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FX Convictions
Group Economics Macro & Financial Markets
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08 December 2015
Still upside US dollar Georgette Boele Co-ordinator FX & Precious Metals Strategy
On 12 November 2015 we put euro short versus US dollar back on our high conviction list…
Tel: +31 20 629 7789
…and on 26 November we also added sterling short versus US dollar
georgette.boele@nl.abnamro.com
Meanwhile we keep our US dollar longs versus Japanese yen, and the
Roy Teo
Australian and New Zealand dollars in place
Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
Recent developments Up to the ECB meeting the euro was the weakest performing major currency losing around 4% versus the US dollar. The euro recovered strongly after the ECB decision and the press conference/Q&A session. EUR/USD rallied to levels above 1.09 during the press conference. Financial markets had anticipated on average a 15bp rate cut in the deposit rate and a 10bn increase in monthly purchases. Mr. Draghi did not meet these expectations as the deposit rate was cut by 10% to -0.30% and there was no increase in monthly purchases. This ECB decision has also resulted in a lower probability of further monetary policy easing in Sweden and Switzerland. As a result, the Swiss franc and the Swedish krona also rallied versus the US dollar.
Australian dollar rebounds sharply…. The Australian dollar (AUD) was the strongest performing major currency last month as economic data surprised on the upside. Employment gains were stronger than expected. In addition, net exports contributed to a strong economic recovery in the third quarter. Furthermore, the Reserve Bank of Australia (RBA) seems cautious to ease monetary policy anytime soon. …and the US dollar supported by rate hike expectations The US dollar also performed strongly in currency and commodity markets, but gave up most of its gain on an index level after the ECB meeting (euro has a heavy weight in the index). Fed rate hike expectations a weaker commodity prices weighed on emerging market currencies.
Insights.abnamro.nl/en
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FX F Convictio ons – Bullis sh on US do ollar - 08 Dec cember 2015 5
Perfformance of m major FX 30 Oct O – 4 Dec
Perform mance of our EM E FX coveraage 30 Oct – 4 Dec
In % with USD as basis
SD as basis In % with US
2
3 2
0 1
-2
0 -1
-4 -2 -3
Source: Bloomberg
RUB
ZAR
INR
PLN
MXN
KRW
CNY
IDR
CAD
CLP
JPY
THB
GBP
CZK
NZD
HUF
CH HF
TWD
EUR
TRY
NOK
BRL
SEK
SGD
-6 AUD
Source: Bloomberg
Our con nvictions view ws Since ou ur latest report on 29 Octoberr, we have added euro short ((12 November 2015) and a sterling short s (26 Nove ember 2015) ve ersus US dollarr. Meanwhile w we have kept in n place our long US dollar views ve ersus the Japa anese yen the Australian A and New Zealand dollar.
Our op pen and close ed high conviiction 2015 viiews High conv viction views High co onviction views Open on base currency y Positio USD/JP PY Long siince 20 Novemberr 2013 AUD/US SD Short since s 3 July 2014 NZD/US SD Short since s 30 March 201 15 EUR/US SD Short since s 12 Nov 2015 15.15 GBP/US SD Short since s 26 Nov 2015 15.11 Closed SD AUD/US NZD/US SD USD/CA AD USD/CN NY KRW/JP PY EUR/GB BP EUR/CH HF EUR/SE EK EUR/PL LN USD/MX XN USD/CH HF CNH/JP PY EUR/MX XN GBP/US SD EUR/US SD USD/SG GD
Closed d short on 5 Februa ary 2014, re-opene ed on 3 July 2014 Closed d short on 6 Januarry 2014 Closed d long on 5 February 2014 Closed d short on 6 Februa ary 2014 on openin ng Closed d long on 5 February 2014 Closed d short on 16 June 2014 Closed d long on 1 July 201 14 Closed d long on 3 July 201 14 Closed d short on 2 Septem mber 2014 Closed d short on 30 Septe ember 2014 Closed d long on 31 Octob ber 2014 Closed d long on 10 Novem mber 2014 Closed d short on 12 Dece ember 2014 Closed d short on 19 May 2015 2 at 14.30 Closed d on 15 Oct 2015 at a 1.1440 Closed d on 15 Oct 2015 at a 1.1780
Source: ABN AMRO Group p Economics
We adde ed euro shortt US dollar lon ng to our list again a on 12 No ovember… We put EUR/USD E shorrt back on our conviction list on o 12 Novembber. The downw ward pressure on EUR//USD will likelyy increase when financial marrkets fully pricee in a Decembe er rate hike by the Fed (now 76% pricced in). The risk ks are also ske ewed towards ffurther ECB ea asing. This divergen nce of monetarry policy across s the Atlantic should push EU UR/USD lower in i the coming
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FX Convictio ons – Bullis sh on US do ollar - 08 Dec cember 2015 5
months. We have more e Fed rate hike es next year tha an financial maarkets currently y anticipate. We expe ect financial ma arkets to catch up with our vie ew in the coursse of next yearr. We expect parity in EUR/USD to b be reached in March M 2016 and 0.95 in Junee 2016. …and also a sterling short versus US dollar on 26 2 November Sterling will weaken sig gnificantly in 20 016 in our view w. Fiscal consoolidation, past sterling s strength and the fear o of a Brexit will weigh w on UK grrowth and resuult in a later sta art of the BoE lift-off tha an currently is anticipated in financial marke ets. Therefore, we added sterling short versus US U dollar to ourr high convictio on list on 26 No ovember. We eexpect that the UK governm ment will hold a referendum on Brexit in the third quarter off 2016. It is like ely that GBP will build d a risk premium m in the month hs leading up to o the referenduum. We expectt our first rate hike in November N 2016 6. Financial ma arkets still expe ect a one rate hhike of 25bp an nd a 50% probability of another rrate hike (in 2016). Our main scenario is thaat Brexit will be e avoided. As a result, we expect ste rling to recovery strongly follo owing this referrendum outcom me also because e the focus will turn to the start of the BoE ra ate hike cycle. Compared to market m expectattions, we see le ess rate hikes for 2016 but more m tightening in 2017. There efore, we expect a rally of sterlin g in 2017.
Net bon nds and stock ks flow JPY bn
1500 00 500 00 -500 00 -1500 00 -2500 00 2013 3 Net bonds outfllow (JPYb)
2014
2 2015 YTD
N stocks outflow Net w (JPYb)
Source: Bloomberg
e and net inves stment flows to t weigh on th he yen Monetarry divergence
We maintain our view w that the Bank k of Japan (Bo oJ) is likely to further increase their qualitative and quantiitative easing program in 20 016 as they seeek to achieve e their 2% inflation target by the second half of o fiscal year 2016. Recent eeconomic data a have weak. The firstt estimate of G GDP growth in n the third quarter was -0.8% %, but this has s been revised up to 1.0%. H However, the components c su uggest that GD DP growth could remain subdued d in the comin ng quarters. In addition, infla ation ex-fresh food and energy declined from 0.9 9% to 0.7% in October. (Forr more details please refer tto our recent publication p Global Outlook O – Japa an – So far, a poor score ca ard for Abenom mics published in 25 Novemb ber 2015).
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FX F Convictio ons – Bullis sh on US do ollar - 08 Dec cember 2015 5
Wider in nterest rate diffferentials betw ween the US and a Japan aree likely to exerrt downward pressure e on the Japa nese yen vers sus the US dollar. Furtherm more, net outwa ard investment flows from m Japan will ca ap any sustain ned strength inn the yen. The e Government Pension n Investment F Fund (GPIF) has h recently stated that theyy do not intend d to hedge their US S dollar investm ments exposu ure due to high her hedging coosts and firme er USD trend outlook. Indeed, this iis consistent with w other life insurers invesstment plans announced a a few mon nths ago. We expect the yen to decline to o 135 against tthe dollar by the t end of 2016. Strong NZD and wea ak dairy price es outlook to trigger RBNZ Z rate cut In our vie ew the current resilience in th he New Zealan nd dollar (NZD)) is not sustaina able. House price infllation remains elevated, prov viding less flexibility for the Reeserve Bank off New Zealand (RBNZ) to lower mone tary policy furth her. However, new macro pruudential tools which w came into effec ct on 1 Novem mber are likely to cool house price p inflation. B Both the manuffacturing and service sectors’ s expanssion trend remains intact. Consumer and buusiness confide ence have also reco overed. ook will continue to weigh on ddomestic farm incomes and However, the weak da iry prices outlo may lead d to deterioratio on in both cons sumer and bus siness sentime nt. Weak food prices and the e strong NZD N are also likkely to exert further downside e pressure on innflationary pres ssures. The labour market m outlook has also becom me softer in the e third quarter. Last but not le east, data from the RBN NZ showed thatt the central ba ank were net se ellers of NZD inn October as it seeks to weaken the currency g given that the NZD N is much stronger than itss forecast. We expect the NZD to o decline becau use of a cut in Official O Cash R Rate by 25bp to o 2.50% on 10 Decemb ber. We also exxpect the RBNZ Z to step up its interventions tto weaken the NZD. This will result in an unwinding of speculative long positions in the NZD. Ouur 2015 and 20 016 year end NZD/US 4 and 0.58, res SD target is 0.64 spectively.
Recove ery in AUD no ot sustainable e – stay beariish We main ntain our bearissh view on the AUD. We remain sceptical thhat the strong employment e gains in October will be e sustainable. Weak business s investment iss also expected d to weigh on e coming quartters. In addition n, the recent reecovery in the AUD A is likely economic growth in the to weigh h on net exportss contribution to t economic grrowth. It is wortth noting that economic e growth in n the first three e quarters of 20 015 is weaker than t in 2014. W We also expectt the RBA to increase e its dovish tone e on the excha ange rate given n the wider diveergence between the AUD and key commodity exxport prices. Furtherm more, we expecct non-tradable e inflation to tre end lower as hoousing auction clearing rates continue e to decline and d wage growth remains subdued. Looking aahead we main ntain our view RBA will lower the Official Ca that it is likely that the R ash Rate by 255bp to 1.75% in n early 2016 ass ary pressures ccontinue to dec cline and the sttrong AUD will be a headwind d to the inflationa rebalanc cing in the econ nomy. As finan ncial markets have not fully prriced in the mo onetary
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FX F Convictio ons – Bullis sh on US do ollar - 08 Dec cember 2015 5
divergen nce between Au ustralia and the e US, we maintain our 2015 aand 2016 year end AUD/US SD target of 0.7 70 and 0.62 res spectively.
ABN AMRO O major currency forecasts s Changes in red//bold
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
08-Dec c 1.0885 5 122.88 8 133.76 6 1.4976 6 0.7268 8 0.9931 1 1.0811 1 0.7203 3 0.6628 8 1.3592 2 9.2332 2 9.5578 8 7.4607 7
Q4 2015 1.05 125 131 1.50 0.70 1.05 1.10 0.70 0.64 1.33 9.50 9.50 7.46
Q 2016 Q1 1.00 127 127 1.41 0.71 1.10 1.10 0.68 0.62 1.35 9.50 9.25 7.46
Q2 201 16 0.9 95 13 30 12 24 1.2 28 0.7 74 1.1 18 1.1 12 0.6 66 0.6 60 1.3 37 9.5 50 9.2 25 7.4 46
Q3 2016 0.95 133 126 1.25 0.76 1.20 1.14 0.64 0.58 1.39 9.50 9.00 7.46
Q4 2016 0.95 135 128 1.27 0.75 1.21 1.15 0.62 0.58 1.41 9.50 9.00 7.46
Q1 2017 2 1 1.00 130 130 1 1.35 0 0.74 1 1.15 1 1.15 0 0.64 0 0.60 1 1.40 9 9.25 8 8.75 7 7.46
Q2 2017 1.00 130 130 1.37 0.73 1.15 1.15 0.68 0.62 1.35 9.00 8.50 7.46
Q3 2017 1.05 125 131 1.46 0.72 1.14 1.20 0.70 0.64 1.30 8.75 8.25 7.46
Q4 4 2017 1.10 120 132 1.57 0.70 1.09 1.20 0.72 0.66 1.25 8.50 8.00 7.46
Q3 2016 6.55 6.57 67 1,230 1.48 37.50 33.80 14,900 55 2.95 13.40 4.15 27.00 300 3.60 16.00 670
Q4 2016 6.55 6.57 67 1,240 1.50 38.00 34.00 15,000 55 2.90 13.20 4.10 26.50 300 3.60 15.75 660
Q1 2017 2 6 6.55 6 6.57 67 1,,240 1 1.50 38 8.00 34 4.00 1,,500 55 2 2.85 13 3.00 4 4.10 26 6.25 295 3 3.55 15 5.50 650
Q2 2017 6.55 6.55 66 1,220 1.48 37.50 33.70 14,700 55 2.80 12.80 4.05 26.00 290 3.50 15.25 640
Q3 2017 6.50 6.50 66 1,200 1.46 37.20 33.50 14,500 50 2.75 12.70 4.05 25.75 285 3.45 15.00 630
Q4 4 2017 6.50 6.50 65 1,200 1.45 37.00 33.20 1 14,200 50 2.75 12.50 4.00 25.50 280 3.40 14.50 620
Bron: ABN AMRO Economisch Bu ureau
ABN AMRO O emerging market m currenc cy forecasts Changes in red//bold
USD/CNY (onsshore) USD/CNH (offsshore) 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
08-Dec c 6.42 2 6.49 9 66.8 8 1,179 9 1.41 1 35.96 6 32.81 1 13,893 3 70 0 2.92 2 14.67 7 4.33 3 27.50 0 314 4 3.81 1 17.05 5 711 1
Q4 2015 6.40 6.40 66 1,190 1.43 36.80 33.00 14,300 60 3.00 14.00 4.20 27.00 310 3.80 16.75 700
Bron: ABN AMRO Economisch Bu ureau
Q 2016 Q1 6.45 6.47 66 1,200 1.45 37.00 33.50 14,500 60 3.00 13.80 4.20 27.00 305 3.75 16.50 690
Q2 201 16 6.5 50 6.5 53 6 67 1,22 20 1.4 47 37.2 20 33.7 70 14,80 00 6 60 2.9 95 13.6 60 4.1 15 27.0 00 30 00 3.7 70 16.2 25 68 80
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FX Convic ctions – Bullish on US dollar d - 08 De ecember 2015
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