the intraday spread between the high and low have
widened significantly.
Oil prices — WTI oil prices reached fresh lows on January 29th, briefly touching $43.58 and adding to the downward pressure
on CAD. However in early February there was a violent 20% rally. Correlations are running notably high, as market participants
have tied oil prices directly to the economic backdrop and Bank of Canada (BoC) policy decisions.
Diverging central bank policy — The BoC has assumed $60 WTI oil in its forecasts. Accordingly, a failure of oil to sustain its
recent rally and stabilize closer to $60 opens up a further interest rate cut in Canada. The central banks of New Zealand and
Australia are following suit, reinforcing a global shift towards lower policy rates. This has proven a significant weight on the CAD
and is likely to support the downward trend from here.
Economic backdrop — Canada’s inflation is low and falling; employment gains have been modest; household debt is at record
highs and housing prices are elevated. The collapse in oil prices is a negative shock. Economic data releases have so far failed
to reveal the long-anticipated surge in manufacturing activity, increasing skepticism over the impact of a lower CAD and strong
US recovery. The divergence of the Canadian and U.S. economic backdrop is widening, fueling CAD depreciation.
Broad USD strength — The broad USD rally is supported by both fundamentals and flows, leaving the uptrend firmly in place
and with further to run.
CAD sentiment is negative — With a net short position, downward revisions to consensus CAD forecasts and numerous CAD
sell recommendations, sentiment has fueled the drop in CAD. From here it is oil that is likely to drive sentiment.
The environment is volatile and has turned against CAD. We are likely to see ongoing weakness in 2015, with a substantial year
-over-year depreciation. In the current environment the most important factors for CAD are oil prices, the domestic outlook and
the broad USD trend. The core risk to CAD weakness is a sustained rally in oil prices or a shift to a more dovish Fed stance. We
target CAD to close the year at 0.75 (or 1.33 in USDCAD terms).
Canadian Dollar Cross-Currency Trends
Spot
3-Feb
0.96
94.1
1.43
1.25
FX Rate
AUDCAD
CADJPY
EURCAD
USDCAD
1.06
15Q1f
15Q2f
15Q3f
15Q4f
16Q1f
16Q2f
16Q3f
16Q4f
0.97
90.6
1.45
1.28
0.98
91.6
1.44
1.31
0.96
93.2
1.43
1.32
0.97
94.0
1.40
1.33
0.97
96.2
1.40
1.33
0.98
97.7
1.37
1.32
0.98
99.2
1.34
1.31
0.98
100.8
1.30
1.30
107.5
AUDCAD
CADJPY
105.0
1.03
102.5
1.01
100.0
97.5
0.98
95.0
0.96
92.5
0.93
Feb-14
May-14
Aug-14
Nov-14
Feb-15
1.60
90.0
Feb-14
1.30
EURCAD
1.28
1.55
Apr-14
Ju n-14
Aug-14
Oct-14
Dec-14
Feb-15
USDCAD
1.25
1.23
1.51
1.20
1.18
1.46
1.15
1.13
1.42
1.10
1.08
1.37
Feb-14
May-14
Aug-14
Nov-14
Feb-15
1.05
Feb-14
May-14
Aug-14
Nov-14
Feb-15
4
February 2015
Global Economics & Foreign Exchange Strategy
United States and Canada
Fundamental Commentary
Foreign Exchange Outlook
Neil Tisdall 416.866.6252
[email protected]
Adrienne Warren 416.866.4315
[email protected]
UNITED STATES — The US economy is recording decent growth averaging around 2½% at the turn of the year. Consumer
confidence and spending have accelerated sharply alongside the steep drop in gasoline prices and a significant improvement in
labour market conditions. The strongest pace of job growth in eight years has pushed the unemployment rate to a six and a half
year low of 5.6%. Broader measures of unemployment also have improved, though still soft wage gains averaging below 2% y/y
suggest some continued labour market slack. Vehicle buying intentions are at their highest level since 2005. US housing activity
also is picking up, with housing starts moving back above the 1 million mark, though the recovery so far remains moderate.
Notwithstanding good housing affordability, relatively tight lending conditions, high student debt loads and a limited inventory of
lower-priced homes are restraining first-time buyer activity, while less favourable valuations have cooled investor demand.
Industrial production is still posting solid gains, with strong domestic sales boosting demand for motor vehicles & parts, business
equipment and technology goods. However, the overall momentum in industrial activity and business spending has slowed
somewhat in recent months, dampened by lower energy-related expenditures, the impact of West Coast port disruptions and
sluggish export sales. Weak global growth combined with a strong US dollar and rising imports suggest external trade will
remain a drag on growth this year. At the same time, the US economy is getting a lift from a pickup in local and state
government spending, and a reduced pace of federal fiscal restraint. US inflation pressures have eased amid falling energy
prices and restrained non-fuel import costs. Headline inflation fell below 1% y/y in December, while core inflation slowed to a 10
-month low of just 1.6% y/y.
CANADA — The Canadian economy continues to post moderate growth with GDP tracking around 2½% y/y in 2014. Persistent
weakness in commodity prices prompted a surprise rate cut by the Bank of Canada last month and suggests that growth will
likely pull back to around 2% in 2015. Housing activity was robust in 2014, with low mortgage rates maintaining affordability
despite record-high prices, although an influx of listings and a slowdown in sales in Alberta points to deteriorating sentiment in
some regional markets. Employment grew just above ½% in 2014, the lowest in five years, and wage growth has been sluggish.
We expect the labour market to add roughly 10,000 jobs per month this year, a similar pace to 2014, with positive momentum in
the manufacturing sector offsetting restructuring in the oil patch. Vehicle sales remain one of the strongest retail sectors, and
are likely to edge up to record highs in 2015. However, consumers are expected to be relatively cautious spenders in the year
ahead as pent-up demand is limited, and homeownership rates remain at record levels. Manufacturing and exports remain
strong with producers benefitting from rising auto sales and residential construction in the US, and a more competitive currency.
Manufacturing exports to the US will be the main growth driver in the coming year, more than offsetting weaker energy receipts.
Business investment has been sluggish as excess capacity combined with moderate sales growth continues to weigh on capital
spending plans, despite improving business sentiment, healthy corporate finances and favourable financing costs. Capital
investment plans among manufacturers and other non-energy producers should gradually firm up over the coming year as
improving US demand underpins a stronger export recovery, despite weak commodity prices limiting investment in the resource
sector. Headline and core inflation picked up to around 2% y/y in 2014, reflecting rising food costs and the pass-through of a
weaker Canadian dollar to a broad range of imported goods. While headline inflation is likely to recede alongside falling
gasoline prices and soft wage gains, the sharp decline in the Canadian dollar in recent months will contain core inflation around
the mid-point of the Bank of Canada’s 1-3% target range in 2015.
Monetary Policy Commentary
Derek Holt 416.863.7707
[email protected]
Dov Zigler (212) 225-6631
[email protected]
UNITED STATES — We expect the FOMC to raise interest rates during Q2 2015. Many conditions are in place for such a
move: a) The FOMC upgraded its assessment of the economy and labor markets in January, b) low interest rates globally have
eased financial conditions, possibly necessitating policy tightening, c) the minutes to the December FOMC meeting implied a
willingness to hike with core inflation running “near” the then-prevailing level of 1.5%, d) the FOMC has gone from guiding that
rates will be low for a “considerable time” to guiding that it can be “patient” regarding rate hikes (the Fed chair has defined this
as implying rate hikes could come mid-year). Principal risks to this outlook are: a) whether global volatility will cause the Fed to
be more cautious and thus more ‘patient’ than it had been inclined to be before, and b) the mild slow-down in core CPI.
CANADA — We expect the Bank of Canada to cut its benchmark interest rate to 0.5% in March and, while our base case is for
the BoC to pause at 0.5%, we see risk that the BoC may continue cutting rates down to its version of the lower zero bound (e.g.
25 bps) if economic data weaken materially and/or if oil prices stay restrained. The BoC’s MPR and post-statement conference
highlighted the contingency of its downside scenario for the economy on crude prices staying below USD 60/barrel; therefore,
the outlook for oil prices will colour our outlook for the BoC. The other big variable is downside risks to housing stemming from a
potential drop in employment and household wealth due to weakness in the energy economy. Ultimately, the BoC’s forecast for
the elimination of spare capacity in the economy by the end of 2016 implies a communicated path of further easing.
5
February 2015
Global Economics & Foreign Exchange Strategy
Foreign Exchange Outlook
Camilla Sutton 416.866.5470
[email protected]
Europe
Currency Outlook
EURO ZONE — In January, EUR collapsed to fresh 13-year low of 1.1098, weighed down by a combination of fundamental
developments and significant outflows; bringing parity within sight. Sentiment is bearish with CFTC reporting a -$26 billion net
short position by the end of January, falling consensus forecasts and an option market which is protecting against USD upside
risk. The combination of fundamentals, flows and technicals all warn of downside risk; however EUR managed to stabilize in the
last week of January, warning of a brief period of range trading. We hold a Q2 2015 forecast of 1.10 falling to 1.05 by year-end.
UNITED KINGDOM — The U.K. faces low and falling inflation pressures, a central bank that is unlikely to change interest rate
policy in 2015 and the uncertainty over the upcoming election. Technically the trend is lower. Sentiment is relatively bearish,
CFTC reported that traders are holding a net short position of $4 billion at the end of January. However, with rates at 0.5% (and
notably positive) and volatility in GBP elevated but lower than many G10 currencies, flows should help to offset some of the
negative developments. Accordingly we hold a modest Q2 2015 forecast of 1.48, rising to 1.50 by year-end.
SWITZERLAND — The SNB’s surprising removal of the EURCHF 1.20 floor sent it to fresh lows of 0.8517, a shocking 29% one
-day collapse; but by the end of January, EURCHF had retraced back up to 1.05. The economic consequences of the sudden
appreciation will be challenging, particularly for an economy that is already in deflation. However, CHF is overvalued on a
fundamental basis, arguing for a slow trend higher in EURCHF. We expect a fresh range of 1.00 to 1.10 to emerge and hold a
Q2 2015 forecast of 1.08.
SWEDEN — SEK is trending lower, falling victim to an uneven fundamental backdrop and ongoing depreciation in EUR.
Sentiment is relatively negative as the weight of a dovish central bank, ongoing deflationary pressures and a strong downward
technical trend shifts the outlook. We expect SEK to lose 9% in 2015, with USDSEK closing Q2 2015 at 8.40.
Currency Trends
Spot
3-Feb
1.14
1.51
1.06
9.43
FX Rate
EURUSD
GBPUSD
EURCHF
EURSEK
15Q1f
15Q2f
15Q3f
15Q4f
16Q1f
16Q2f
16Q3f
16Q4f
1.13
1.48
1.06
9.38
1.10
1.48
1.08
9.24
1.08
1.50
1.09
9.13
1.05
1.50
1.10
9.01
1.05
1.51
1.10
9.01
1.04
1.51
1.10
8.84
1.02
1.51
1.10
8.67
1.00
1.51
1.10
8.50
1.75
1.40
GBPUSD
1.35
1.71
EURUSD
1.67
1.30
1.63
1.25
1.59
1.20
1.55
1.15
1.51
1.10
Feb-14
1.25
May-14
Aug-14
Nov-14
Feb-15
1.47
Feb-14
Nov-14
Feb-15
EURSEK
1.20
9.60
1.15
9.40
1.10
9.20
1.05
9.00
1.00
8.80
May-14
Aug-14
9.80
EURCHF
0.95
Feb-14
May-14
Aug-14
Nov-14
Feb-15
8.60
Feb-14
Apr-14
Ju n-14
Aug-14
Oct-14
Dec-14
6
Global Economics & Foreign Exchange Strategy
Europe
Fundamental Commentary
February 2015
Foreign Exchange Outlook
Alan Clarke 44.207.826.5986
[email protected]
Erika Cain 416.866.4205
[email protected]
EURO ZONE — Economic conditions in the euro area remain challenging and the political outlook has been complicated by
Greece’s decision to elect Alexis Tsipras and his left-wing Syriza party. During his early days in office, there was substantial
speculation over how his relationship with the Troika would evolve, whether debt terms would be re-negotiated and if there were
building risks over an eventual Greek exit of the European Monetary Union (EMU). Meanwhile, lower oil prices have sent euro
zone inflation sharply into negative territory at a time when the region’s recovery remains constrained by elevated
unemployment, insufficient structural reforms, and subdued monetary/credit dynamics. Against this backdrop, the ECB
expanded its asset-purchase program to €60 billion per month, which it will start on March 1st and run through at least
September 2016. Significant monetary accommodation by the ECB will maintain the depreciatory bias on the EUR. In turn, this
should support medium-term price stability by increasing import costs and economic growth on the back of greater export
competitiveness. However, it is no cure all. More accommodative fiscal policy — in accordance with the Stability and Growth
Pact — and structural reform is necessary to support investment, long-term growth and job creation. Nevertheless, Q4
economic growth in Spain has accelerated at its strongest annual pace since 2008, while leading euro zone economic indicators
point to a more sustainable recovery in the coming months. The weaker euro, lower energy prices, and improving economic
momentum in the periphery should support a modest pick-up in growth to 1.1% this year, up from 0.8% in 2014. Headline
inflation is forecast to remain in negative territory through most of 2015 before ending the year at 0.1% y/y.
UNITED KINGDOM — GDP growth in the UK slowed further into end-2014, but that didn’t impact the fact that UK was the
fastest growing developed economy in 2014. We expect GDP growth to reaccelerate over the course of 2015 as the boost to
household real income resulting from the fall in energy prices pushes up consumer spending growth. The boost from lower oil
could prove to be twofold if euro zone growth also recovers and translates into stronger demand for UK exports. Overall, we
expect GDP growth above 2.5% y/y this year, with risks skewed to the upside. The biggest development in the last month has
been the substantial downward surprise in inflation. We believe that inflation is close to the bottom, with small residual downside
to 0.3% y/y in the coming months. Thereafter, powerful base effects should begin to push inflation up sharply around the end of
2015 (potentially early 2016), helping inflation to converge much closer to the 2% target. There are clearly risks in both
directions depending on the path of crude oil prices. The market has pushed back expectations for the timing of the first Bank of
England interest rate hike substantially (second half of 2016). While we agree that near-zero CPI inflation makes it difficult for
the BoE to hike rates, there is a risk that the first rate hike arrives earlier than the market is expecting. However, such a move
would rely on our assumption that lower oil prices indeed boost growth and that wage inflation continues to accelerate.
SWITZERLAND — Following the Swiss National Bank’s (SNB) abrupt decision to scrap its long-held minimum exchange rate of
CHF1.20 per euro, we have lowered our real GDP growth forecast to 1% in 2015 and 1.5% in 2016. The SNB likely abandon
the ceiling due to the rising cost of intervention amid safe haven flows from the Russian crisis and expectations of QE by the
ECB. The appreciation of the Swiss franc will bear particularly adverse implications on its already weak consumer price inflation
and will affect economic output through various channels. Exports, which account for over 70% of GDP, will likely be dragged
down in the coming months by its decreased competitiveness. In turn, and combined with rising domestic uncertainty and
modest growth in the euro zone, business investment will likely weaken as export-oriented companies cancel or postpone
planned capital expenditure. The tourism industry will also face challenges and could see a drop in foreign tourist arrivals and
spending. Leading economic indicators already suggest that industrial confidence and economic sentiment has waned, with the
Swiss manufacturing PMI falling into contractionary territory and experiencing the sharpest monthly decline since 2008. This
was in line with the results of the Swiss Economic Institute KOF economic barometer, which edged lower in January and
suggested that the economy is headed for recession this year. We expect inflation of -1.5% in 2015 and -0.2% in 2016.
SWEDEN — Economic growth has been supported by strong services sector activity (accounting for 65% of GDP), underpinned
by resilient domestic demand. This has provided an offset to weakness in industrial output and exports, which have been
dragged down by less buoyant growth in some key trading partners. Meanwhile, with inflation in negative territory and the ECB
rolling out unprecedented monetary accommodation, the Riksbank has brought its key interest rate to a record low of zero in
December and has communicated a more dovish policy stance. Looking ahead, with deflationary pressures forecast to persist
through most of 2015 and the minutes from December’s meeting revealing an increased likeliness of further action, we expect
the Riksbank will announce a package of unconventional monetary stimulus at its next meeting in February. Looking ahead,
Swedish real GDP growth is forecast to accelerate from roughly 2% in 2014 to 2.5% in 2015. Despite the recent deterioration in
consumer sentiment, the service sector will likely continue to drive growth. However, the NIER’s latest economic tendency
survey also points to a pick-up in industrial production, while export competitiveness will be supported by the weaker SEK.
7
February 2015
Global Economics & Foreign Exchange Strategy
Foreign Exchange Outlook
Camilla Sutton 416.866.5470
[email protected]
Asia / Pacific
Currency Outlook
Eric Theoret 416.863.7030
[email protected]
Sacha Tihanyi 852.6117.6070
[email protected]
JAPAN — Entering February USDJPY is trading within a 116.66 to 118.87 range, constrained by JPY-supportive risk aversion
that is offsetting Japan’s weak economic fundamentals. Technically, weekly candles hint to indecision as trend and momentum
indicators remain neutral, with CFTC sentiment highlighting a steady reduction in bearish positioning as of late January. We
expect JPY to resume a trend of depreciation and hold a Q2 2015 USDJPY forecast of 120.00.
CHINA — Indirect measures of short term capital outflows indicate pressure on CNY continues, though the fundamentally
constructive medium term outlook for the renminbi continues to hold. However, in the very near term the authorities are likely to
allow for CNY weakness against the USD, given the rapid appreciation in recent months of the real effective exchange rate due
to JPY and EUR weakness. We have adjusted our USDCNY year-end target higher to 6.10.
AUSTRALIA — AUD lost 5% in January and reached fresh lows in February when the RBA surprised markets with a 25 basis
point interest rate cut. Traders are bearish AUD, with the CFTC reporting a net short position of $4 billion in late January. Option
pricing continues to show a desire to protect against USD upside and technically AUD is in a strong downward trending pattern.
Fundamentals and flows warn of an ongoing bearish trend for AUD. We hold a Q2 2015 target of 0.76.
NEW ZEALAND — NZD has entered February with a weakening bias, breaking to fresh multi-year lows in response to an
environment of rising volatility and less-supportive interest rate differentials given a shifting outlook for RBNZ policy. Options
prices suggest a rising demand for downside NZD protection, and we note the recent technical break below a major
retracement level at 0.7335. We expect NZD to stabilize following this period of adjustment and hold a Q2 2015 target of 0.73.
Currency Trends
Spot
3-Feb
118
6.26
0.77
0.73
FX Rate
USDJPY
USDCNY
AUDUSD
NZDUSD
15Q1f
15Q2f
15Q3f
15Q4f
16Q1f
16Q2f
16Q3f
16Q4f
116
6.23
0.76
0.73
120
6.20
0.75
0.73
123
6.15
0.73
0.74
125
6.10
0.73
0.74
128
6.08
0.73
0.75
129
6.05
0.74
0.75
130
6.03
0.75
0.75
131
6.00
0.75
0.75
6.30
123
USDJPY
USDCNY
119
6.26
115
6.21
111
6.17
107
6.12
103
6.08
99
Feb-14
1.00
May-14
Aug-14
Nov-14
Feb-15
6.03
Feb-14
0.89
AUDUSD
May-14
Aug-14
Nov-14
Feb-15
NZDUSD
0.87
0.95
0.85
0.82
0.90
0.80
0.85
0.78
0.76
0.80
0.73
0.75
Feb-14
May-14
Aug-14
Nov-14
Feb-15
0.71
Feb-14
May-14
Aug-14
Nov-14
Feb-15
8
Global Economics & Foreign Exchange Strategy
Asia / Pacific
Fundamental Commentary
February 2015
Foreign Exchange Outlook
Tuuli McCully 416.863.2859
[email protected]
Neil Shankar 416.866.6781
[email protected]
JAPAN — The achievement of the Bank of Japan’s inflation target of 2% y/y remains at risk given declining global energy prices
and the Japanese economy’s lacklustre performance. While headline inflation stood at 2.4% y/y at the end of 2014, core inflation
that excludes fresh food and the impact of the consumption tax rate increase in April 2014 hovers in the range of 0.5-1.0% y/y,
according to the central bank. Consequently, the monetary policy stance is set to remain ultra-accommodative in the foreseeable
future, with additional stimulus remaining a possibility. Given the economy’s relatively subdued performance in the final months
of 2014, we now estimate that Japanese output expanded by only 0.2% in 2014 as a whole. Nevertheless, momentum is
expected to pick up in the coming months, taking economic expansion to 0.8% in 2015 and to slightly above 1% in 2016. The
improving performance reflects increasing purchasing power of Japanese consumers following the collapse of international oil
prices as well as recuperating export sector prospects given the substantially weaker Japanese yen. Moreover, the newlyelected government of Prime Minister Shinzo Abe continues to revive economic growth via new fiscal stimulus initiatives despite
Japan’s fragile government finances.
CHINA — China’s real GDP growth will continue to decelerate in 2015-16 as the country transitions to a rebalanced and more
sustainable economic framework. Output expanded by 7.3% y/y in the final quarter of 2014, in line with the gain in the JulySeptember period, taking overall gains to 7.4% for 2014 as a whole. We expect the country’s real GDP to advance by 7% this
year followed by further moderation to 6.5% in 2016. In line with the process of economic transformation, the country’s services
sector continues to increase in importance as a growth engine, exceeding the industrial sector in size and pace of momentum;
the tertiary industry grew by 8.1% y/y in the final three months of 2014 compared with the secondary industry’s 7.3% gain.
Inflation remains muted, with consumer prices increasing by 1.5% y/y in December, on the back of lower international oil prices
and persistent producer price deflation due to domestic industrial overcapacity. This will allow the People’s Bank of China to
maintain a monetary easing bias in the coming months, which will support the economy and the implementation of the
government’s complex structural reform agenda. We expect another reduction in the benchmark interest rates to take place in
the first quarter of 2015; in November 2014, the central bank lowered the key lending and deposit rates by 40 and 25 basis
points, respectively, to 5.6% and 2.75%. A cautious process of interest rate liberalization will likely proceed in 2015.
AUSTRALIA — The Reserve Bank of Australia (RBA) has joined various other major central banks in providing further monetary
easing on the back of persisting economic uncertainty and easing inflationary pressures globally. On February 3rd, the RBA
reduced the benchmark interest rate by 25 basis points to 2.25% in an effort to support domestic demand. We do not anticipate
any further rate cuts in the near term. Lower international oil prices are reflected in Australian inflation dynamics. The consumer
price index rose by 1.7% y/y in the final quarter of 2014, compared with a 2.3% gain in the previous quarter, and fell below the
RBA inflation target of 2-3% y/y. While we expect price gains to accelerate in the second half of 2015, inflation is set to remain
within the central bank’s target through the forecast horizon. Australia will maintain relatively favourable domestic growth
dynamics through 2016, despite the adverse impact of lower commodities prices. We expect annual output expansion to
average 2¾% in 2015-16, in line with the estimated expansion in 2014. The economy’s performance is underpinned by a higher
volume of resource exports that reflect increased mining capacity following several investment project completions. However,
economic momentum will be dampened by weakening mining investment activity and the government’s fiscal consolidation
efforts. The combined effect of strong house price and accommodative monetary policy should support consumer confidence
and household spending, thereby offsetting lower investment growth. Ongoing global uncertainty and asset reallocation moves
together with China’s slowing economic growth trajectory continue be reflected in the value of the Australian dollar. The currency
is vulnerable to external shocks and capital outflows due to declining commodity prices and Australia’s current account deficit.
NEW ZEALAND — After raising the overnight cash rate by 100 basis points in 2014, the Reserve Bank of New Zealand signaled
the possibility of a rate cut following the most recent monetary policy meeting in January, largely dependent on economic data
released in the near term. Lower oil prices have caused inflation, as measured by the consumer price index, to drop below the
central bank’s 1-3% target range, closing 2014 at 0.8% y/y. Indeed, the country is a large net energy importer, meeting more
than 70% of its petroleum needs through imports. Moreover, pass-through effects from the strong New Zealand dollar (NZD) to
import prices will act to further weaken inflationary pressures, likely resulting in persistently low levels of inflation through 2015.
Monetary authorities continue to consider the strength of he NZD as “unjustified” and “unsustainable”, bearing risks to the
country’s external sector and subsequently weighing on growth. Subdued global demand combined with the rapid decline in
dairy prices will place a further drag on export sector. Nonetheless, the economy’s performance is broadly supported by strong
domestic fundamentals largely driven by robust net immigration. Accordingly, domestic demand will continue to rise and
construction activity will remain elevated translating to a healthy housing market; real estate prices faced a monthly average gain
of 6.4% y/y in 2014. We expect real GDP growth to moderate slightly to 2.7% annually in 2015-16 from an estimated expansion
of 3.0% in 2014.
9
February 2015
Global Economics & Foreign Exchange Strategy
Foreign Exchange Outlook
Sacha Tihanyi 852.6117.6070
[email protected]
Developing Asia
Currency Outlook
INDIA — The January RBI rate cut was positive for fixed income and equity investors, as foreign inflows picked up following the
move. However, further pro-INR inflows will be contingent on the government sticking to fiscal consolidation in 2015-16. The
sharp drop in oil prices will reduce the current account deficit significantly this year to below 2%, allowing INR to better cope
with rising US yields and a stronger USD. We target USDINR at 63.75 by Q4 2015.
SOUTH KOREA — The drop in Korea’s oil import bill will help bolster the current account surplus against the potential for a
rebound in domestic demand following Korea’s record nominal surplus in 2014. Nevertheless, disinflationary pressures will keep
the central bank biased for further monetary easing, while weakness in JPY and to some degree EUR suggests greater
tolerance for won weakness. We target 1170 for USDKRW in Q4 2015.
THAILAND — USDTHB has traded in a fairly volatile range through January as the central bank continues to utilize reserves to
stabilize the currency, sending reserves to their lowest level since mid-2010. While there remains a large reserves buffer, it is
obvious that volatility stabilization continues to be a key concern for the central bank. USD strength and domestic demand is still
expected to pressure THB with our end of year target of 34.00 in USDTHB.
SINGAPORE — The Monetary Authority of Singapore eased policy at an unannounced meeting in January, electing to reduce
the slope of the SNEER due to a significant negative shift in the inflation outlook. The S$NEER appreciatory trend was cut from
an annual implied pace of appreciation of around 1.75% - 2%. Though it will be difficult to ascertain the degree of slope
reduction in the SNEER for some period of time, we’d posit a new slope of 1% - 1.25%. We now target USDSGD at 1.40 at end
of Q4 2015, reflecting the policy shift.
Currency Trends
Spot
3-Feb
61.7
1097
32.6
1.35
FX Rate
USDINR
USDKRW
USDTHB
USDSGD
64.0
15Q1f
15Q2f
15Q3f
15Q4f
16Q1f
16Q2f
16Q3f
16Q4f
62.1
1110
32.9
1.36
62.6
1130
33.3
1.38
63.2
1150
33.6
1.39
63.8
1170
34.0
1.40
63.8
1165
33.9
1.40
63.9
1160
33.8
1.40
63.9
1155
33.6
1.39
64.0
1150
33.5
1.39
1126
USDINR
USDKRW
1106
62.5
1086
61.0
1066
1046
59.5
1026
58.0
Feb-14
May-14
Aug-14
Nov-14
Feb-15
33.3
1006
Feb-14
1.36
USDTHB
May-14
Aug-14
Nov-14
Feb-15
Aug-14
Nov-14
Feb-15
USDSGD
1.34
32.9
1.32
32.6
1.30
1.28
32.2
1.26
31.9
1.24
31.5
Feb-14
May-14
Aug-14
Nov-14
Feb-15
1.22
Feb-14
May-14
10
Global Economics & Foreign Exchange Strategy
Developing Asia
Fundamental Commentary
February 2015
Foreign Exchange Outlook
Tuuli McCully 416.863.2859
[email protected]
Neil Shankar 416.866.6781
[email protected]
INDIA — Lower interest rates combined with declining oil prices, a period of relative political stability, increasing infrastructure
outlays, and authorities’ efforts to clear structural bottlenecks delaying large industrial projects will likely lead to faster real GDP
growth in India. The country has entered a gradual monetary easing phase, enabled primarily by low international energy prices
and the resultant slowing of inflation, combined with subdued — yet recovering — domestic demand conditions. The Reserve
Bank of India (RBI) reduced the policy repo rate by 25 basis points to 7.75% following an unscheduled monetary policy meeting
on January 15th, but left the rate unchanged at the February 3rd meeting. The consumer price index increased by 5.0% y/y in
December, significantly below the RBI’s inflation target of 8.0% y/y for January 2015. RBI Governor Raghuram Rajan indicated
that subsequent monetary policy easing actions will be taken in the coming months as long as data confirm continuing
disinflation. He assessed that annual inflation will likely be below the 6% target for January 2016. Governor Rajan also
highlighted that critical to further monetary easing is the government’s commitment to fiscal consolidation and structural reforms.
We expect that the benchmark interest rate will be brought down to 7.0% by the third quarter of 2015. More accommodative
monetary conditions will support policymakers’ efforts to place India back onto a fast-growth trajectory in a sustainable manner.
SOUTH KOREA — We expect South Korean real GDP gains to average 3.2% this year followed by a pick-up to 3.8% in 2016.
Net exports and the government’s fiscal measures will underpin activity, while sound labour market conditions and solid
consumer confidence will buttress household spending prospects in the coming quarters. The nation’s real GDP growth slowed
in the final quarter of 2014, with output expanding by 0.4% q/q (2.8% y/y) compared with a 0.9% gain (3.3% y/y) in the JulySeptember period, according to preliminary estimates. The slowdown was mainly attributable to weaker investment. The
economy expanded by 3.4% in 2014, falling short of the 10-year average pace of 3.8%. South Korean inflation remains low with
consumer prices rising by 0.8% y/y in January — well below the Bank of Korea’s (BoK) target corridor of 2½-3½%. Due to
negative producer price inflation together with low international oil prices, headline inflation will remain below the central bank’s
target range for an extended period of time. We expect price gains to start picking up gradually in the second half of 2015,
approaching 2½% y/y by the end of 2016 as the economy’s output gap diminishes. The substantial depreciation of the
Japanese yen and weak inflation have increased the likelihood of the BoK reducing the benchmark interest rate from the current
level of 2.0%, yet a relatively high household debt burden and policymakers’ expectations for a gradually rising inflation
trajectory will limit the central bank’s latitude.
THAILAND — In Thailand, improving private sector confidence bodes well for consumption and investment prospects while the
government’s infrastructure spending will bolster activity further. Moreover, the net oil-importing Thai economy will benefit from
the collapse in oil prices, being one of the largest beneficiaries among its regional peers due to the outsized value of petroleum
imports relative to GDP. The stabilization of the political situation will help the tourism industry to recover. Thailand’s annual real
GDP growth will likely pick up to 4% in 2015-16 from less than 1% in 2014. Easing inflationary developments due to the
collapse in global oil prices are providing Thai monetary authorities with room to maneuver should the economy fail to regain
traction as expected. While the possibility of an interest rate reduction has increased, we anticipate that the Bank of Thailand
(BoT) will keep the benchmark rate unchanged at 2% in the near term. BoT authorities consider the current policy stance to be
sufficiently accommodative and the military administration uses fiscal stimulus as a means to boost economic activity. Inflation
has turned negative; the headline consumer price index decreased by 0.4% y/y in January, on the back of lower international
energy prices as well as still-muted demand-side pressures. We expect inflation to begin accelerating in the second half of 2015
along with recuperating domestic demand, closing the year around 1¼% y/y.
SINGAPORE — Activity in the trade-intensive Singaporean economy slowed in the latter half of 2014 on the back of subdued
demand from the euro zone, Japan, and China. Indeed, real GDP advanced by 1.5% y/y in the fourth quarter of 2014 compared
with an average expansion of 3.3% in the first three quarters. Economic growth remains supported by gains in the services
sector, which expanded by 2.6% y/y in the fourth quarter, underpinned primarily by the finance and insurance sectors.
Momentum will likely pick up somewhat in 2015, driven by stronger demand gains in the US. Moreover, household spending will
continue to remain buttressed by a relatively healthy job market; the unemployment rate was 1.9% at end-2014, a two-year low.
We expect real GDP to expand by 3% y/y in 2015-16. Deflationary pressures persist on the back of lower oil prices and a
cooling domestic property market; prices, as measured by the consumer price index, contracted by 0.2% y/y in December
following a decline of 0.3% in November. We anticipate inflation to accelerate somewhat in 2015-16 on the back of a tighter
domestic labour market feeding through to higher wages and increasing domestic demand. Inflation will likely close 2015
around 0.5% y/y before accelerating to roughly 1.5% in 2016. Singapore relies directly on its exchange rate rather than interest
rates to manage inflation; the Monetary Authority of Singapore shifted its policy stance to a more modest appreciation of the
Singapore dollar in an unscheduled announcement on January 28th, effectively easing monetary policy.
.
11
February 2015
Global Economics & Foreign Exchange Strategy
Foreign Exchange Outlook
Eduardo Suárez 416.945.4538
[email protected]
Developing Americas
Currency Outlook
BRAZIL — Despite the market friendly / proactive approach that the new administration has taken to solving the country’s
balance sheet issues in order to avoid a loss of its investment grade ratings, sentiment towards Brazil remains relatively weak.
The BRL has lost -2.3% relative to the USD, making it the third worst performing currency in the region. Additional concerns
over the impact of potential power rationing on growth and inflation add to the BRL’s woes.
MEXICO — Outside of the heavily intervened Venezuelan Bolivar, the Mexican peso has been second best performing LatAm
currency in 2015, although it’s lost ground to the USD (-0.85%). Strong links to the dynamic US economy have supported the
peso, along with positive news on the reform front, low commodity dependence, and a solid balance sheet. The question for
2016 is whether the fiscal buffers can be boosted to support public finances under a low oil price environment.
CHILE — CLP was the worst performing LatAm currency in January (-3.8%), weighed down by a combination of concerns over
the near-term growth outlook, as well as the adverse impact that the government’s reform program can have on the country’s
long run economic potential. In particular, there are some concerns over the repercussions that the new tax structure could
have on investment in the country. Weak sentiment does not bode well for CLP.
COLOMBIA — After the sharp declines we saw in the final quarter of 2014, as the collapse in oil prices hit the peso with losses
exceeding 20% vs the USD, it has stabilized somewhat to kick-off 2015. The bottoming of oil prices has helped, as well as what
now seems to be “better value” in domestic assets, which have led to increasing foreign holdings of domestic debt over recent
months.
Currency Trends
Spot
3-Feb
2.70
14.77
628
2374
FX Rate
USDBRL
USDMXN
USDCLP
USDCOP
2.85
15Q1f
15Q2f
15Q3f
15Q4f
16Q1f
16Q2f
16Q3f
16Q4f
2.70
14.59
621
2380
2.75
14.65
619
2400
2.80
14.78
617
2450
2.85
15.02
616
2475
2.85
14.97
615
2500
2.90
14.70
614
2500
2.95
14.63
614
2475
3.00
14.71
613
2450
15.3
USDBRL
2.75
USDMXN
14.8
2.65
14.3
2.55
2.45
13.8
2.35
13.3
2.25
2.15
Feb-14
May-14
Aug-14
Nov-14
Feb-15
12.8
Feb-14
May-14
Aug-14
Nov-14
Feb-15
2525
655
USDCOP
USDCLP
2425
635
2325
615
2225
595
2125
575
2025
555
535
Feb-14
1925
May-14
Aug-14
Nov-14
Feb-15
1825
Feb-14
May-14
Aug-14
Nov-14
Feb-15
12
Global Economics & Foreign Exchange Strategy
Developing Americas
Fundamental Commentary
February 2015
Foreign Exchange Outlook
Pablo F.G. Bréard 416.862.3876
[email protected]
BRAZIL — The Brazilian real (BRL) will retain a fragile tone in the near term. Brazil welcomed the New Year on a very weak
macroeconomic situation. Economic activity shows evidence of contraction with little chance of an imminent recovery. The latest
official data confirmed a sharp widening of the market-sensitive twin (fiscal and current account) deficits, increasing the
likelihood of a potential credit rating downgrade revision. The consolidated public sector deficit closed last year at 6.7% of GDP,
a sharp increase from the 3.2% shortfall registered in 2013; the primary deficit of 0.6% of GDP, caused by election-related fiscal
misconduct, was at the core of such negative fiscal outcome. Additionally, persistently high inflationary pressures drove
domestic investors to increase their holdings of inflation-indexed government debt securities, pushing overall gross government
debt to 63.4% of GDP. To make matters worse, the current account deficit increased to US$81 billion (3.6% of GDP) by the end
of the year as a result of weakening external demand and deteriorating terms of trade; foreign direct investment (FDI) flows, at
US$62.5 billion, were insufficient to cover the external financing gap. Taking into consideration a broad-based deterioration of
macroeconomic conditions in the context of a generalized move in favour of USD-denominated financial assets and increased
global risk aversion, the central bank maintained a monetary tightening bias and increased the reference interest rate by 50 bps
to 12.25% last month.
MEXICO — The Mexican peso (MXN) remains vulnerable to volatility swings associated to both external and domestic factors.
We now estimate an end-year rate of 15 MXN per USD. The Mexican government has announced a reduction in public sector
expenditures equivalent to 0.7% of GDP as a result of the adverse fiscal impact caused by the reduction in crude oil prices over
the past six months. The non-financial public sector borrowing requirements (PSBR) closed at 4% of GDP in 2014; however, the
adjusted PSBR were a bit higher at 4.7% of GDP. Oil-related fiscal revenue (which declined by 7.5% over the last 12 months)
represented 30.5% of the total revenue base in 2014, down from 33.2% in 2013. The government reported that economic
activity began to strengthen during the fourth quarter of last year as a result of persistently strong non-oil exports to the United
States (primarily influenced by the robust automotive industry) as well as the recovery in domestic construction activity. The
central bank estimates that there’s still room for employment recovery despite the positive increase of 4.3% during 2014.
Domestic credit activity has also evidenced a gradual recovery, expanding by almost 5% last year. The government estimates
real GDP to expand between 3.2% and 4.2%, yet we project a growth rate slightly below 3% in 2015. The monetary outlook
remains strictly aligned to the timing and pace of US adjustments.
CHILE — The Chilean peso (CLP) maintains a bearish tone despite incipient evidence of temporary stabilization. Consumer
and business confidence readings still highlight relatively weak economic conditions prompting GDP growth revisions by both
the government and private analysts. Overall activity will begin an accelerating phase by the last quarter of the current year. We
estimate that real GDP will expand by 2.6% in 2015 before gradually accelerating to 3.7% in 2016; our position is more cautious
than the official forecast which assumes that the economy will grow by at least 3% this year. At the latest monetary policy
committee meeting, the central bank opted to keep the reference rate unchanged at 3% stressing the external risk factors
affecting the outlook. Copper prices traded as low as US$2.41 per pound in late January, before staging a modest recovery in
the early days of February. The unexpected decline in copper prices over the past six months has been one of the primary
factors shaping the bearish tone in the peso. Additionally, increased global risk aversion connected with Chinese growth
deceleration, unexpected shifts in monetary policy in key developed markets (Switzerland, Canada, Australia) and the relentless
strengthening of the USD contributed to a weakening trend for the peso. Valuations in derivatives markets imply further
weakness in the months ahead. On a positive note, there is evidence of a welcoming narrowing of the current account deficit.
COLOMBIA — The Colombian peso (COP) has been stabilizing at a trading range between 2,350 and 2,450 per US dollar
(USD), following a 26% currency depreciation between July and December 2014. The COP may trade within this range
throughout the first quarter of the year, before regaining a weakening bias later in the year. In brief, oil price gyrations still inject
a negative tone into the FX outlook. The primary factors affecting the FX view are: 1) Crude oil prices 2) US Fed policy shifts 3)
Decelerating economic growth, 4) Widening current account deficit and 5) Local monetary policy. Colombian sovereign debt
assets have been affected the most within the Latin American Pacific Alliance group of countries as a result of the oil price
shock; however, all credit rating agencies maintain a “stable” outlook on Colombia’s long-term foreign-currency sovereign credit
ratings. Oil exports represent over 50% of total external sales, 80% of foreign direct investment and one sixth of central
government’s fiscal revenue. The growth outlook remains positive, yet the forecast for the first half of the year has been
adjusted to reflect a weaker export and investment profile as a result of the oil price collapse. The Colombian economy will
decelerate and likely expand by 3.5% y/y this year, down from an estimated 4.7% y/y growth rate for 2014. Inflation remains
within the officially established target range of 3% +/- 1%.
13
February 2015
Global Economics & Foreign Exchange Strategy
Foreign Exchange Outlook
Erika Cain 416.866.4205
[email protected]
Developing Europe & Africa
Currency Outlook
Neil Shankar 416.866.6781
[email protected]
RUSSIA — The Russian ruble (RUB) continues to experience extreme volatility. The RUB depreciated by nearly 20% in
January against the US dollar (USD) as oil prices fell and market participants reacted negatively to the Central Bank of Russia’s
(CBR) unexpected interest rate cut and S&P’s decision to downgrade its credit rating to junk. However, the recent improvement
in global oil prices has supported the 7½% appreciation in the RUB since January 30th to 66.3 against the USD. The outlook for
the RUB remains bearish. The USDRUB is forecast to end the year at 65.0 in 2015 and 60.0 in 2016.
TURKEY — The Turkish lira (TRY) has come under heavy pressure over the past month, depreciating to a record low on January
29th. This reflects the Central Bank of Turkey’s (CBRT) decision to cut interest rates, despite the fact that inflation remains above its
5% medium-term target. Meanwhile, amid intensifying government pressure to boost sluggish growth, confidence in the CBRT’s
independence came under pressure after Governor Erdem Basci suggested that an emergency meeting could be held to cut rates if
inflation fell below 7%. This did not take place, which prompted the TRY to retrace some of its earlier losses. However, it is fair to
expect further weakness ahead of the CBRT’s next meeting on February 24th. The TRY is forecast to end the year at around 2.47
against the USD in 2015 and 2.38 in 2016.
CZECH REPUBLIC — The Czech National Bank (CNB) remains committed to maintaining the exchange rate floor of EURCZK
27.0 until 2016 as stated following the most recent monetary policy meeting in December. The decision by the European
Central Bank to inject monetary stimulus into the economy will help the CNB keep the currency above its published floor.
SOUTH AFRICA — The South African rand (ZAR) will likely face a mild depreciating bias through 2015. Despite inflationary
pressures easing on the back of lower oil prices, we maintain our view that South African monetary authorities will begin
normalizing the benchmark repurchase rate in the third quarter of 2015 following the initialization of US interest rate
normalization in the second quarter to limit further depreciation of the currency vis-à-vis the USD. Accordingly, we expect the
ZAR to average roughly 11.8 against the USD in 2015-16.
Currency Trends
Spot
3-Feb
66.3
2.40
27.8
11.40
FX Rate
USDRUB
USDTRY
EURCZK
USDZAR
15Q1f
15Q2f
15Q3f
15Q4f
16Q1f
16Q2f
16Q3f
16Q4f
64.0
2.35
27.8
11.80
65.0
2.40
27.9
12.10
65.0
2.45
28.0
11.90
64.5
2.47
28.1
11.80
63.0
2.45
28.1
11.70
62.0
2.43
28.0
11.75
61.0
2.40
27.7
11.80
60.0
2.37
27.8
11.85
Nov-14
Feb-15
73.0
2.55
USDRUB
USDTRY
67.0
2.45
61.0
2.35
55.0
2.25
49.0
2.15
43.0
2.05
37.0
31.0
Feb-14
28.50
May-14
Aug-14
Nov-14
Feb-15
1.95
Feb-14
11.85
EURCZK
28.30
11.55
28.10
11.25
27.90
10.95
27.70
10.65
27.50
10.35
27.30
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-14
Aug-14
USDZAR
10.05
Feb-14
May-14
Aug-14
Nov-14
Feb-15
14
Global Economics & Foreign Exchange Strategy
Developing Europe & Africa
Fundamental Commentary
February 2015
Foreign Exchange Outlook
Erika Cain 416.866.4205
[email protected]
Neil Shankar 416.866.6781
[email protected]
RUSSIA — Russia continues to experience severe market turmoil fuelled by the sharp depreciation of the ruble amid lower oil
prices, intensifying capital flight, and economic stress from US-led sanctions. The Russian economy is teetering on the edge of
recession, while banking sector stability is highly concerning and annual inflation is at a worryingly high 11.5%. Policymakers’
have made numerous attempts to calm sentiment and restore currency stability, including a recently announced package of 60
measures to support the economy, the financial sector, and stimulate structural reform. However, efforts have been undermined
by lower global oil prices and the escalating conflict in the Ukraine. Meanwhile, S&P’s recent decision to downgrade the
country’s credit rating to below investment grade dealt another blow to the ailing economy, which came just days before the
Central Bank of Russia (CBR) unexpectedly lowered its key interest rate by 200 basis points to 15%. This decision signals that
the CBR is more concerned with aiding growth and the banking sector rather than fighting inflation and near-term currency
stability. Despite the rate cut, the key policy rate remains at emergency levels, which will have a negative knock-on effect to
household spending at a time of declining real wages and tighter lending conditions. Business confidence and investment will
also remain depressed by the sharp rise in financing costs, heightened uncertainty, and the threat of harsher sanctions.
Meanwhile, government finances will become increasingly strained by less revenue and growing support for companies affected
by sanctions. The weaker ruble, however, will lend some support to exports. Real GDP growth is forecast to contract 5% in
2015 and 0.5% in 2016, with inflation remaining near double-digits over our forecast horizon.
TURKEY — Economic activity in Turkey remains constrained by domestic political uncertainty, tight monetary policy, and
geopolitical risks from the conflict in Iraq and Syria, as well as the Russian-Ukraine crisis. The country’s large current account
deficit and high external financing requirements continue to be its main source of weakness and vulnerability to shifts in global
sentiment. Inflationary pressures have eased to 7.2% y/y in January, but remain above the Central Bank of the Republic of
Turkey (CBRT) medium-term target of 5%. Nevertheless, the CBRT decided to cut interest rates by 50 basis points in January,
bringing its benchmark one-week repo rate to 7.25%. Given that global oil prices are expected to stay low in 2015, the CBRT
may announce further monetary easing in the coming months ahead of the government election, due by mid-2015. However,
with the weaker lira likely to offset disinflation from lower oil prices, bouts of capital outflows and currency weakness will impede
the expected improvement in Turkey’s large current account deficit and inflation dynamics. This combined with prospects of
tighter US monetary policy will prove highly problematic for Turkish policymakers. Looking ahead, real GDP growth is forecast
to accelerate to 3.5% in 2015 and 4% in 2016. Inflation pressure should ease from a year-end rate of 8.2% y/y in 2014 to 6.7%
in 2015, while the current account deficit will likely narrow from 5.5% of GDP to 5%, respectively.
CZECH REPUBLIC — The Czech economy will likely benefit from the European Central Bank’s (ECB) decision to inject
stimulus into the euro economy by way of an expanded asset purchase programme. Furthermore, the move by the ECB will
help the Czech National Bank (CNB) keep to its currency target of 27 Czech koruna (CZK) per euro currency target. Indeed, the
CNB reaffirmed its commitment to intervene on the foreign exchange market to circumvent any possible appreciation of the CZK
at the central bank’s most recent monetary policy meeting. The exchange rate is used as an additional tool for easing monetary
conditions as the benchmark interest rate stands at a technical zero. Price levels are currently growing well below the CNB’s
target of 2%, closing 2014 at 0.1% y/y, largely due to the sustained decrease in global oil prices. Nevertheless, the economy is
seen to be a net beneficiary of the oil price decline and lower inflationary pressures will likely allow the CNB to hold its
supportive monetary policy stance in place through 2016. Going forward, momentum will be largely supported by strong gains in
domestic demand as consumer confidence begins to rise, increasing by a record high of 4.3% y/y in January. Furthermore,
construction output continues to increase mainly on account of a recovery in government investment. Accordingly, we expect
real GDP growth to remain steady, averaging 2.5% y/y in 2015-16, up slightly from an estimated expansion of 2.2% in 2014.
SOUTH AFRICA — The South African growth outlook for 2015-2016 remains hopeful following a year plagued by successive
waves of labour unrest and strikes, which have dragged down growth in the mining, manufacturing, and the utilities sectors.
Production in the mining sector is improving with output contracting by 0.2% y/y in November compared with a contraction of
roughly 10% in August. Furthermore, lower oil prices will likely support the economy by enhancing the country’s medium-term
growth prospects, and improving the inflation outlook. The country is a large net energy importer, meeting roughly 70% of its
petroleum needs by imports. Inflationary pressures have eased from an average monthly gain of 6.0% y/y over the past 12
months – the top end of South African Reserve Bank’s (SARB) 3-6% target – to 5.3% in December. Despite the SARB
governor, Lesetija Kganyago, signaling a strong hawkish bias upon taking office in November, benchmark rate hikes are yet to
materialize. The key repurchase rate was raised by 75 basis points in 2014 and monetary authorities indicated that the lower
inflation path has provided some room to pause the interest rate normalization process, signaling that plans for further rate
hikes were still in place. The SARB will likely continue to monitor external risks, stemming from — but not limited to — further
depreciation of the South African rand vis-à-vis the US dollar, reflecting global investor portfolio reallocation moves ahead of
monetary policy tightening by the US Federal Reserve.
15
February 2015
Global Economics & Foreign Exchange Strategy
Foreign Exchange Outlook
Global Currency Forecast (end of period)
2014 2015f 2016f
Major Currencies
2015f
2016f
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Japan
USDJPY
120
125
131
116
120
123
125
128
129
130
131
Euro zone
EURUSD
1.21
1.05
1.00
1.13
1.10
1.08
1.05
1.05
1.04
1.02
1.00
EURJPY
145
131
131
131
132
133
131
134
134
133
131
GBPUSD
1.56
1.50
1.51
1.48
1.48
1.50
1.50
1.51
1.51
1.51
1.51
EURGBP
0.78
0.70
0.66
0.76
0.74
0.72
0.70
0.70
0.69
0.68
0.66
USDCHF
0.99
1.05
1.10
0.94
0.98
1.01
1.05
1.05
1.06
1.08
1.10
EURCHF
1.20
1.10
1.10
1.06
1.08
1.09
1.10
1.10
1.10
1.10
1.10
Canada
USDCAD
1.16
1.33
1.30
1.28
1.31
1.32
1.33
1.33
1.32
1.31
1.30
CADUSD
0.86
0.75
0.77
0.78
0.76
0.76
0.75
0.75
0.76
0.76
0.77
Mexico
USDMXN
14.75
15.02
14.71
14.59
14.65
14.78
15.02
14.97
14.70
14.63
14.71
CADMXN
12.69
11.29
11.32
11.40
11.19
11.20
11.29
11.26
11.14
11.17
11.32
Brazil
USDBRL
2.66
2.85
3.00
2.70
2.75
2.80
2.85
2.85
2.90
2.95
3.00
Chile
USDCLP
606
616
613
621
619
617
616
615
614
614
613
2450
UK
Switzerland
Am ericas
Colombia
USDCOP
2377
2475
2450
2380
2400
2450
2475
2500
2500
2475
Peru
USDPEN
2.98
3.10
3.02
3.05
3.10
3.15
3.10
3.08
3.06
3.04
3.02
Uruguay
USDUYU
24.32
25.50
26.50
24.64
24.93
25.21
25.50
25.75
26.00
26.25
26.50
Asia / Pacific
Australia
AUDUSD
0.82
0.73
0.75
0.76
0.75
0.73
0.73
0.73
0.74
0.75
0.75
China
USDCNY
6.21
6.10
6.00
6.23
6.20
6.15
6.10
6.08
6.05
6.03
6.00
Hong Kong
USDHKD
7.76
7.78
7.78
7.76
7.77
7.77
7.78
7.78
7.78
7.78
7.78
India
USDINR
63.0
63.8
64.0
62.1
62.6
63.2
63.8
63.8
63.9
63.9
64.0
Indonesia
USDIDR
12388 13200 13000
12760 12910 13055 13200
13150 13100 13050 13000
Malaysia
USDMYR
3.50
3.76
3.68
3.64
3.68
3.72
3.76
3.74
3.72
3.70
3.68
New Zealand
NZDUSD
0.78
0.74
0.75
0.73
0.73
0.74
0.74
0.75
0.75
0.75
0.75
45.8
Philippines
USDPHP
44.7
46.0
45.8
44.5
45.0
45.5
46.0
45.9
45.9
45.8
Singapore
USDSGD
1.33
1.40
1.39
1.36
1.38
1.39
1.40
1.40
1.40
1.39
1.39
South Korea
USDKRW
1091
1170
1150
1110
1130
1150
1170
1165
1160
1155
1150
T aiwan
USDTW D
31.7
32.7
32.3
31.8
32.1
32.4
32.7
32.6
32.5
32.4
32.3
T hailand
USDTHB
32.9
34.0
33.5
32.9
33.3
33.6
34.0
33.9
33.8
33.6
33.5
27.8
Europe / Africa
Czech Rep.
EURCZK
27.7
28.1
27.8
27.8
27.9
28.0
28.1
28.1
28.0
27.7
Hungary
EURHUF
317
314
318
311
313
314
314
315
316
317
318
Norway
USDNOK
7.45
7.90
7.70
7.70
7.87
7.90
7.90
7.90
7.85
7.75
7.70
Poland
EURPLN
4.29
4.40
4.51
4.20
4.25
4.30
4.40
4.42
4.45
4.47
4.51
Russia
USDRUB
60.7
64.5
60.0
64.0
65.0
65.0
64.5
63.0
62.0
61.0
60.0
11.85
South Africa
USDZAR
11.57
11.80
11.85
11.80
12.10
11.90
11.80
11.70
11.75
11.80
Sweden
EURSEK
9.44
9.01
8.50
9.38
9.24
9.13
9.01
9.01
8.84
8.67
8.50
T urkey
USDTRY
2.34
2.47
2.37
2.35
2.40
2.45
2.47
2.45
2.43
2.40
2.37
f: forecast a: actual
16
February 2015
Global Economics & Foreign Exchange Strategy
Foreign Exchange Outlook
International Economics Group
Canadian & U.S. Economics
Foreign Exchange Strategy
Pablo F.G. Bréard
[email protected]
Frances Donald
[email protected]
Eduardo Suárez
[email protected]
Erika Cain
[email protected]
Derek Holt
[email protected]
Camilla Sutton
[email protected]
Rory Johnston
[email protected]
Adrienne Warren
[email protected]
Eric Theoret
[email protected]
Tuuli McCully
[email protected]
Sacha Tihanyi
[email protected]
Estela Molina
[email protected]
Neil Shankar
[email protected]
Foreign Exchange Strategy
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