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FX Convictions
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29 January 2016
Central banks tackle sentiment Georgette Boele
• Risk off favours yen and US dollar…
Co-ordinator FX & Precious Metals
• …but weighs on commodity and growth-sensitive FX
Strategy
• Central banks reflation efforts starting to gain some traction
Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
Roy Teo
• We keep our US dollar longs versus the euro, the sterling, the Japanese yen, the Australian and New Zealand dollars in place
Senior FX Strategist Tel: +65 6597 8616
Yen in favour followed by the dollar…
roy.teo@sg.abnamro.com
Since the end of November, sentiment in financial markets has clearly deteriorated. The continued slide in the oil price and uncertainty about global growth have been the main reasons behind this. In this environment the yen has outperformed in currency markets because of its safe haven status. The US dollar has been the runner-up mainly because its current cyclical behaviour has capped the upside versus major currencies such has the yen and the euro.
…meanwhile investor sentiment towards sterling has deteriorated… The downward adjustment in expectations about the UK economy, expectations of a later BoE rate hike and uncertainty surrounding the Brexit referendum has seriously weighed on sterling. As a result, it is one of the few non-commodity currencies that has underperformed.
…while currencies of commodity exporters came under pressure Currencies of commodity exporting countries have been aggressively sold off for several reasons. For a start, the slide in oil prices pressured currencies of oil exporting countries such as NOK, CAD, RUB and MXN. Moreover, this oil price slide weighed on risk sentiment because of its impact on economies of oil exporters and the impact of a sharp reduction in petrodollars towards other financial assets. Moreover, the consistent decline in oil prices has resulted in concerns about the state of the global economy. In turn, this has led to a sharp deterioration in sentiment towards commodities, currencies of other commodity exporting countries and growth sensitive currencies. As a result, AUD, NZD, ZAR and BRL moved sharply lower versus the US dollar and the yen. However, the recovery in investor sentiment and oil prices helped by central bank reflation efforts has resulted in some recovery in prices.
Insights.abnamro.nl/en
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FX Convictions – Central banks tackle sentiment - 29 January 2016
CEE FX at the margin more vulnerable In general, currencies of central and Eastern Europe are shielded from these negative developments as long as the eurozone economy is holding up relatively well. However, this time around fears that Poland is moving towards a Hungarian-style political regime and uncertainty surrounding Turkish monetary polish have weighed on the zloty and the lira.
Performance of major FX 4 Dec – 29 Jan
Performance of our EM FX coverage 4 Dec – 29 Jan
In % with USD as basis
In % with USD as basis
2
5
0
0
-2
-5
-4
-10
-6
Source: Bloomberg
ZAR
RUB
BRL
MXN
KRW
PLN
CNY
TRY
GBP
SGD
CAD
TWD
AUD
INR
CHF
CLP
NOK
CZK
SEK
HUF
NZD
THB
EUR
IDR
-15 JPY
Source: Bloomberg
Our convictions views Since our latest report on 4 December 2015, we have kept in place our long US dollar views versus the euro, the sterling, the Japanese yen the Australian and New Zealand dollar.
Our open and closed high conviction 2016 views High conviction views High conviction views Open Position base currency USD/JPY Long since 20 November 2013 AUD/USD Short since 3 July 2014 NZD/USD Short since 30 March 2015 EUR/USD Short since 12 Nov 2015 15.15 GBP/USD Short since 26 Nov 2015 15.11 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 EUR/USD USD/SGD
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 Closed on 15 Oct 2015 at 1.1440 Closed on 15 Oct 2015 at 1.1780
Source: ABN AMRO Group Economics
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FX Convictions – Central banks tackle sentiment - 29 January 2016
Patience with euro short Ahead of the FOMC meeting market expectations about possible rate hikes had been scaled down. Therefore investor sentiment was more constructive and the US dollar was under pressure. The statement was more dovish-than-expected and as a result the US dollar remained slightly under pressure. Financial markets now expect only one rate Fed hike for this year. We still expect three rate hikes of 25bp with the next rate hike scheduled for June. Though the risk has increased for later or fewer rate hikes. On the other side of the Atlantic, we expect the ECB to reduce the official deposit rate to -0.5% with a 10bp rate reduction in March and a 10bp rate cut in June. In addition, we expect an increase of the Asset Buying Program by 10bn per month at the March meeting. If investor sentiment improves again on the back of improvement in economic data and a stabilisation in oil and other commodity prices, monetary policy divergence should make a come-back as main driver in currency markets. Therefore, we expect EUR/USD to move to parity in the course of this year. Sterling short versus US dollar Since we have initiated the position short sterling versus dollar as of our top convictions, it has gained more than 5% mainly because of a downward adjustment in expectations about the US economy, a later start of the BoE tightening cycle and the uncertainty surrounding the Brexit referendum. Currently financial markets are only pricing in a 50% probability of a BoE rate hike this year. This is around our expectations. It is likely that sterling will weaken further as uncertainty about the Brexit referendum will unlikely fade in the coming months. In addition, UK economic data could disappoint, which will weigh on sterling as well. Our main scenario is that Brexit will be avoided. As a result, we expect sterling to recovery strongly following this referendum outcome also because the focus will turn to the start of the BoE rate hike cycle. Compared to market expectations, we see more tightening in 2017. Therefore, we expect a rally of sterling in 2017.
Further weakness in JPY as BoJ starts negative interest rate policy This morning the Japanese yen (JPY) plunged from 118.50 to 121 against the USD. The BoJ became the latest central bank to join global reflation efforts by cutting its interest rate on new excess reserves into negative territory. The BoJ’s negative rate system differs from that of the ECB. For excess reserves, the BoJ has a dual system as it will only be new reserves that will face the 10bp charge. Existing balances will continue to earn a rate of +0.1% (while required reserves will earn no interest). This has the advantage of cushioning the blow for commercial banks but has the disadvantage of making the impact on market interest rates less significant. Having said that, the BoJ has left the door wide open to cut the rate on new reserves (now the policy rate) deeper into negative territory. So this move may actually also just be to test the water. The BoJ showed its determination to inflate the economy by stating that it will cut interest rate further into negative territory if this was judged to be necessary. The size and average maturity of JGB purchases remain unchanged. Inflation is now projected to reach around 2% target in the first half of fiscal year 2017 compared to previous assessment of second half of fiscal year 2016. We expect lower domestic yields and a weaker JPY to incentivise more outward investments from domestic investors going forward. We continue to
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FX Convictions – Central banks tackle sentiment - 29 January 2016
see further yen weakness ahead. Our year-end forecast for USD/JPY is 130. A weaker JPY towards 130 against the USD is likely in our view.
RBNZ to lower OCR as soon as March – Downside risk in NZD to persist We see a material risk that the RBNZ will resume lowering the Official Cash Rate (OCR) by 25bp to 2.25% in March. This is earlier than what is priced in by financial markets. Inflation in the last quarter of 2015 was weaker than the RBNZ forecast (0.1% vs 0.4% yoy). The passthrough effect of a weaker exchange rate to tradable inflation has been less than expected. In addition, we expect non-tradable inflation to ease lower as house price inflation moderates in the coming months. Slower house price inflation will also give the RBNZ more comfort to lower monetary policy further to support the economy given their current concerns on housing market risk. Second, the decline in the NZD in the past one year has been of a smaller magnitude than that of New Zealand’s key commodity export prices. Despite the 4 cents depreciation in the NZD since the start of this year, the central bank reiterated that a weaker NZD is appropriate given the ongoing weakness in export prices. Last but not least, speculative short positions in the NZD have more room to increase in our view, which would put downward pressure on NZD. We expect the NZD to decline towards 0.58 against the USD by the end of this year.
Stay bearish in AUD – RBA to lower OCR in May Our bearish view on the AUD has not changed. In our view, the Reserve Bank of Australia (RBA) is likely to lower the Official Cash Rate (OCR) by 25bp to 1.75% in May. We expect inflation to move lower because of fading out of the specific supportive factors, slower house price inflation and soft labour market. A weaker AUD is also needed to cushion the economy given that Australia’s key commodity export prices fell by almost 20% in 2015 compared to 10% decline in the AUD against basket of currencies of Australia’s main trading partners. Weak business investment is also expected to weigh on economic growth in the coming quarters. As financial markets have not fully priced in the monetary divergence between Australia and the US, we expect the AUD to decline towards 0.62 against the USD by the end of this year.
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FX Convictions – Central banks tackle sentiment - 29 January 2016
ABN AMRO major currency forecasts 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
29-Jan 1.0914 120.79 131.83 1.4346 0.7607 1.0183 1.1113 0.7092 0.6503 1.4048 9.3103 9.4589 7.4627
Q1 2016 1.06 120 127 1.41 0.75 1.04 1.10 0.68 0.62 1.44 9.50 9.50 7.46
Q2 2016 1.04 123 128 1.37 0.76 1.08 1.12 0.66 0.60 1.46 9.50 9.25 7.46
Q3 2016 1.02 126 129 1.32 0.77 1.12 1.14 0.64 0.58 1.47 9.50 9.00 7.46
Q4 2016 1.00 130 130 1.33 0.75 1.15 1.15 0.62 0.58 1.48 9.50 9.00 7.46
Q1 2017 1.00 126 126 1.35 0.74 1.15 1.15 0.64 0.60 1.40 9.25 8.75 7.46
Q2 2017 1.02 123 125 1.40 0.73 1.13 1.15 0.68 0.62 1.38 9.00 8.50 7.46
Q3 2017 1.05 120 126 1.46 0.72 1.14 1.20 0.70 0.64 1.35 8.75 8.25 7.46
Q4 2017 1.10 120 132 1.57 0.70 1.09 1.20 0.72 0.66 1.30 8.50 8.00 7.46
Q4 2016 6.70 6.73 68.00 1,260 1.52 38.00 34.50 15,000 68 2.90 16.00 4.25 27.00 305 4.00 17.00 700
Q1 2017 6.70 6.70 67.50 1,250 1.50 38.00 34.30 15,000 66 2.85 15.80 4.20 26.50 300 3.95 16.50 680
Q2 2017 6.65 6.65 67.00 1,240 1.48 37.50 34.00 14,700 64 2.80 15.60 4.15 26.25 300 3.90 16.25 670
Q3 2017 6.65 6.65 66.50 1,220 1.46 37.20 33.70 14,500 62 2.75 15.40 4.15 26.00 295 3.85 16.00 660
Q4 2017 6.60 6.60 66.00 1,200 1.45 37.00 33.50 14,200 60 2.75 15.00 4.10 25.50 290 3.80 15.50 650
Source: ABN AMRO Group Economics
ABN AMRO emerging market currency forecasts Changes in red/bold
USD/CNY (onshore) USD/CNH (offshore) 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
29-Jan 6.58 6.61 67.8837 1,199 1.42 35.70 33.33 13,778 76 2.97 16.08 4.44 27.03 312 4.07 18.21 710
Source: ABN AMRO Group Economics
Q1 2016 6.55 6.65 67.00 1,200 1.45 36.70 33.50 14,200 74 3.00 16.50 4.35 27.00 315 4.00 17.75 720
Q2 2016 6.60 6.65 67.50 1,230 1.48 37.20 33.80 14,600 72 2.95 16.25 4.30 27.00 310 4.00 17.50 715
Q3 2016 6.65 6.70 68.00 1,250 1.50 37.50 34.20 14,800 70 2.95 16.00 4.30 27.00 310 4.00 17.25 710
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FX Convictions – Central banks tackle sentiment - 29 January 2016
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