FX Convictions The fall-out from the turmoil
Group Economics Macro & Financial Markets Research
Georgette Boele +31 20 629 7789 Roy Teo +65 65 978616
DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.
01 September 2015
Adjustments in our forecasts The market turmoil, fall in commodity prices and China risks have resulted in an adjustment in our major currency forecasts. Although not our base case, chances of more QE by the ECB have increased sharply and this will hang over the market in the months ahead. As a result, it is unlikely that financial markets will start anticipating a QE exit by the ECB in the first half of 2016. Therefore, we expect the euro to remain under pressure until around the middle of 2016. Moreover, we have pushed out our first Fed rate hike to December from September. This will have a dampening effect on the dollar’s rally in the near-term. Monetary policy divergence will continue to drive EUR/USD lower in our view.
More economic slack and headwinds to exports – JPY negative Our bearish view on the Japanese yen has not changed. Economic slack has increased and more headwinds to Japanese exports are expected due to a weaker Chinese yuan. We expect the Bank of Japan to increase monetary stimulus by early 2016 as inflationary pressures are likely to fall well below the 2% target by the first half of Fiscal year 2016. Widening interest rate differentials between the US and Japan will continue to weigh on the yen versus the US dollar.
Downgrade of AUD and NZD forecasts The Reserve Bank of New Zealand is expected to cut the Official Cash Rate by 25bp in September and to maintain a dovish stance. Looser monetary policy in Australia is also likely later this year. More importantly, financial markets have still not priced in the rate hike cycle in the US, in our view. SGD added to short conviction list We have included long US dollar versus Singapore dollar (SGD) into our conviction list on 18 August. The Monetary Authority of Singapore is likely to shift its current modest appreciation of S$NEER policy to neutral in October. The SGD is also vulnerable to a weaker Chinese yuan and firmer short term yields in the US. We expect the SGD to decline towards 1.46 against the US dollar later this year.
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The fall-out from the turmoil - 01 September 2015
Currency Forecasts majors Red/bold = change in forecasts
EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD NZD/USD USD/CAD EUR/SEK EUR/NOK EUR/DKK
01-Sep 1.1317 120.27 136.11 1.5399 0.7349 0.9593 1.0857 0.7116 0.6375 1.3180 9.5358 9.4102 7.4633
Q3 2015 1.10 123 135 1.55 0.71 0.99 1.09 0.72 0.65 1.34 9.50 9.25 7.46
Q4 2015 1.00 128 128 1.49 0.67 1.10 1.10 0.70 0.63 1.36 9.50 9.00 7.46
Q1 2016 1.00 130 130 1.49 0.67 1.10 1.10 0.69 0.62 1.38 9.50 8.50 7.46
Q2 2016 1.05 135 142 1.52 0.69 1.07 1.12 0.67 0.60 1.41 9.50 8.25 7.46
Q3 2016 1.05 135 142 1.50 0.70 1.09 1.14 0.65 0.59 1.43 9.50 8.00 7.46
Q4 2015 6.55 6.55 66 1,240 1.46 36.40 33.40 14,300 60 3.10 13.50 4.15 27.50 315 3.70 17.00 700
Q1 2016 6.60 6.60 67 1,250 1.47 36.60 33.50 14,400 60 3.05 13.25 4.10 27.40 315 3.60 16.75 690
Q2 2016 6.65 6.65 67 1,270 1.49 36.80 33.70 14,600 55 3.00 13.00 4.05 27.25 310 3.55 16.50 680
Q3 2016 6.70 6.70 68 1,290 1.50 37.00 33.80 14,800 55 2.95 13.00 4.00 27.00 310 3.55 16.25 670
Q4 2016 1.10 135 149 1.49 0.74 1.05 1.15 0.64 0.58 1.45 9.50 8.00 7.46
Source: ABN AMRO
Currency Forecasts major emerging markets Red/bold = change in forecast
USD/CNY (onshore) USD/CNH (of f shore) USD/INR USD/KRW USD/SGD USD/THB USD/TWD USD/IDR USD/RUB USD/TRY USD/ZAR EUR/PLN EUR/CZK EUR/HUF USD/BRL USD/MXN USD/CLP Source: ABN AMRO
01-Sep 6.37 6.42 66.3 1,172 1.40 35.72 32.41 14,090 66 2.91 13.28 4.24 27.50 314 3.62 16.84 692
Q3 2015 6.50 6.55 66 1,200 1.43 36.00 32.80 14,000 65 3.00 13.50 4.20 27.50 315 3.70 17.00 690
Q4 2016 6.75 6.75 68 1,300 1.52 37.30 34.00 15,000 55 2.90 12.50 4.00 26.75 310 3.50 16.00 660
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The fall-out from the turmoil - 01 September 2015
Georgette Boele +31 20 629 7789 Roy Teo +65 65 978616
Performance and update of high conviction views • • •
Commodity currencies dived mirroring commodity prices… …while the euro and the yen rallied because of the closing of outstanding short positions We expect more dollar strength ahead and keep our long positions versus the euro, yen, Australian dollar and New Zealand dollar We initiated short Singapore dollar view against the US dollar on 18 August
•
Commodity currencies dive
The euro rallied …
The potent cocktail of Chinese economy, emerging market and
The euro has been the best performing major currency. For
commodity fears escalated sharply since the end of July.
some time now, financial markets were short the euro and long
Emerging market commodity currencies and Asia FX showed
US dollar because of monetary policy divergence. Investors
substantial losses. Currencies of emerging market commodity
had set up carry trades with the euro as the funding currency.
exporters mirrored the price sell-off in commodity prices (see
As investor sentiment deteriorated investors closed these
graph below). Meanwhile, the deterioration in investor
positions. Moreover, the US dollar has had some cyclical
sentiment towards China weighed on Asian FX.
weakness which was mainly reflected versus the euro and the yen. When US inflation came in below-expectations and
Performance EM FX 23 July – 28 August
FOMC minutes were seen as more dovish, investor sentiment
Spot performance against the USD, in USD terms, in %
sharply scaled back expectations of Fed rate hikes this year.
500
140
As a result, the US dollar fell versus the euro and the yen. In short, the reason for the EUR/USD rise last Monday was a cut
400
160
back of positions (unwinding of carry trades) combined with cyclical US dollar weakness. In our opinion, safe haven
300
180
200
200
100
220
demand has not been behind the surge in EUR/USD.
Commodity FX sharply lower 23 July – 28 August Spot performance against the USD, in USD terms, in %
00
05
10
CRB Index (lhs)
3
15
USD/EM (rhs)
2 1
Source: Bloomberg
0 -1
Performance EM FX 23 July – 28 August
-2
Spot performance against the USD, in USD terms, in %
-3
5
-4 EUR
JPY
SEK
CHF
GBP
NOK
CAD
NZD
AUD
0 Source: Bloomberg
-5
… and so did the yen
-10
During the recent risk aversion waves, the yen was one of the clear outperformers. This outperformance was also mainly due RUB
TRY
BRL
ZAR
CLP
MXN
IDR
INR
TWD
THB
CNY
SGD
PLN
Source: Bloomberg
KRW
HUF
CZK
-15
to the closing of yen short positions. However, safe-haven demand has also provided support.
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The fall-out from the turmoil - 01 September 2015
Since our latest report on 24 July, we have kept in place
of early 2016. We maintain our year end USD/JPY target of
our long US dollar views versus the euro, the yen the
128.
Australian and New Zealand dollar. We have also added the Singapore dollar on 18 August as we expect an accumulative 8% underperformance against the US dollar by the end of 2016
Our open and closed high conviction 2015 views High conviction views Open Position base currency EUR/USD Short since 20 November 2013 USD/JPY Long since 20 November 2013 AUD/USD Short since 3 July 2014 NZD/USD Short since 30 March 2015 USD/SGD Long since 18 August 2015 Closed AUD/USD NZD/USD USD/CAD USD/CNY KRW/JPY EUR/GBP EUR/CHF EUR/SEK EUR/PLN USD/MXN USD/CHF CNH/JPY EUR/MXN GBP/USD
RBNZ easing bias to weigh on NZD The Reserve Bank of New Zealand is widely expected to cut the Official Cash Rate (OCR) by 25bp to 2.75% in the next monetary policy meeting on 10 September. This is fully priced in by financial markets. With the exception of house prices, most economic indicators have softened in the past month. The impact of slower Chinese growth should not be exaggerated as New Zealand’s exports to China in 2014 were equivalent to only about 4% of domestic GDP. However, export price competitiveness is more pronounced as Asian currencies (which we expect to decline further against the US
Closed short on 5 February 2014, re-opened on 3 July 2014 Closed short on 6 January 2014 Closed long on 5 February 2014 Closed short on 6 February 2014 on opening Closed long on 5 February 2014 Closed short on 16 June 2014 Closed long on 1 July 2014 Closed long on 3 July 2014 Closed short on 2 September 2014 Closed short on 30 September 2014 Closed long on 31 October 2014 Closed long on 10 November 2014 Closed short on 12 December 2014 Closed short on 19 May 2015 at 14.30
Source: ABN AMRO Group Economics
dollar) account for almost 50% of the NZD trade weighted index. We expect the RBNZ to remain dovish and a weaker NZD/USD towards 0.63 later this year remains on the cards. Remain bearish AUD – RBA too optimistic We maintain our bearish view in the AUD and still expect another rate cut later this year for the following reasons. First, the recovery in business confidence in May and June has faltered in July. This does not bode well for non-mining investment. Second, consumer confidence has remained below trend rate since 2014. Consumer spending and retail
Adjustments in our forecasts
business investment are expected to remain tepid as a result.
The market turmoil, fall in commodity prices and China risks
Third, we expect house price inflation to moderate later this
have resulted in an adjustment in our major currency
year, which is likely to weigh on non-tradable inflation. Last but
forecasts. Although not our base case, chances of more QE by
not least, as Asian currencies (which account for more than
the ECB have increased sharply and this will hang over the
60% of AUD trade weighted basket) are expected to decline, a
market in the months ahead. As a result, it is unlikely that
stronger AUD TWI will weigh on tradable inflation. We maintain
financial markets will start anticipating a QE exit by the ECB in
our year end AUD/USD target of 0.70.
the first half of 2016. Therefore, we expect the euro to remain under pressure until around the middle of 2016. Moreover, we
MAS to shift S$NEER policy to neutral in October
have pushed out our first Fed rate hike to December from
We included our long US dollar versus Singapore dollar (SGD)
September. This will have a dampening effect on the dollar’s
to our high conviction list on 18 August for several reasons.
rally in the near-term. Monetary policy divergence will continue
We expect the Monetary Authority of Singapore (MAS) to shift
to drive EUR/USD lower in our view.
its policy from a current modest appreciation of S$NEER to
Slack in economy – weaker JPY expected Our view is that the JPY depreciation trend is still in place. The weak business spending and household consumption in the second quarter reinforce our view that inflationary pressures will take much longer to materialise than the Bank of Japan’s forecast. A weaker Chinese yuan is also expected to result in more headwinds to Japan’s competitiveness. Indeed, according to the BIS metrics, the yuan comprises almost 30% of the yen’s trade weighted index. In addition, an IMF study in 2011 states that Japan’s exports are ranked 7th in terms of export similarity to China’s exports in 2008. Looking ahead, we do not rule out that the BoJ may increase monetary stimulus later this year in October, compared to our base case scenario
neutral in the next scheduled monetary policy meeting in October. An interim monetary policy meeting in September to widen the trading band cannot be ruled out if volatility in currency markets rises after the September FOMC meeting. In addition, the SGD is one of the more sensitive currencies to movements in the Chinese yuan, which we expect to decline. Higher short term yields in the US are also expected to weigh on the SGD. Finally a weaker euro, yen and Chinese yuan (combined about 40% of S$NEER weights based on BIS metrics) will affect Singapore’s competitiveness. Hence a weaker SGD against the US dollar is expected. Our 2015 year end USD/SGD target is 1.46.
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The fall-out from the turmoil - 01 September 2015
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