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FX Forecast Update
June: Global recession fears to send EUR/USD lower again
Arne Lohmann Rasmussen
Chief Analyst, Head of Rates, FX and Commodities Strategy
Kasper Kirkegaard Stefan Mellin
Senior Analyst Senior Analyst
John M. Hydeskov Morten Thrane Helt
Chief Analyst Senior Analyst
www.danskebank.com/research Bloomberg: DRFX <GO>
www.danskeresearch.com
Important disclosures and certifications are contained from page 22 of this report.
Main forecast changes
• The US recovery was one of the most important factors behind the positive market environment earlier
in the year and what helped keep EUR/USD above 1.30 during February, March and April. Recent
months have brought indications of a slowdown in the US, however, and we see it as highly likely that
disappointing US data over the coming months will cause markets to price a higher recession risk.
• This should weigh on the cyclical currencies and not least on EUR/USD. As a result, and because of the
worsening EMU crisis, we have opted to add dollar strength to our forecast. We now look for EUR/USD
to trade at 1.24 in 3M, 1.26 in 6M and 1.30 in 12M. The upwards trend in our forecast profile reflects
our expectation of a significant monetary easing from the Fed as well as the still dollar negative US
balance of payments situation.
• We have also pencilled in near term weakness in AUD, NZD and CAD, but consider downside risks to
these currencies as lower than downside risks to the EUR, as (i) the commodity currencies have
already seen a large sell-off, (ii) we expect the main part of the commodity price correction to be behind
us, (iii) positioning is stretched – IMM has indicated net AUD shorts at October 2008 levels, and (iv) as
economic data has surprised positively lately in not least Australia.
• We expect the BoJ to move in a substantially more dovish direction over the next year - not least after
the latest IMF report concluded that JPY is overvalued from a medium term perspective. We expect
BoJ easing to support USD/JPY but have lowered our 12M forecast on USD/JPY as QE from the FED
is likely to counter some of the effect from Japanese easing. We now see USD/JPY at 79 in 3M, 84 in
6M and 87 in 12M.
www.danskeresearch.com 2
EUR/USD – Renewed downside expected
• Growth: The US economy has clearly Forecast: 1.24 (3M), 1.26 (6M) and 1.30 (12M)
outperformed in recent quarters, but is now 1.60
EUR/USD
slowing. Europe remains caught in a near zero 1.50
1.40
growth environment. 1.30
• Monetary policy: Both the ECB and Fed is 1.20
1.10
expected to ease monetary policy during summer, 1.00
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
but timing is uncertain.
• Flows: The current account deficit is much bigger
75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
EUR/USD 1M 3M 6M 12M
in the US, but the EuroZone has seen a Forecast (pct'ile) 1.23 (23%) 1.23 (29%) 1.25 (39%) 1.30 (54%)
deterioration in the BBoP – reflecting a long term Fwd. / Consensus
50% confidence int.
1.26 / 1.28
1.23 / 1.29
1.26 / 1.25
1.22 / 1.32
1.26 / 1.25
1.20 / 1.34
1.27 / 1.25
1.17 / 1.38
capital outflow (at highest pace during the EMU 75% confidence int. 1.20 / 1.31 1.17 / 1.34 1.13 / 1.38 1.06 / 1.44
crisis). Source: Danske Markets
• Valuation: EUR/USD is trading around neutral • Conclusion: The US slowdown is likely to see
markets price an even higher risk of a global
levels according to both our short- and long-term
recession, which should sustain pressure on risk
models (PPP estimate is 1.28).
assets and EUR/USD. Our main expectation is,
• Risks: Tail-risks remain skewed to the downside. however, for a policy response from both the ECB
However, stretched short EUR positioning in the and Fed which should mitigate downside risks and
market and uncertainty about the relative timing of help to stabilise EUR/USD at lower levels. In the
a Fed and ECB response implies that upside risks longer term our main scenario is for EUR/USD to
to exist. trade closer to, but below, medium term fair value.
Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com, +45 4513 70 18
www.danskeresearch.com 3
EUR/USD – Important issues to watch
• Weaker macro, high event risks, and CB responses Eurozone financial stress index
− Most fundamental drivers are working against the euro at
the moment:
− The EMU crisis means that investors are likely to keep
pricing a high risk premium on the euro and unlike the first
stages of the crisis there is now signs of net long term
capital outflow.
− The global economy is slowing and while the US was the
bright spot over recent quarters it has become evident that
growth is slowing abroad as well. Higher global recession
Source: Reuters EcoWin, Danske Markets
risks is likely to weigh on EUR/USD.
Speculative investors remain short EUR/USD
− The ECB is expected to ease monetary policy by lowering 60 60
% of open interest
the lending rate and potentially also introduce further / 50
40
Non-commercial EUR positions
50
40
expand non-conventional measures. Monetary policy over 30 30
20 20
the coming quarters is not necessarily euro negative, 10 10
however. If the Fed also ease the net effect on the euro from 0 0
-10 -10
ECB and Fed easing could easily prove positive. -20 -20
-30 +/- 1 stdev from mean -30
• ...But positioning remains stretched -40
-50
-40
-50
-60 -60
− The above negative euro drivers is reflected in our 1.24 3M 06 07 08 09 10 11 12
forecast. However, positioning is stretched and likely to
reduce downside euro risks. Source: Reuters EcoWin, Danske Markets
Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com, +45 4513 70 18
www.danskeresearch.com 4
USD/JPY – BoJ easing to support USD/JPY
• Growth: Japan’s economy expanded 1.2% in the Forecast: 79(3M), 84 (6M) and 87 (12M)
first quarter and domestic demand is likely to 90.0 USD/JPY
remain on a recovery trend supported by the 85.0
increase in public spending for rebuilding. However, 80.0
downside risks related to the development in 75.0
Europe is substantial. 70.0
• Monetary policy: Bank of Japan kept interest rate
May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13
and its asset purchase programme unchanged on 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
June 15. We expect the central bank to move in a USD/JPY 1M 3M 6M 12M
Forecast (pct'ile) 79.0 (29%) 79.0 (39%) 84.0 (79%) 87.0 (82%)
substantially more dovish direction over the next Fwd. / Consensus 80.0 / 81.0 80.0 / 81.8 80.0 / 82.3 80.0 / 85.3
year. We see a chance that BoJ easing could 50% confidence int.
75% confidence int.
78.8 / 81.2
77.9 / 82.2
77.7 / 82.1
76.0 / 84.0
76.4 / 83.1
73.8 / 86.1
74.4 / 84.5
70.3 / 89.1
become relative aggressive - not least after the Source: Danske Markets
latest IMF report that concludes that JPY is • Conclusion: USD/JPY has traded lower from its
overvalued in a medium term perspective. March high, as disappointing macro data has
raised renewed growth concerns and continued
• Debt risks: Since Japan’s debt of 200+% of GDP is euro zone woes have shaken investor confidence.
domestically held, this does not seem to be a near-
We expect the negative sentiment to support the
term issue despite weaker external balances.
yen in near term and we see USD/JPY at79 in one
• Valuation: PPP estimate around 84. month time. Going forward, however, we expect
• Risks: Aggressive BoJ easing cloud take USD/JPY USD/JPY upside to unfold, as the BoJ eases
higher while weaker sentiment is a downside risk. monetary policy further and the global macro
picture becomes brighter.
Senior Analyst, Morten Helt, mohel@danskebank.com, +45 4512 85 18
www.danskeresearch.com 5
USD/JPY – important issues to watch
• BoJ to move in a substantially more dovish direction USD/JPY correlation with risk has turned positive
− The BoJ board is poised to move in a substantially more 0.6 0.6
0.5 0.5
dovish direction over the next year, as parliament is 0.4
S&P500
0.4
increasingly trying to influence the composition of the board. 0.3
Nikkei
0.3
0.2 0.2
Two doves have been nominated for the two seats currently 0.1 0.1
vacant and next year board governor Masaaki Shirakawa’s 0.0 0.0
-0.1 -0.1
term will expire. This increases the likelihood that BoJ easing -0.2 -0.2
could become even more aggressive. -0.3 MSCI wld. -0.3
-0.4 -0.4
− The latest report on the yen from the IMF suggests that the -0.5 -0.5
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
currency looks overvalued from a medium-term perspective. 11 12
Source: Reuters EcoWin and Danske Markets
The IMF advises the Bank of Japan (BoJ) to ease monetary
conditions further in order to achieve the central bank’s Short JPY positions still stretched
inflation target of 1%. 0.5
USD/JPY
130
of open interest << Non-commercial JPY positions
0.4 125
• Neutral positioning to support upside in USD/JPY 0.3
0.2
120
115
0.1 110
− The latest IMM data, show a reduction in JPY short positions 0.0 105
and market positioning is now relative neutral. Hence, new -0.1 100
-0.2 95
build up in short positions could support USD/JPY going -0.3 90
forward. -0.4 +/- 1 stdev from mean 85
-0.5 80
USD/JPY spot >>
-0.6 75
06 07 08 09 10 11 12
Source: CFTC
Senior Analyst, Morten Helt, mohel@danskebank.com, +45 4512 85 18
www.danskeresearch.com 6
USD/JPY – BoJ easing to support USD/JPY
• Growth: Japan’s economy expanded 1.2% in the Forecast: 79(3M), 84 (6M) and 87 (12M)
first quarter and domestic demand is likely to 90.00
USD/JPY
remain on a recovery trend supported by the 85.00
increase in public spending for rebuilding. However, 80.00
downside risks related to the development in 75.00
70.00
Europe is substantial.
65.00
• Monetary policy: Bank of Japan kept interest rate Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
and its asset purchase programme unchanged on 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
June 15. We expect the central bank to move in a USD/JPY 1M 3M 6M 12M
substantially more dovish direction over the next Forecast (pct'ile)
Fwd. / Consensus
79.0 (57%)
78.7 / 80.1
82.0 (83%)
78.7 / 80.4
84.0 (85%)
78.7 / 81.7
86.0 (83%)
78.7 / 83.4
year. We see a chance that BoJ easing could 50% confidence int. 77.4 / 79.9 76.4 / 80.9 75.3 / 81.9 73.4 / 83.4
75% confidence int. 76.3 / 81.0 74.6 / 82.7 72.5 / 84.6 69.1 / 87.7
become relative aggressive - not least after the Source: Danske Markets
latest IMF report that concludes that JPY is • Conclusion: We expect the negative global risk
overvalued in a medium term perspective. sentiment to support the yen in near term and we
see USD/JPY at79 in one month’s time. Going
• Debt risks: Since Japan’s debt of 200+% of GDP is forward, however, we expect USD/JPY upside to
domestically held, this does not seem to be a near-
unfold, as the BoJ eases monetary policy further
term issue despite weaker external balances.
and the global macro picture becomes brighter.
• Valuation: PPP estimate around 84. With JPY positioning back in neutral territory new
• Risks: Aggressive BoJ easing cloud take USD/JPY build up in short positions is likely to support
higher while weaker sentiment is a downside risk. USD/JPY going forward.
Senior Analyst, Morten Helt, mohel@danskebank.com, +45 4512 85 18
www.danskeresearch.com 7
USD/JPY – important issues to watch
• BoJ to move in a substantially more dovish direction USD/JPY correlation with risk has turned positive
− The BoJ board is poised to move in a substantially more 0.6 0.6
0.5 0.5
dovish direction over the next year, as parliament is 0.4
S&P500
0.4
increasingly trying to influence the composition of the board. 0.3
Nikkei
0.3
0.2 0.2
Two doves have been nominated for the two seats currently 0.1 0.1
vacant and next year board governor Masaaki Shirakawa’s 0.0 0.0
-0.1 -0.1
term will expire. This increases the likelihood that BoJ easing -0.2 -0.2
could become even more aggressive. -0.3 MSCI wld. -0.3
-0.4 -0.4
− The latest report on the yen from the IMF suggests that the -0.5 -0.5
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
currency looks overvalued from a medium-term perspective. 11 12
Source: Reuters EcoWin and Danske Markets
The IMF advises the Bank of Japan (BoJ) to ease monetary
conditions further in order to achieve the central bank’s JPY positioning in neutral territory
inflation target of 1%. 0.5
USD/JPY
130
of open interest << Non-commercial JPY positions
0.4 125
• Neutral positioning to support upside in USD/JPY 0.3
0.2
120
115
0.1 110
− The latest IMM data, show a reduction in JPY short positions 0.0 105
and market positioning is now relative neutral. Hence, new -0.1 100
-0.2 95
build up in short positions could support USD/JPY going -0.3 90
forward. -0.4 +/- 1 stdev from mean 85
-0.5 80
USD/JPY spot >>
-0.6 75
06 07 08 09 10 11 12
Source: CFTC
Senior Analyst, Morten Helt, mohel@danskebank.com, +45 4512 85 18
www.danskeresearch.com 8
EUR/GBP – bottoming out around 0.80
Forecast: 0.80 (3M), 0.82 (6M) and 0.84 (12M)
• Growth: The UK is in technical recession and 0.95
activity probably also shrank in Q2. Private 0.90
EUR/GBP
consumption is low and exports are at risk due to 0.85
the euro crisis. 0.80
0.75
• Monetary policy: The Bank of England has stopped 0.70
0.65
QE and but has instead introduced 6-month Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
liquidity auctions against a broader range of 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
collateral. Yields have fallen in response.
EUR/GBP 1M 3M 6M 12M
• Debt risks: Focus is on the downgrades in the Forecast (pct'ile)
Fwd. / Consensus
0.80 (30%)
0.81 / 0.80
0.80 (34%)
0.81 / 0.80
0.82 (54%)
0.81 / 0.80
0.84 (62%)
0.81 / 0.79
eurozone but could shift to negative focus on the 50% confidence int. 0.80 / 0.82 0.79 / 0.83 0.78 / 0.84 0.77 / 0.86
75% confidence int. 0.78 / 0.83 0.77 / 0.85 0.75 / 0.87 0.71 / 0.90
UK, which runs a bigger deficit than most eurozone
members, including Italy, Spain and France. Source: Danske Markets
• Valuation: From a long-term perspective, sterling • Conclusion: Investors see sterling as a safe haven
from the unstable eurozone but the UK has its own
is undervalued (PPP around 0.77) . A regime shift
problems. UK assets are liquid and have offered
has probably happened though and EUR/GBP, in
good protection so far. Tables can turn though and
our view, belongs above 0.80.
sterling is in our view not a real insurance against
• Risks: Almost anything. The forecast is surrounded the turmoil in the Euro zone. Strong link between
with considerable uncertainty and caution is USD and GBP persists, but is fading. A relatively
warranted. high hedging ratio is recommended.
Chief Analyst John Hydeskov, johy@uk.danskebank.com, +44 (0)20 7410 8144
www.danskeresearch.com 9
EUR/GBP – important issues to watch
• The Bank of England stops QE... Sterling closely linked with dollar, but fading
− After purchasing £325bn worth of Gilts, BoE has lost Pound / dollar correlation
0,80 Correlation coefficient 0,80
faith in QE, see “BoE abandons QE – as expected but still Correlation coefficient
0,75 0,75
controversial”. We do not see gilt purchases returning
0,70 0,70
this year.
0,65 0,65
• ...but introduces more stimulus 0,60
GBP/USD correlation using
0,60
0,55 EUR as numeraire (3M rolling) 0,55
− Bank of England commences its Extended Collateral 0,50 10Y average 0,50
Term Repo Facility, designed to reduce financial-stability 0,45 0,45
risks arising from a shortage of short-term sterling jun jul aug sep okt nov dec jan feb mar apr maj jun
11 12
liquidity. Source: Reuters EcoWin, Danske Bank
− The Bank intends to hold a 6-month ECTR auction at least Britain lagging behind (GDP since pre-crisis)
monthly until further notice.
102 102
2008 = 100
− The BoE and the UK Treasury will start a "funding for 101
USA
Germany 101
100 100
lending" plan within weeks. 99 99
France
• Dollar link is fading
98 98
97 97
96 96
− Still strong, but BoE and Fed follow different strategies. 95 95
UK is more exposed to euro crisis than the US. 94 UK 94
93 93
• A true safe haven? 92
08 09 10 11 12
92
− The UK is on negative outlook from two out the three Source: Reuters Ecowin, Danske Bank
large rating agencies and the public deficit remains huge.
Chief Analyst John Hydeskov, johy@uk.danskebank.com, +44 (0)20 7410 8144
www.danskeresearch.com 10
EUR/CHF – SNB sticks with its 1.20 minimum target
• Growth: The Swiss economy is under pressure
from the strong Swiss franc and weaker foreign Forecast: 1.20 (3M), 1.20(6M) and 1.20 (12M)
export demand.
• Monetary policy: The SNB left monetary policy
unchanged at its June meeting and pledged to
enforce the 1.20 minimum target “with utmost
determination”.
• Flows: SNB Swiss franc selling should keep
EUR/CHF stable above 1.20.
• Valuation: The Swiss franc remains overvalued by
about 13% against the euro according to the
Danske Bank General PPP model. Source: Danske Markets
• Risks: Tail-risks remain skewed to the downside • Conclusion: Deflation risks mean that the SNB is
and the market is pricing an increased probability unlikely to move away from its 1.20 minimum
of EUR/CHF breaking below 1.20. The minimum target – even after the large build-up in FX
target could be abandoned if inflation becomes a reserves during May. Should the currency inflow
concern (currently its not), the build-up in FX become too excessive it is likely that the SNB
reserves becomes a concern, or political support would introduce new measures (e.g. Negative
to the SNB fades. rates) but keep the minimum target on EUR/CHF.
We expect EUR/CHF to trade at 1.20 for the
coming quarters.
Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com, +45 4513 70 18
www.danskeresearch.com 11
EUR/CHF – Important issues to watch
• This is not a currency peg Switzerland still runs a massive C/A surplus
350 100
− SNB’s minimum target on EUR/CHF is technically no Monthly change FX reserve CHF bn
80
different from the interventions that the SNB conducted 300
from March 2009 to mid-2010, although this time the SNB 250
60
has announced the level that it will defend. It is important to 200
40
note that this is not a currency peg in the traditional sense. 20
150
The SNB has not expressed any view on how long it intends 0
to keep the exchange rate floor in place, or as to whether it 100
-20
intends to move the target. 50 -40
• 1.20 floor no longer secured by credibility alone 0
Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12
-60
Source: Bloomberg, Danske Markets
− Since the SNB introduced the 1.20 minimum target in
Swiss franc still overvalued at 1.20
September last year it had been able to secure the floor 2.0 2.0
almost only via credibility. FX reserves rose significantly in 1.9 1.9
May, however, in what was likely the third biggest 1.8 1.8
intervention month on record. In other words, the SNB has 1.7 PPP estimate 1.7
lost some of its credibility. 1.6 1.6
1.5 1.5
− The question now is how much currency inflow the SNB will 1.4 EUR/CHF spot 1.4
accept before potentially changing policy. As such there is 1.3 1.3
SNB's 1.20 minimum target
no problem in letting FX reserves rise further, as inflation 1.2 1.2
remains non existing and as authorities are taking measure 1.1
90 92 94 96 98 00 02 04 06 08 10 12
1.1
to try and address imbalances on the local credit market
and not least on the housing market. Source: Reuters EcoWin, Danske Markets
Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com, +45 4513 70 18
www.danskeresearch.com 12
EUR/SEK – relative quality remains SEK supportive
• Growth: We have raised our GDP 2012 forecast Forecast: 8.70 (3M), 8.60 (6M) and 8.50 (12M)
to +0.5% after better than expected Q1. H2 2012 10.00
EUR/SEK
will be more challenging given global headwinds. 9.50
We continue to see sub-trend growth in 2013. 9.00
• Monetary policy: We expect the Riksbank to leave 8.50
rates unchanged in July as macro readings have 8.00
developed in line with or even better than their Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
forecast. Pricing suggests 50% likelihood of 25bp. 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
• Fundamentals: Current account posts steady and EUR/SEK
Forecast (pct'ile)
1M
9.00 (78%)
3M
8.70 (30%)
6M
8.60 (27%)
12M
8.50 (27%)
significant surpluses. Swedish public debt is low Fwd. / Consensus
50% confidence int.
8.87 / 8.93
8.73 / 8.98
8.89 / 8.91
8.65 / 9.07
8.92 / 8.85
8.57 / 9.18
8.99 / 8.80
8.46 / 9.34
and falling, while euro ditto is high and rising. 75% confidence int. 8.64 / 9.09 8.50 / 9.27 8.34 / 9.47 8.10 / 9.76
Source: Danske Markets
• Flows: Basic balance positive. Huge inflows to SEK
government bonds. Commercial demand
• Conclusion: Quality vs growth – stronger or weaker
SEK? The latter has for a long time suggested a
diminishes but still keep a lid on SEK crosses.
weaker SEK but the former has been the dominant
• Valuation: EUR/SEK below L/T average but factor. We think this will continue to be the case
actually still above L/T equilibrium estimates. and therefore we keep the EUR/SEK forecast intact
at 8.70, 8.60 and 8.50 in 3, 6 and 12 months.
• Risks: Escalating euro crisis could trigger broad-
based USD buying that also pushes EUR/SEK
higher. However, if relative quality remains the
dominant factor it will be SEK supportive.
Senior Analyst Stefan Mellin, mell@danskebank.com +46 (0)8 568 805 92
www.danskeresearch.com 13
EUR/SEK – important issues to watch
• Risk for further downgrades – but not in Sweden SEK one of the “cheapest” AAA
AAA currency misalignment vs EUR
Percentage deviation from historic mean (1995-)
− Foreign holdings of SEK government debt touched an all time -25 -25
high at 56% in April. Relative quality is a key driver here. We -20 -20
Stronger
see a continuation of this theme. The risk of further -15 -15
downgrades among the few European AAA left, leaves -10 -10
Swedish stable AAA in an even more favorable position. -5 -5
GBP (-10%)
0 0
• Valuation not yet a hinder for further downside 5
AUD (23%) CHF (21%) CAD (16%) SGD (14%) NOK (7%) SEK (2%) DKK (0%)
5
Weaker
− Valuation is one aspect of quality-driven SEK demand. Within 10 10
the AAA camp some currencies are massively overvalued.
This is not the case for the SEK, which in addition is backed by Source: Reuters EcoWin, Danske Markets
better key fundamentals than most other AAA’s. This should EUR/SEK vs rate differential
be factored in by investors going forward. -0,2 9,4
EUR/SEK >>
-0,3
• The Riksbank rate decision -0,4
9,3
9,2
-0,5
− We expect the Riksbank to keep rates unchanged on 4 July. 9,1
-0,6
Domestic data like GDP, labor market and inflation have been -0,7 9,0
in line with or even above the Riksbank forecasts. The caveat is -0,8
if the euro crisis escalates even further, then we could see a -0,9
8,9
cut. Market is pricing in 50% probability for 25bp. If repo rate -1,0
8,8
<< 2Y swap spread
is left at 1.5%, it should give some support to SEK. As for the -1,1 8,7
rest of the year we expect two more cuts from the Riksbank, sep okt
11
nov dec jan feb mar
12
apr maj jun
which is in line with market pricing and thus SEK neutral. Source: Reuters EcoWin, Danske Markets
Senior Analyst Stefan Mellin, mell@danskebank.com +46 (0)8 568 805 92
www.danskeresearch.com 14
EUR/NOK – still the steady performer
• Growth: Norwegian numbers have continued to be Forecast: 7.50 (3M), 7.40 (6M) and 7.40 (12M)
strong in Q2 with upside surprises to retail sales, and 8.50
PMI and CPI core recently. Mainland growth was well EUR/NOK
8.00
above trend at 1.1% q/q in Q1. Oil investments are
very strong, estimated at close to NOK200bn in 7.50
2013, up NOK 51bn compared with a similar forecast 7.00
for 2012 (SSB figures). 6.50
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
• Monetary policy: Norges Bank lowered the policy rate
by 25bp to 1.50% in March. We believe this will be the 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
last rate cut given the strong economy. We expect the EUR/NOK 1M 3M 6M 12M
Forecast (pct'ile) 7.55 (55%) 7.50 (44%) 7.40 (34%) 7.40 (36%)
first rate increase in late 2012. Fwd. / Consensus 7.54 / 7.55 7.57 / 7.52 7.60 / 7.50 7.67 / 7.50
50% confidence int. 7.43 / 7.64 7.37 / 7.72 7.30 / 7.83 7.21 / 7.98
• Flows: Norges Bank did not adjust its daily purchase of 75% confidence int. 7.35 / 7.74 7.23 / 7.89 7.10 / 8.06 6.91 / 8.34
Source: Danske Markets
foreign currency higher in June despite the revised
budget showing a smaller oil-corrected deficit. • Conclusion: We expect EUR/NOK to decline
Speculative long NOK positions are not particularly towards 7.40 in 2012. We still see strong
stretched at the moment. international focus on strong Norwegian
fundamentals. Furthermore, we expect Norges Bank
• Valuation: NOK is slightly expensive (PPP 7.98). to raise rates. The latest rate cut by Norges Bank
• Risks: New rate cuts, risk aversion and a lower oil points to a more activist approach to countering too-
price could put strong upward pressure on EUR/NOK. fast NOK appreciation but in the end we believe
Safe-haven flows add downside pressure. Norges Bank will not win the battle. If risk aversion
spikes strongly, we do not expect the NOK to
perform.
Chief Analyst Arne Lohmann Rasmussen, arr@danskebank.com, +45 4512 8532
www.danskeresearch.com 15
EUR/NOK – important issues to watch
• Fundamentals support latest move lower in EUR/NOK Relative rates can explain lower EUR/NOK
Relative rates can explain the latest moves in 8.3
EUR/NOK << EUR/NOK %-points
-1.0
8.2 -1.1
EUR/NOK. This was not the case following the SNB 8.1 -1.2
announcement in September last year, which pushed 8.0 -1.3
7.9 -1.4
the cross significantly lower. 7.8 -1.5
• Changes in NOK flows
7.7 -1.6
7.6 -1.7
The weekly flow data from Norges Bank indicates that 7.5
2y swap spread >>
-1.8
7.4 -1.9
foreign banks, which we see as a proxy for speculative 7.3 -2.0
money, are not particularly long the NOK. Hence, we Jun Aug Oct
10
Dec Feb Apr Jun
11
Aug Oct Dec Feb Apr
12
Jun
believe the risk of profit taking in NOK should be Source: Reuters EcoWin, Danske Markets
smaller than the sell-off after the Norges Bank rate Very strong outlook for oil investments
cut in March. We still expect Norges Bank to revise
200000 mn NOK 200000
daily purchases of foreign currency higher. mn NOK
175000 175000
• Rate changes from Norges Bank 150000 150000
Norges Bank surprised the market when rates were 125000 Oil investment 125000
cut by 25bp on 14 March. The reason was the strong 100000 100000
NOK. Hence, given our FX forecasts, further rate cuts 75000 75000
cannot be ruled out, which could lead to a more 50000 50000
volatile NOK. However, rate hikes might also enter 25000 25000
85 90 95 00 05 10
the agenda quicker than expected given the very
strong Norwegian economy and red-hot housing Source: Norges Bank
market.
Chief Analyst Arne Lohmann Rasmussen, arr@danskebank.com, +45 4512 8532
www.danskeresearch.com 16
EUR/DKK – ‘send no more money, please’
• Actual range tighter than official bands: EUR/DKK Forecast: 7.43 (3M), 7.43(6M) and 7.45(12M)
trades in a +/-2.25% band around the ERM2 central 7.465
parity of 7.46038 (7.29252-7.62824). In practice, 7.460
Central parity
the central bank has kept EUR/DKK within a much
7.455
tighter band of 7.423-7.468 (-0.1% to +0.5%). In
7.450
recent years, the Danish central bank has shown a
7.445
strong commitment to keeping EUR/DKK stable and
7.440
lower than the central parity. EURDKK
7.435
• Fast central bank response: After two relatively quiet 7.430
months, currency inflow returned with a vengeance in
07 08 09 10 11 12
May and after invention equal to DKK30bn
Nationalbanken slashed rates twice and introduced a EUR/DKK Spot 7.46038
Source: Reuters EcoWin, Danske Markets
zero-rate policy, as the folio rate was lowered to zero.
We look for new rate cuts over the summer and • Conclusion: We believe Nationalbanken will continue
forecast that the CD rate will be lowered below zero to fight any currency inflow into Denmark using both
next time. The forward discount in EUR/DKK has intervention and rate cuts. Rates have already reached
widened significantly recently. A new rate cut and the zero and the next step is negative policy rates. We
next Danish LTRO in September 2012 could put forecast that Nationalbanken will eagerly try to avoid
further pressure on EUR/DKK forwards. EUR/DKK falling below 7.43, as it might trigger a new
round of speculative inflow. If global financial markets
normalise, we should expect a slight upward move in
EUR/DKK.
Chief Analyst Arne Lohmann Rasmussen, arr@danskebank.com, +45 4512 8532
www.danskeresearch.com 17
EUR/DKK – important issues to watch
• Danish krone back as safe-haven currency DGSs still popular by investors
Lately we have seen accounts selling EUR/DKK 40
bp 10Y Danish Yield Spread to Germany bp
40
apparently as a hedge against a eurozone break-up. If 30 30
20 20
this continues, it could create new downward 10 10
pressure on EUR/DKK. In 2011, we saw strong 0 0
inflows into Danish government bonds. It seems that -10 -10
the inflow is now less, even though DGBs have -20 -20
-30 -30
performed very strongly over the last month.
-40 -40
• What happens if flows turn around? May Jun Jul Aug Sep
11
Oct Nov Dec Jan Feb Mar Apr May Jun
12
We cannot rule out that in 2012 foreigners will start Source: Reuters EcoWin, Danske Markets
scaling back significantly on holdings of Danish bonds
and short EUR/DKK positions. If this happens fast, it The currency reserve rose in May to a new high
550 550
could put significant upward pressure on EUR/DKK. 500
DKK bn
500
450 450
• Negative policy rates the ‘next weapon’ 400 Currency reserve 400
Until now, Nationalbanken has been able to mitigate 350
300
350
300
the inflow into DKK through rate cuts and intervening 250 250
200 200
in the FX market. However, with policy rates at zero, 150 150
the next move is negative policy rates. In March, it 100 100
50 50
said it is technically possible to obtain negative rates. 0 0
In such circumstances, the plan is to lower the CD 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
rate below zero but keep the lending and current Source: Reuters EcoWin
account rate above the CD rate. See
Nationalbanken.dk for further info.
Chief Analyst Arne Lohmann Rasmussen, arr@danskebank.com, +45 4512 8532
www.danskeresearch.com 18
AUD/USD – Victim of growth concerns
• Growth: Despite indications of a slowdown in China Forecast: 0.99(3M), 1.01 (6M) and 1.05 (12M)
data out Australia have been relative strong. First 1.15
AUD/USD
quarter GDP advanced1.3% QoQ - twice as much as 1.10
1.05
expected. 1.00
0.95
• Monetary policy: The RBA lowered interest-rate by 0.90
25bp to 3.5% on June 5. Further rate cuts by the 0.85
0.80
RBA of as much as 50bp to75bp in 2012 are Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
already priced in the market. 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
• Debt risks: Public debt is a mere 23% of GDP in AUD/USD
Forecast (pct'ile)
1M
0.98 (23%)
3M
0.99 (37%)
6M
1.01 (50%)
12M
1.05 (66%)
Australia and is thus far from US’s triple digits. Fwd. / Consensus 1.00 / 1.00 1.00 / 1.00 0.99 / 1.00 0.98 / 1.00
50% confidence int. 0.98 / 1.03 0.97 / 1.04 0.95 / 1.05 0.91 / 1.07
• Flows: According to the weekly IMM data, market 75% confidence int.
Source: Danske Markets
0.96 / 1.04 0.92 / 1.06 0.88 / 1.08 0.81 / 1.12
is now speculative net short AUD. Positioning is
stretched with short AUD at October 2008 levels
• Conclusion: AUD/USD has been correcting higher
over the past weeks as economic data have
• Valuation: AUD/USD remains overvalued by long- surprised to the upside. Due to high correlation
term measures (PPP estimate at 0.77). with global risk sentiment near term risks remain
skewed to the downside. However, further rate
• Risks: AUD remains highly correlated with global cuts are already priced in and long speculative
risk sentiment and tail-risks remain skewed to the
positions are extreme, downside might be limited.
downside.
We look for the AUD to reverse its losses going
forward.
Senior Analyst, Morten Helt, mohel@danskebank.com, +45 4512 85 18
www.danskeresearch.com 19
NZD/USD –RBNZ on hold for now
• Growth: Economic growth slowed in Q4, but is Forecast: 0.78(3M), 0.79 (6M) and 0.81 (12M)
expected to recover in 2012. In that respect, 0.90 NZD/USD
rebuilding following last year’s natural disasters 0.85
0.80
should make a positive impact later this year. 0.75
• Monetary policy: The RBNZ decided to keep rates 0.70
0.65
unchanged at 2,5% on June 13. We expect rates 0.60
to be on hold for now. Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
• Debt risks: New Zealand has very low public debt, 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
but runs a budget deficit and a sizeable current NZD/USD
Forecast (pct'ile)
1M
0.77 (27%)
3M
0.78 (41%)
6M
0.79 (49%)
12M
0.81 (59%)
account deficit. Fwd. / Consensus 0.79 / 0.78 0.78 / 0.78 0.78 / 0.78 0.77 / 0.79
50% confidence int. 0.77 / 0.81 0.75 / 0.82 0.74 / 0.83 0.71 / 0.84
• Flows: According to the weekly IMM data, the 75% confidence int.
Source: Danske Markets
0.75 / 0.82 0.72 / 0.84 0.69 / 0.86 0.63 / 0.88
market is now speculative short NZD.
• Valuation: NZD/USD remains heavily overvalued • Conclusion: NZD/USD has corrected higher in
June after a significant drop in May as
compared with long-term models (PPP estimate
expectations of global policy responses have
at 0.63), but terms of trade gains and weak US
increased. While near term risks remains skewed
fundamentals justify this.
to the downside, we expect NZD/USD to edge
• Risks: NZD remains a high-beta currency and higher as global growth outlook and risk sentiment
should risk sentiment worsen again downside improves and increases demand for carry
risks would be significant. currencies.
Senior Analyst, Morten Helt, mohel@danskebank.com, +45 4512 85 18
www.danskeresearch.com 20
USD/CAD – Still aiming for sub-parity
• Growth: GDP growth stagnated in the first quarter and Forecast: 1.02(3M), 1.01 (6M) and 0.98 (12M)
the Canadian economy is under increasing pressure 1.15 USD/CAD
from the fact that the US economy has slowed. 1.10
Consumer spending increased at the slowest pace in 1.05
three years indicating that the domestic economic 1.00
recovery is fading. 0.95
• Monetary policy: BoC kept its main interest rate on 0.90
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
hold on June 5 but sounded relative hawkish. In our
view however, a tighter monetary policy is not 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst
imminent at this stage. A slow down in the US USD/CAD 1M 3M 6M 12M
economy increases the likelihood of a rate cut by BoC Forecast (pct'ile) 1.03 (65%) 1.02 (54%) 1.01 (48%) 0.98 (38%)
Fwd. / Consensus 1.02 / 1.01 1.03 / 1.01 1.03 / 1.00 1.03 / 1.00
as the Fed might ease the monetary policy. 50% confidence int. 1.00 / 1.04 0.99 / 1.05 0.98 / 1.05 0.95 / 1.07
75% confidence int. 0.99 / 1.05 0.97 / 1.08 0.95 / 1.10 0.92 / 1.13
• Debt risks: Canadian public finances are healthy, and Source: Danske Markets
we expect the CAD to receive support from Canada’s • Conclusion: Recent CAD-strength has been
tripple-A debt rating status. interrupted by global growth concerns and lower oil
• Flows: We expect oil prices to support CAD in 2012. prices and USD/CAD is back above parity. Near term
risk remains to the upside, and we expect USD/CAD to
• Valuation: USD/CAD is expensive on PPP measures, increase further as a weaker macro economic picture
but less so than other commodity currencies. could trigger speculations of a rate cut from BoC.
• Risks: A large setback in oil prices or a decline in risky However, in 6-12 months time we see global macro
asset prices remain the key risks. picture improving and expects USD/CAD to drop back
below sub-parity in 12 months time.
Senior Analyst, Morten Helt, mohel@danskebank.com, +45 4512 85 18
www.danskeresearch.com 21
Danske Markets FX forecasts
Forecast Forecast vs forward outright, %
Spot +1m +3m +6m +12m +1m +3m +6m +12m
Exchange rates vs EUR
USD 1.271 1.24 1.24 1.26 1.30 -2.5 -2.5 -1.0 1.8
JPY 100.7 98 98 106 113 -2.6 -2.6 5.4 12.5
GBP 0.809 0.80 0.80 0.82 0.84 -1.1 -1.2 1.1 3.3
CHF 1.201 1.20 1.20 1.20 1.20 -0.1 0.1 0.2 0.6
DKK 7.43 7.43 7.43 7.43 7.45 0.0 0.2 0.3 0.8
NOK 7.54 7.55 7.50 7.40 7.40 0.0 -0.9 -2.7 -3.6
SEK 8.84 9.00 8.70 8.60 8.50 1.6 -2.0 -3.5 -5.3
Exchange rates vs USD
JPY 79.2 79 79 84 87 -0.2 -0.1 6.5 10.4
GBP 1.57 1.55 1.55 1.54 1.55 -1.3 -1.3 -2.1 -1.4
CHF 0.95 0.97 0.97 0.95 0.92 2.5 2.6 1.3 -1.2
DKK 5.85 5.99 5.99 5.90 5.73 2.5 2.7 1.3 -1.1
NOK 5.93 6.09 6.05 5.87 5.69 2.5 1.6 -1.7 -5.4
SEK 6.96 7.26 7.02 6.83 6.54 4.2 0.5 -2.5 -7.1
CAD 1.02 1.03 1.02 1.01 0.98 0.8 -0.3 -1.4 -4.7
AUD 1.01 0.98 0.99 1.01 1.05 -2.8 -1.3 1.4 6.6
NZD 0.79 0.77 0.78 0.79 0.81 -2.7 -1.0 0.8 4.5
Note: GBP, AUD and NZD are denominated in local currency rather than USD
www.danskeresearch.com 22
Danske Markets FX forecasts vs. DKK
Forecast Forecast vs forward outright, %
Spot +1m +3m +6m +12m +1m +3m +6m +12m
Exchange rates vs DKK
EUR 7.43 7.43 7.43 7.43 7.45 0.0 0.2 0.3 0.8
USD 5.85 5.99 5.99 5.90 5.73 2.5 2.7 1.3 -1.1
JPY 7.38 7.58 7.58 7.01 6.59 2.7 2.8 -4.8 -10.4
GBP 9.19 9.29 9.29 9.06 8.87 1.2 1.4 -0.8 -2.4
CHF 6.19 6.19 6.19 6.19 6.21 0.1 0.1 0.1 0.1
NOK 0.99 0.98 0.99 1.00 1.01 0.0 1.1 3.0 4.3
SEK 0.84 0.83 0.85 0.86 0.88 -1.6 2.2 3.9 6.2
CAD 5.73 5.82 5.87 5.84 5.85 1.7 3.0 2.8 3.6
AUD 5.91 5.87 5.93 5.96 6.02 -0.4 1.4 2.7 5.4
NZD 4.64 4.61 4.67 4.66 4.64 -0.2 1.6 2.1 3.3
PLN 1.75 1.77 1.77 1.77 0.1 1.2 3.4
CZK 0.29 0.30 0.30 0.31 0.9 1.6 3.3
HUF 0.26 0.25 0.25 0.25 -2.8 -1.6 0.9
RUB 0.18 0.20 0.20 0.20 7.5 7.9 8.8
www.danskeresearch.com 23
Danske Markets FX forecasts vs. SEK
Forecast Forecast vs forward outright, %
Spot +1m +3m +6m +12m +1m +3m +6m +12m
Exchange rates vs SEK
EUR 8.84 9.00 8.70 8.60 8.50 1.6 -2.0 -3.5 -5.3
USD 6.96 7.26 7.02 6.83 6.54 4.2 0.5 -2.5 -7.1
JPY 8.79 9.18 8.88 8.11 7.52 4.4 0.6 -8.4 -15.8
GBP 10.93 11.25 10.88 10.49 10.12 2.8 -0.8 -4.5 -8.3
CHF 7.36 7.50 7.25 7.17 7.08 1.7 -2.1 -3.7 -5.9
NOK 1.17 1.19 1.16 1.16 1.15 1.6 -1.1 -0.8 -1.8
DKK 1.19 1.21 1.17 1.16 1.14 1.6 -2.2 -3.8 -6.0
CAD 6.82 7.05 6.88 6.76 6.67 3.3 0.8 -1.1 -2.5
AUD 7.04 7.11 6.95 6.89 6.87 1.2 -0.8 -1.1 -0.7
NZD 5.52 5.59 5.47 5.39 5.30 1.4 -0.6 -1.7 -2.7
PLN 2.09 2.07 2.05 2.02 -1.8 -2.3 -2.2
CZK 0.35 0.35 0.35 0.35 -1.1 -1.9 -2.4
HUF 0.30 0.29 0.29 0.29 -4.7 -5.0 -4.6
RUB 0.22 0.24 0.23 0.22 5.0 4.0 2.8
www.danskeresearch.com 24
Danske Markets FX forecasts vs. NOK
Forecast Forecast vs forward outright, %
Spot +1m +3m +6m +12m +1m +3m +6m +12m
Exchange rates vs NOK
EUR 7.54 7.55 7.50 7.40 7.40 0.0 -0.9 -2.7 -3.6
USD 5.93 6.09 6.05 5.87 5.69 2.5 1.6 -1.7 -5.4
JPY 7.49 7.70 7.65 6.98 6.55 2.7
GBP 9.32 9.44 9.38 9.02 8.81 1.2 0.3 -3.8 -6.6
CHF 6.28 6.29 6.25 6.17 6.17 0.1 -1.0 -2.9 -4.2
SEK 0.85 0.84 0.86 0.86 0.87 -1.6 1.1 0.8 1.9
DKK 1.01 1.02 1.01 1.00 0.99 0.0 -1.1 -3.0 -4.2
CAD 5.81 5.91 5.93 5.81 5.81 1.7 1.9 -0.3 -0.7
AUD 6.00 5.97 5.99 5.93 5.98 -0.4 0.3 -0.3 1.1
NZD 4.71 4.69 4.72 4.64 4.61 -0.3 0.5 -0.9 -1.0
PLN 1.78 1.79 1.76 1.76 -0.8 -1.5 -0.4
CZK 0.30 0.30 0.30 0.30 0.0 -1.0 -0.7
HUF 0.26 0.25 0.25 0.25 -3.6 -4.2 -2.9
RUB 0.18 0.20 0.20 0.20 6.2 4.9 4.7
www.danskeresearch.com 25
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