FX Convictions Parity in EUR/USD still on
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.
29 September 2015 Monetary policy divergence should drive EUR/USD lower Recent developments have not changed our view on the US dollar and the euro. It is likely that the Fed will start its rate hiking cycle this year driven by a strong domestic economy. This should also give a clear signal of confidence in the state of the US economy. Therefore, we expect an improvement in overall investor sentiment. Financial markets are widely underestimating the probability of a Fed rate hike this year. The probability derived from the options market show a 36% chance of a rate hike in December. In the futures market, Fed fund futures price in a rate of 0.20% for the end of this year and 0.66% for the end of next year, respectively. We foresee one rate hike this year and four 25bp rate hikes next year. If financial markets start to move in this direction, the US dollar could rally strongly. Meanwhile, we stick to our base case scenario that the ECB will step up its monthly QE purchases by EUR 20bn before year end. As a result of this divergence in monetary policy, compared to market expectations, it is likely that EUR/USD will fall to parity this year.
BoJ to signal downside risks to economic growth and inflation in October Our bearish view on the Japanese yen has also not changed. We expect the Bank of Japan (BoJ) to signal in October that downside risks to its economic growth and inflation forecasts have increased. Hence the BoJ is likely 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.
More downside in AUD and NZD Despite the recent sharp falls, we continue to see value in short AUD and NZD positions and keep them on our conviction list. Recently, we have downgraded our Australian and New Zealand dollar year end forecasts to 0.68 (from 0.70) and 0.60 (from 0.63). Both central banks are expected to lower monetary policy in the last quarter of this year. MAS easing bias in October to weigh on SGD We also maintain our short SGD. The Monetary Authority of Singapore (MAS) is likely to shift its current modest appreciation of S$NEER policy to neutral in October. A wider trading band to accommodate recent higher volatility cannot be ruled out. We expect the SGD to decline towards 1.46 against the US dollar later this year.
2
Parity in EUR/USD still on - 29 September 2015
Currency Forecasts majors Red/bold = recent 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 USD/NOK EUR/DKK
28-Se p 1.1184 120.14 134.37 1.5226 0.7345 0.9794 1.0954 0.7022 0.6366 1.3333 9.4392 9.5985 8.5824 7.4593
Q4 2015 1.00 128 128 1.49 0.67 1.10 1.10 0.68 0.60 1.36 9.50 9.50 9.50 7.46
Q1 2016 1.00 130 130 1.49 0.67 1.10 1.10 0.66 0.58 1.38 9.50 9.25 9.25 7.46
Q2 2016 1.05 135 142 1.52 0.69 1.07 1.12 0.64 0.56 1.41 9.50 9.00 8.57 7.46
Q3 2016 1.05 135 142 1.50 0.70 1.09 1.14 0.62 0.55 1.43 9.50 8.75 8.33 7.46
Q4 2016 1.10 135 149 1.49 0.74 1.05 1.15 0.60 0.55 1.45 9.50 8.50 7.73 7.46
Source: ABN AMRO
Currency Forecasts major emerging markets Red/bold = recent 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
28-Se p 6.37 6.38 66.1 1,195 1.40 36.29 33.09 14,674 66 3.06 13.97 4.24 27.50 315 3.98 17.02 702
Q4 2015 6.55 6.55 66 1,240 1.46 36.40 33.40 15,000 60 3.10 14.00 4.15 27.50 315 4.00 17.00 700
Q1 2016 6.60 6.60 67 1,250 1.47 36.60 33.50 15,200 60 3.05 13.80 4.10 27.40 315 3.90 16.75 690
Q2 2016 6.65 6.65 67 1,270 1.49 36.80 33.70 15,400 55 3.00 13.60 4.05 27.25 310 3.85 16.50 680
Q3 2016 6.70 6.70 68 1,290 1.50 37.00 33.80 15,500 55 2.95 13.40 4.00 27.00 310 3.80 16.25 670
Q4 2016 6.75 6.75 68 1,300 1.52 37.30 34.00 15,600 55 2.90 13.20 4.00 26.75 310 3.75 16.00 660
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Parity in EUR/USD still on - 29 September 2015
Georgette Boele +31 20 629 7789 Roy Teo +65 65 978616
Performance and update of high conviction views
Concentrated weakness in EM FX… …and a deterioration in investor sentiment supported the yen MAS expected to ease S$NEER policy in October We expect more dollar strength ahead and keep our long positions versus the euro, yen, Australian dollar, New Zealand dollar and Singapore dollar
Concentrated weakness in EM FX…
it is likely that weakness in the real will persist. In the current
Since the end of August, most emerging market currencies
environment USD/BRL may overshoot to 4.5. Meanwhile, CDS
have moved lower. The currencies of our top six emerging
spreads of Brazil have risen sharply. They have surpassed the
markets at risk (see our Macro Focus – the top 6 emerging
levels seen at the height of the global financial crisis, but they
markets at risk) have declined substantially and have
are still far away from the 2002 crisis levels.
accounted for the largest part of EM currency weakness versus the US dollar last month. In short, weakness in
Performance major FX 28 Aug – 28 Sep
emerging market currencies has been concentrated in
Spot performance against the USD, in USD terms, in %
Brazilian real, Malaysian ringgit, Indonesia rupiah, South
2
African rand and Turkish lira. Within this group of weak performers, the Brazilian real has been the weakest (more on
1
this below).
0
Performance of our EM FX coverage 28 Aug – 28 Sep
-1 -2
Spot performance against the USD, in USD terms, in %
-3
2
-4
0
JPY
SEK
EUR
CAD
GBP
NZD
CHF
AUD
NOK
-2 Source: Bloomberg
-4 -6
Deterioration in investor sentiment supported the yen…
BRL
IDR
TRY
ZAR
TWD
MXN
KRW
CLP
SGD
THB
CZK
RUB
PLN
INR
Concerns about global growth, weakness in equity markets, HUF
Investor sentiment in financial markets has often been weak.
-10
CNY
-8
uncertainty about the Fed and impact of a lower amount of foreign exchange reserves being invested in funds worldwide,
Source: Bloomberg
have made investors more cautious. As a result, the yen as a global safe haven currency has been able to profit.
…and a new all-time low for Brazilian real The Brazilian real has fallen sharply this month. It has declined
ECB officials grapple on timing of move
by almost 10% versus the US dollar, taking it to a new all-time
Various ECB Governing Council members have given
low. At some point, USD/BRL almost reached 4.25. Afterwards
speeches over recent days. In general they point to the
the real recovered, but the situation remains very fluid. This
likelihood of further monetary easing, but there are mixed
steep decline further increases inflationary pressures. As a
messages on how quickly this may come. In general, some
result, the central bank is between a rock (deep recession) and
Executive Board members (Draghi, Praet and Coeure) are
a hard place (inflation) in an environment of political turmoil
suggesting that there will be no hesitation and that they will act
and risk of further downgrades. The central bank will probably
with force. On the other hand, some national central bank
continue to intervene in FX markets to dampen the slide in the
governors (Nowotny, Vasiliauskas) have said they need more
real, but this will unlikely be very aggressive. In the near-term,
time, with no discussion of new measures until December. The
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Parity in EUR/USD still on - 29 September 2015
exception to this rule is Executive Board member Sabine
underestimating the probability of a Fed rate hike this year.
Lautenschlaeger, who also said it was ‘too early’ to talk about
The probability derived from the options market show a 36%
broadening QE on Monday. Having said that, she is clearly on
chance of a rate hike in December. In the futures market, Fed
the extreme hawkish side of the spectrum of the Governing
fund futures price in a rate of 0.20% for the end of this year
Council. Overall, these comments have given some support to
and 0.66% for the end of next year, respectively. We foresee
the euro.
one rate hike this year and four 25bp rate hikes next year. If financial markets start to move in this direction, the US dollar
…while US dollar recovered
could rally strongly.
Initially the US dollar fell considerably after the FOMC sounded more dovish. However, afterwards several Fed speakers,
Market probability of the Fed being in the range
including Fed Chair Yellen, re-calibrated their message,
%
emphasizing that an increase in the US Federal Funds rate is still likely this year. As a result, the US dollar recovered ground
50
40
lost.
30
Surprise rate cut by Norges Bank triggers NOK sell-off The Norges bank surprised financial markets by cutting rates to 0.75% and left the door open for another reduction. A weak economic backdrop will likely prompt the Norges Bank to cut
20 10 0 Jan 15
Mar 15
rates one more time. This dovish message has triggered a
Jul 15
Sep 15
16 Dec 2015 Fed funds range 0.25-0.50%
sell-off in the Norwegian krone. Since our latest report on 1 September, we have kept in
May 15
14 Dec 2016 Fed funds range 1.25-1.50% Source: Bloomberg
place our long US dollar views versus the euro, the yen the Australian, New Zealand dollar and the Singapore
Meanwhile, our base case is that the ECB will step up QE
dollar.
before the end of this year, by increasing the size of monthly purchases by EUR 20bn. We see October as more likely than
Our open and closed high conviction 2015 views
December at this stage, though the mixed messages from
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
officials have made us less certain about this. As a result of
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
BoJ to signal easing bias in October Inflation ex fresh food and energy has been edging higher and
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
the divergence in monetary policy across the Atlantic, compared to market expectations, it is likely that EUR/USD will fall to parity this year.
hence we expect the Bank of Japan (BoJ) to keep monetary policy unchanged in October. However the BoJ is likely to signal that downside risk to economic growth and inflation outlook has increased. For more details, please refer to our Japan Watch – China a risk for Japan’s breakthrough? published on 23 September. Speculative short positions in the yen are less overcrowded due to some unwinding of carry trades recently. We expect USD/JPY to find good support above 118. A higher bias towards 128 by the end of this year
Parity in EUR/USD still on
remains our central scenario.
Recent developments have not changed our view on the US dollar and the euro. It is likely that the Fed will start its rate hiking cycle this year driven by a strong domestic economy.
RBNZ easing bias to weigh on NZD In our view, the Reserve Bank of New Zealand (RBNZ) is likely
This should also give a clear signal of confidence in the state
to keep the Official Cash Rate unchanged at 2.75% in
of the US economy. Therefore, we expect an improvement in
October. This is because dairy auction prices have continued
overall investor sentiment. Financial markets are widely
to recover in recent weeks. In addition dwelling sales imply
5
Parity in EUR/USD still on - 29 September 2015
that house price inflation is expected to remain strong.
consecutive months since April this year. Headline inflation
However we expect the RBNZ to remain dovish as business
has fallen further into negative territory (-0.8% yoy in August).
and consumer confidence have deteriorated. Our agri
Economic data in recent months has also been weak. Hence a
commodity analyst also expects any recovery in dairy prices to
technical recession in the third quarter cannot be ruled out. We
remain modest well into 2016. Another 25bp rate cut in
expect the MAS to shift its modest appreciation of S$NEER
December is likely. Our year-end NZD/USD forecast is 0.60.
policy to neutral in the next monetary policy meeting in October. A wider trading band cannot be ruled out, given
Deteriorating business confidence - RBNZ dovish
higher volatility in currency markets. Our year end USD/SGD target is 1.46.
Diffusion index %
80 60 40 20 0
-20 -40 -60 Jan-08
Jul-09
Jan-11
Business confidence
Jul-12
Jan-14
Jul-15
Business activity outlook
Source: NBNZ
Remain bearish AUD – RBA to cut OCR in November We maintain our bearish view on the AUD and still expect another rate cut later this year, most likely in November. Business investment and consumer spending remain weak. This will continue to weigh on economic growth. In addition, inflation in the third quarter (Q3 CPI release on 28 October) is likely to ease lower due to soft job market and moderating house price inflation. As financial markets have not fully priced in a rate cut this year, a weaker AUD/USD to 0.68 is expected by the end of this year.
Soft labor market to weigh on inflation %
reverse scale %
4.5
4.5
4.0
5.0
3.5 5.5
3.0 6.0
2.5 2.0 Feb-11
6.5 Feb-12 Feb-13 Feb-14 Feb-15 Non tradable inflation YoY% (lhs) Unemployment rate % (rhs)
Source: ABS
Stay short SGD – MAS to ease S$NEER policy in October Core inflation in Singapore has remained below the Monetary of Authority of Singapore (MAS) forecast of 0.5-1.5% for five
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Parity in EUR/USD still on - 29 September 2015
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