FX Watch
Group Economics Macro & Financial Markets Research
04 July 2016
Less positive on European FX Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
The Brexit result will impact European currencies … …via the trade channel and financial markets channel Weaker exports and lower growth will weigh on European FX Meanwhile central banks will remain accommodative… …which has a downward pressure on the currency… …but also supports investor sentiment In general we have lowered our European FX forecasts
Introduction Since the result of the Brexit referendum, sterling has dropped by more than 10% versus the US dollar, to levels below 1.33. EUR/GBP has also rallied sharply, to around 0.84. We expect sterling – and to a lesser extent the euro – to be weaker than in our pre-Brexit scenario. In particular, sterling looks likely to fall further – to a low of 1.20 against the dollar – given the risks related to the UK’s huge current account deficit and the capital flows necessary to fund it as well as in anticipation of weaker UK economic growth and BoE monetary policy easing. Our base case sees lower economic growth, especially in the UK, where the uncertainty and hence corporate retrenchment will be more severe than in the rest of Europe. These effects will also impact the eurozone economy. In this FX Watch we examine these effects on European currencies: Norwegian krone, Swedish krona, Swiss franc, Polish zloty, Hungarian forint, Czech Koruna, Turkish lira.
Exports to UK and eurozone % of total exports
Hungary Czech Republic Turkey Poland Switzerland Sweden Norway 0
25 eurozone
50 UK
Source: Thomson Reuters Datastream, IMF DOTS
Insights.abnamro.nl/en
75
100
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FX Watch - Less posittive on Euro opean FX - 0 04 July 2016 6
Weakness in expo orts to weigh on European n currencies… … Brexit can impact Eu uropean currencies via two diffferent channells. First, we inv vestigate the effects s via the trade cchannel. Second, we focus on the impact off Brexit via fina ancial markets. Overall, the e exposure to th he UK via the trade t channel iis relatively sm mall except for Norway. The UK a accounts for 20 0% of Norway’s total exports.. However, the e majority of these exports e are co mmodities suc ch as energy. In n general, dem mand for energy y is quite inelasttic. What is mo ore, our base ca ase is that a Brrexit will also hhave a modest negative impactt on the eurozo one economy. This T will have a more substanntial impact on European countries as they are e highly depend dent on exports s to the eurozoone. So the slow wdown in eurozo one growth will have a direct impact on expo orts from thesee countries to th he eurozo one. This will a lso weigh on economic e growtth. We have addjusted econom mic growth for most of these cou untries downwa ards. Therefore e, the outlook oof European cu urrencies will deterio orate.
…and d central bank ks to remain accommodattive Centra al banks of mosst of these European countrie es will likely conntinue to ease monetary policy or at least be a accommodative e. The Swiss National N Bank aand the Riksba ank will keep monetary policy loosse in order to da ampen the ups side in the curreency and to support the economy. We expectt that the centrral bank of the Czech Republiic will keep its floor in EUR/C CZK in place fo or longer. For Norway N and the e krone the situuation is slightly y different. To beg gin with, the kro one moves clo osely in tandem m with the oil prrice as higher oil o prices improv ve the outlook ffor the econom my. Secondly, we w don’t expect ct further easing g by the central bank despite weaker eurozo one and UK gro owth weighing on the Norweg gian economy. We do exp pect that the No orges bank will merely wait a bit longer befo ore hiking interes st rates next ye ear.
Investtor sentimentt should also o give some support s The da ays following th he Brexit refere endum result, investor sentim ment on financia al markets deterio orated sharply. Since then, fin nancial markets s have becomee more constru uctive. The slide in n sterling came e to a standstill. In addition, financial marketts have anticipa ated more accom mmodative centtral banks, inclu uding the pricin ng out of Fed raate hikes for 20 016 and most of o 2017. This ha as supported investor sentiment. Although U UK political and economic uncertainty will rema in, we don’t ex xpect a sharp deterioration in sentiment in global financiial markets. Th his will support currencies of countries c that aare more cyclic cal in nature (levera aged to global e veraged via co ommodity expossure). Except for f Swiss economy or lev franc (local safe have en currency) and the Turkish lira, the currenncies we coverr in this FX Watch are more cycl ical in nature. To T reflect all th he above, we hhave adjusted our o Europe ean FX forecassts.
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FX Watch - Less posittive on Euro opean FX - 0 04 July 2016 6
Our European E FX forecast Change es in red/bold SD EUR/US GBP/US SD EUR/GB BP USD/CH HF EUR/CH HF USD/SE EK EUR/SE EK EUR/NO OK USD/NO OK EUR/DK KK USD/TR RY EUR/PLN N EUR/CZZK EUR/HU UF
04-Jul 1.11088 1.32544 0.83800 0.97544 1.08355 8.46488 9.40233 9.26855 8.34444 7.44100 2.900 4.433 27.099 316.755
Q3 2016 1.10 1.27 0.87 0.98 1.08 8.64 9.50 9.40 8.55 7.46 2.95 4.40 27.10 320.00
Q4 20166 1.100 1.200 0.922 0.999 1.099 8.644 9.500 9.255 8.41 7.466 3.000 4.455 27.155 320.000
Q1 2017 1.10 1.20 0.92 1.00 1.10 8.64 9.50 9.00 8.18 7.46 3.05 4.50 27.20 320.00
Q2 2017 1.10 1.225 0.888 1.000 1.10 8.664 9.550 9.000 8.18 7.446 3.10 4.550 27.225 320.000
Q3 2017 1.10 1.30 0.85 1.01 1.11 8.41 9.25 8.75 7.95 7.46 3.00 4.40 27.00 310.00
Q4 20117 1.110 1.335 0.881 1.002 1.112 8.118 9.000 8.550 7.773 7.446 2.990 4.330 26.550 300.000
Source: ABN AMRO Grouup Economics
nd out more abo out Group Eco onomics at: http ps://insights.a abnamro.nl/en n/ Fin
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