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FX Convictions
Group Economics Macro & Financial Markets
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04 March 2016
Time for Draghi to deliver Georgette Boele
Yen as well as EM FX strengthen versus USD (a strange combination)
Co-ordinator FX & Precious Metals
Since our latest report we have added NOK long versus euro
Strategy
We have kept in place our long US dollar views versus the euro, the
Tel: +31 20 629 7789
sterling, the Japanese yen, the Australian and New Zealand dollars
georgette.boele@nl.abnamro.com
We have also implemented stop loss levels to our high conviction
Roy Teo
views
Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
Unusual constellation… Since the end of last month currency markets have showed an interesting development. First, the yen has been the strongest currency across the board. At the same time, emerging market currencies have outperformed the US dollar. This combination is very unusual. Often the yen strengthens because of safe have demand and/or yen repatriation while investors move out of emerging market currencies.
Performance of major FX 29 January – 3 March
Performance of our EM FX 29 January – 3 March
In % with USD as basis
In % with USD as basis
5
8
4
6
3 4
2 2
1
0
0
-2
Source: Bloomberg
KRW
INR
CNY
CZK
THB
MXN
TRY
ZAR
GBP
TWD
SEK
HUF
NOK
RUB
EUR
PLN
CHF
SGD
NZD
CLP
AUD
IDR
CAD
BRL
-1 JPY
Source: Bloomberg
Emerging market commodity currencies have strongly outperformed the US dollar since 11 February at a time that commodity prices, US equities and US Fed rate hike expectations have started to move higher.
Insights.abnamro.nl/en
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FX Convictions – Time for Draghi to deliver - 04 March 2016
Sterling has been one of the weakest currencies. It had a good start into February but it erased more than earlier gains once Prime Minister Cameron announced 23 June as the referendum date and on news that London Mayor and Conservative political heavy-weight Boris Johnson will campaign for UK exit from the EU. Our convictions views Since our latest report we have added NOK long versus euro. We have kept in place our long US dollar views versus the euro, sterling, the Japanese yen, and the Australian and New Zealand dollars. We have also implemented stop loss levels to our high conviction views.
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 EURNOK Short since 19 Feb 2016 17.00 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
Stop loss 112 0.74 0.69 1.15 1.4675 10.00
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
Expectations of ECB monetary stimulus weigh on euro Weak inflation data and dovish ECB commentary have increased expectations of aggressive monetary policy easing by the ECB in March. Our base case is that the ECB will cut its deposit rate by 20bp in March and by another 20bp in June. We expect measures to cushion the blow for banks. A tiered deposit rate system and even longer duration refi loans look likely. Finally, we expect a EUR 10bn increase in monthly asset purchases and an extension of the programme to June 2017. This will be facilitated by removing the deposit rate floor for asset purchases. As our base scenario is not fully priced in by financial markets, we expect more downward pressure on the euro.
Keep short sterling versus US dollar Since Prime Minister Cameron agreed a deal with EU and announced 23 June as the referendum date, sterling has fallen sharply. Although, financial markets already widely anticipated that the referendum would be held in June, by officially setting the date Brexit risks
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FX Convictions – Time for Draghi to deliver - 04 March 2016
have come more into focus. In addition, news that London Mayor and Conservative political heavy weight Boris Johnson will campaign for UK exit from the EU was seen as increasing chances of a Brexit. As a result sterling fell sharply; GBP/USD dropped to even below 1.40 and EUR/GBP surpassed 0.79. Recently, sentiment has calmed somewhat resulting in a slight recovery of sterling. Although a Brexit is not our base scenario, we have been negative on sterling versus the US dollar since November 2015 because of a delay in BoE rate hikes, a weaker economy and fears about Brexit ahead of the referendum. As such our short sterling versus US dollar high conviction view has been our top-performing trade this year. We expect GBP/USD to move towards 1.35 ahead of the referendum. However, in the case of no Brexit, sterling could recover sharply as the risk premium is being priced out. Therefore, we have adjusted our end-2016 GBP forecasts. We have recently published a note on the impact of various Brexit scenarios (see Macro Focus – Brexit Scenarios).
We added long NOK versus euro on 19 February 2016 We have added a new high conviction call: long Norwegian krone versus the euro (short EUR/NOK) on 19 February 2016. For a start, our energy analyst expects a recovery in oil prices during the course of this year. This will give a boost to the sentiment for currencies of oil exporting countries such as the Russian ruble, Mexican peso and the Norwegian krone. Norway has relatively strong fundamentals compared to other oil exporting countries, as it has a fiscal surplus and current account surplus. In addition, although we expect the Norges bank to cut policy rates by 25bp in March, most of this is already reflected in the price. It is likely the last cut in the cycle and this would be an insurance rate cut. If oil prices recover as we expect, the Norges bank will likely become less dovish as inflation is close to target. The Norwegian economy is more geared towards the eurozone than the US. We have already in place positions with exposure to the US economy and to the US dollar. A new position in EUR/NOK will therefore diversify our calls as well as an indirect position for an oil price recovery. Last but not least, the Norwegian krone is cheap in terms of valuation. The Purchasing Power Parity level is around 8.15 in EUR/NOK. In short, we expect the ECB to be more dovish than the Norges bank this year and oil prices to recover. In addition, the Norwegian krone is relatively cheap. Therefore, we enter long Norwegian krone versus euro as high conviction view. We place our stop loss at 10.
Yen’s resilience to be temporary Since the Bank of Japan (BoJ) introduced negative interest rates on 29 January 2016, the Japanese yen (JPY) has defied gravity. A deterioration in investor sentiment pushed the yen to 111 against the US dollar. Afterwards the yen has eased to around 114 versus the US dollar. However, taking into account the overall improvement in sentiment, the yen has remained relatively resilient. One would have expected a much weaker yen versus the US dollar in the current environment. The reasons for this behaviour are a bit unclear. Therefore, we have raised our stop loss in USD/JPY from 110 to 112. Nevertheless, we expect the yen to weaken going forward because of an improvement in investor sentiment, more easing by the BoJ and Japanese investors turn abroad for higher return. Indeed, the Government Pension Investment Fund (GPIF) reported that in the quarter
FX Convictions – Time for Draghi to deliver - 04 March 2016
4
ending December 2015, they have continued to reduce their holdings in domestic bonds and increased allocations to domestic equities and foreign assets. With domestic yields under pressure since the Bank of Japan (BoJ) introduced negative interest rates on 29 January, we expect the GPIF and other insurers to increase their purchases or overseas assets in search for higher yielding assets. Data from the Ministry of Finance also showed that domestic investors have increased purchase of overseas assets in the month of February after the BoJ introduced negative interest rates on 29 January. This will be negative for the yen as their foreign currency exposures are not fully hedged.
GPIF investment allocation shift
Outward investments from Japan have increased
%
JPY bn
50
3500
40
3000 2500
30
2000 1500
20
1000 10
500 0
0 FB
FY 14 Q3
FS
FY 15 Q3
DS
Lower target
Jan-16
DB
Upper target
Source: GPIF, *FB: Foreign bonds; FS: Foreign stocks; DB: Domestic bonds; DS: Domestic stocks
Jap purchase foreign bonds
Feb-16 Jap purchase foreign stocks
Source: MoF, Japan
Both the BoJ Governor and Deputy Governor have recently stated that they are unlikely to lower interest rates further in the next monetary policy meeting this month. This is priced in by financial markets. However, we do not rule out that other monetary stimulus including an enhancement of their qualitative and quantitative easing program will be announced. They are also likely to reinforce that even lower interest rates remains on the cards. In our view, lower deposit rates, further increase in the size of qualitative and quantitative easing program and ETF purchases will result in an indirect weakness of the yen.
RBNZ dovish bias to weigh on NZD We maintain our bearish view on the New Zealand dollar (NZD). The business confidence and outlook indicators declined in February that are weaker than when the RBNZ last cut the OCR by 25bp to 2.5% in December last year. In addition, consumer confidence and inflation expectations have also eased lower. Furthermore, key commodity export prices remain weak and the NZD is stronger than the RBNZ’s forecast by about 4%. However, we expect the RBNZ to keep the OCR unchanged this month as the unemployment rate in the last quarter of 2015 was surprisingly better than the central bank’s estimate. We also suspect that the RBNZ would want to wait for house price gains to slow further before easing again. As financial markets are pricing in about 20% probability that the RBNZ will ease next week, a relief recovery in the NZD is possible. However, we expect the RBNZ to strike a dovish tone next week and signal their discomfort on the exchange rate. Upside in the NZD is likely to be
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FX Convictions – Time for Draghi to deliver - 04 March 2016
limited towards 0.68. We have our stop loss in place at 0.69. A combination of further rate cuts and intervention by the RBNZ should push the NZD towards our year-end target of 0.61.
Resilient AUD challenging our short conviction view The strength in the Australian dollar (AUD) in the past month is challenging our short conviction view in the AUD. Firmer iron ore prices and stronger than expected economic growth in the last quarter of 2015 have resulted in market paring bets that the Reserve Bank of Australia (RBA) will ease monetary policy anytime soon. The RBA has also maintained their neutral outlook stating that the current low inflation outlook would provide scope for easier policy if deemed necessary to support demand. On the exchange rate, the RBA stated that the AUD has been adjusting to the evolving economic outlook. Our bearish view in the AUD remains intact for the following reasons. First, the stronger than expected 2015 Q4 GDP print was partly due to favourable base year effects and strong contribution from domestic demand. We remain sceptical that the latter will persist given that the household savings rate has declined to the lowest level since late 2008. We expect the labour market to deteriorate further and this will weigh on consumer spending especially when wage growth is at the weakest level since the Australian Bureau of Statistics (ABS) compiled data in 1998. Second, businesses’ investment intentions in the new fiscal year about 20% lower based on initial estimates compiled by the ABS. Third, we do not expect the current recovery in iron ore prices to persist. Last but not least, there is room for liquidation of long speculative futures positions in the AUD when the RBA turns dovish in the coming months. We maintain our view that the RBA will cut the Official Cash Rate by 25bp in May. This is not fully priced in by financial markets. We expect the AUD/USD to decline to 0.65 by the end of this year.
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FX Convictions – Time for Draghi to deliver - 04 March 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
03-Mar 1.0910 113.82 124.13 1.4096 0.7727 0.9916 1.0834 0.7336 0.6703 1.3439 9.3672 9.4398 7.4592
Q1 2016 1.10 116 128 1.40 0.79 1.00 1.10 0.70 0.65 1.40 9.50 9.60 7.46
Q2 2016 1.05 117 123 1.35 0.78 1.05 1.10 0.68 0.63 1.40 9.50 9.20 7.46
Q3 2016 1.05 118 124 1.42 0.74 1.05 1.10 0.66 0.62 1.38 9.50 9.00 7.46
Q4 2016 1.05 120 126 1.48 0.71 1.05 1.10 0.65 0.61 1.36 9.50 9.00 7.46
Q1 2017 1.05 122 128 1.50 0.70 1.06 1.11 0.63 0.60 1.38 9.25 8.75 7.46
Q2 2017 1.05 124 130 1.50 0.70 1.07 1.12 0.62 0.58 1.40 9.00 8.50 7.46
Q3 2017 1.05 122 128 1.50 0.70 1.08 1.13 0.64 0.60 1.42 8.75 8.25 7.46
Q4 2017 1.05 120 126 1.50 0.70 1.09 1.14 0.65 0.62 1.44 8.50 8.00 7.46
Q3 2016 6.60 6.63 69 1,250 1.44 36.50 34.20 14,000 70 2.80 15.60 4.30 27.00 310 4.00 18.25 700
Q4 2016 6.70 6.73 70 1,260 1.46 37.00 34.50 14,300 68 2.75 15.40 4.25 27.00 305 4.00 18.00 700
Q1 2017 6.75 6.78 70 1,260 1.48 37.50 34.70 14,500 66 2.75 15.40 4.20 26.50 300 3.95 17.75 685
Q2 2017 6.80 6.83 70 1,270 1.50 38.00 35.00 14,700 64 2.75 15.20 4.15 26.25 300 3.90 17.50 680
Q3 2017 6.80 6.80 70 1,270 1.50 38.00 35.00 14,700 62 2.75 15.20 4.15 26.00 295 3.85 17.25 675
Q4 2017 6.80 6.80 70 1,270 1.50 38.00 35.00 14,700 60 2.75 15.00 4.10 25.50 290 3.80 17.00 670
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
03-Mar 6.54 6.54 67.34 1,215 1.39 35.45 33.06 13,232 74 2.93 15.70 4.34 27.06 309 3.86 17.93 685
Source: ABN AMRO Group Economics
Q1 2016 6.50 6.50 68 1,200 1.40 35.50 33.40 13,400 74 2.90 15.80 4.35 27.00 310 4.00 18.75 700
Q2 2016 6.55 6.58 69 1,230 1.42 36.00 33.80 13,700 72 2.85 15.80 4.30 27.00 310 4.00 18.50 700
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FX Convictions – Time for Draghi to deliver - 04 March 2016
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