FX Weekly
Group Economics Macro & Financial Markets Research
15 January 2016
New forecasts Georgette Boele
• Fears dominate fundamentals leading to a higher yen
Co-ordinator FX & Precious Metals
• We have moderated our bullish dollar view…
Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
• …and we have become more cautious on EM FX (ex Asia) • We downgrade our KRW, TWD, SGD, INR forecasts
Roy Teo Senior FX Strategist
Fears versus fundamentals…
Tel: +65 6597 8616
The uncertain start to the year caught many investors and analysts off guard. Financial
roy.teo@sg.abnamro.com
markets are concerned about the state of the global economy, recent developments in China and the slide in the oil price. Fears are clearly dominating fundamentals, which have improved, at this stage. The US employment report was very strong. In addition, China’s trade data improved at the end of last year, providing some tentative signs of improvement for global growth prospects. In yuan terms, exports even rose in annual terms (+2.3% yoy), the first positive number since June. This may hint at some strengthening of global demand, although the CNY depreciation versus the USD in the last months of 2015 (around 4.5% in August-December) triggered by changes in China’s exchange rate regime also seem to have played a role.
Major FX performance ytd In %, with USD as basis
4 2 0 -2 -4 -6 -8 JPY
NOK
EUR
CHF
SEK
GBP
CAD
AUD
NZD
Source: Bloomberg
Investor sentiment will only calm and turn if economic data continue to show a consistent pattern of improvement and if authorities in China calm financial markets about their intensions with regards to the path of the yuan. Until then, the yen will be the currency markets’ favourite as a safe haven currency. The performance of the US dollar will be
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FX Weekly - New forecasts - 15 January 2016
more mixed. On the one hand, the US dollar is clearly driven by the state of the US economy and expectations about Fed rate hikes (cyclical). So a deterioration in investor sentiment is weighing on the US dollar unless the other currency has a stronger cyclical and/or commodity sensitivity than the US dollar has. On the other hand, if investor sentiment were to deteriorate further and risk aversion spreads across different financial markets, then the US dollar could appreciate because it remains the most liquid currency there is. …risk seeking will now and again be interrupted by worries about growth We stick to the view that investor risk sentiment will improve as economic fundamentals come to the fore. Why is this important for currency markets? In general, a constructive investor sentiment will lead to risk seeking behaviour. Currencies that have more substantial exposure to the global growth cycle, relatively higher yields or more hawkish central banks will be in favour. We expect global growth and the US economy to improve. Moreover, the Fed will continue to tighten while other major central banks will ease. As a result, monetary policy divergence will remain a crucial theme for G10 currencies in 2016. However, the bumpy road in the Chinese economy and the trial-and-error of the Chinese authorities with regard to its FX policy could result in a deterioration in risk sentiment from time to time. Therefore, moves driven by monetary policy divergence will now and again be interrupted by worries about growth. As a result of the above, we have moderated our bullish dollar view versus the euro and yen. …leading to a moderation in bullish US dollar view… Nevertheless, we continue to expect the dollar to strengthen versus the euro and the yen but less than before. We now expect EUR/USD to reach parity (previously 0.95) and USD/JPY to reach 130 (previously 135) by year-end 2016. We expect the ECB and the Bank of Japan to step up monetary stimulus further. This is not fully anticipated in financial markets. We also expect that the Reserve Bank of Australia and the Reserve Bank of New Zealand to ease monetary policy to support the economy. Also this is not completely priced in. Further easing by the ECB will add pressure on the Riksbank and the SNB to also ease in order to avoid currency appreciation. The Riksbank could even intervene in currency markets to push the krona lower to create more inflationary pressures. The Norges Bank’s aim is to dampen the impact of the low oil price on the domestic economy. As the oil price has weakened further and inflation is also coming down, it has become more likely that the Norges bank will cut its deposit rate to 0.50% (from 0.75%) on 17 March). …and we are now more cautious on FX of EM commodity exporters The sharp drop in commodity prices in 2015 (-30% CRB) has been a major negative driver for currencies of commodity exporting countries. In addition, political uncertainty/scandals (for example Brazil, South Africa), weak fundamentals, uncertainty about the Chinese economy, downgrades (or risk thereof), a stronger US dollar and higher US Treasury yields have all weighed on emerging market currencies leading to dramatic performances. For 2016 most of these negative forces will likely continue to dominate. There are some positives though. We expect commodity prices to consolidate and move higher during the course of 2016. In addition, we expect Chinese imports, global trade and the global economy to improve moderately as well. These developments should neutralise the
FX Weekly - New forecasts - 15 January 2016
negative factors resulting in a consolidation in emerging market currencies especially the Russian rouble, Brazilian real, Mexican peso, Chilean peso and South African rand.
EM Commo FX vs CRB Index In %, with USD as basis
350
300 350
300 400 250
450 500
200 550 150
600 12
13 CRB Index (lhs)
14 15 16 USD/EM Commo (rhs, reverse scale)
Source: Bloomberg, ABN AMRO
The economic fundamentals for Brazil and South Africa continue to be weak and the political crisis will unlikely be solved in the near-term. The risk has increased that South Africa’s sovereign rating will be downgraded. In addition, the central banks of Brazil and South Africa will likely increase official rates to bring inflation down despite the dire state of the economy. However, Brazil continues to have sufficient FX reserves. Despite all the bad news in 2015, the Brazilian real has not made new lows versus the US dollar. Therefore, we judge that the real will likely consolidate this year. This process can be volatile but we don’t expect new lows. In case of the South African rand, the current situation has the appearance of being in an overshooting phase.
EM FX performance 2015 In %, with USD as basis
0 -5 -10 -15 -20 -25
BRL
ZAR
TRY
RUB
MXN
IDR
CLP
PLN
HUF
THB
CZK
SGD
KRW
INR
CNY
-30
TWD
3
Source: Bloomberg
We expect the Mexican peso to perform relatively well in 2016 because the growth outlook is more positive. In addition, Mexico competitiveness has improved compared to China as manufacturing country due to relatively lower labour costs. The central bank has started to tighten monetary policy to support the Mexican peso versus the US dollar.
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FX Weekly - New forecasts - 15 January 2016
Less positive on Central and Eastern European currencies… We had a positive view on currencies of Central and Eastern Europe because their economies are strong, they are linked to the eurozone economy and they don’t export commodities. However, sentiment has deteriorated in the recent months. For a start, inflationary pressures have fallen resulting in pressure on the central banks to ease monetary policy, to keep the floor in EUR/CZK in place for longer or to delay monetary tightening. In addition, governments have become increasingly more populistic. Stress in the relationship with the EU is thus likely. Finally, in Poland, the Monetary Policy Committee is likely to turn more dovish. The PiS dominated government will need to replace several members of the Monetary Policy Committee. As the government is progrowth oriented, the new members as well as the Governor, which will be replaced in June, are likely to be more dovish than the old members. These developments have resulted in a downwards adjustments in our PLN forecasts. Furthermore, we now expect that the Czech central bank will not abandon the floor in EUR/CZK this year. 2016 year end KRW, TWD, SGD, INR forecasts downgraded On 7 January 2016, we downgraded our Chinese yuan (CNY) forecasts as we expect the People’s Bank of China to engineer a gradual depreciation in the CNY against currencies of China’s main trading partners (see our FX Watch publication – ‘Gradual depreciation in CNY TWI’). Hence, we expect a weaker yuan to put more downward pressure on Asian currencies through the export channel. A weaker yuan will make Asian exports’ less price competitive. According to a study by the IMF, exports from Hong, Thailand, South Korea and Indonesia have a relatively high export similarity with China exports. A weaker yuan may also result in lower purchasing power from Chinese consumers. Given South Korea, Taiwan and Singapore higher exports exposure to China, we have become more bearish on the KRW, TWD and SGD. The Chinese yuan also accounts for about 15 to 30% of most Asian currencies trade weights. Hence Asian currencies valuation will be more expensive ceteris paribus. Though the Indian rupee (INR) is less exposed to a weaker CNY, we expect sentiment in the INR to remain weak due to the contagion effect from other Asian currencies, which account for around 40% of INR weight in the nominal effective exchange rate.
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FX Weekly - New forecasts - 15 January 2016
ABN AMRO major currency forecasts Change in bold/red EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD EUR/AUD NZD/USD EUR/NZD USD/CAD EUR/SEK EUR/NOK EUR/DKK
14-Jan Q1 2016 1.0883 1.06 117.76 120 128.17 127 1.4404 1.41 0.7556 0.75 1.0055 1.04 1.0944 1.10 0.6955 0.68 1.5649 1.56 0.6449 0.62 1.6875 1.71 1.4362 1.44 9.2759 9.50 9.5848 9.50 7.4623 7.46
Q2 2016 1.04 123 128 1.37 0.76 1.08 1.12 0.66 1.58 0.60 1.73 1.46 9.50 9.25 7.46
Q3 2016 1.02 126 129 1.32 0.77 1.12 1.14 0.64 1.59 0.58 1.76 1.47 9.50 9.00 7.46
Q4 2016 1.00 130 130 1.33 0.75 1.15 1.15 0.62 1.61 0.58 1.72 1.48 9.50 9.00 7.46
Q1 2017 1.00 126 126 1.35 0.74 1.15 1.15 0.64 1.56 0.60 1.67 1.40 9.25 8.75 7.46
Q2 2017 1.02 123 125 1.40 0.73 1.13 1.15 0.68 1.50 0.62 1.65 1.38 9.00 8.50 7.46
Q3 2017 1.05 120 126 1.46 0.72 1.14 1.20 0.70 1.50 0.64 1.64 1.35 8.75 8.25 7.46
Q4 2017 1.10 120 132 1.57 0.70 1.09 1.20 0.72 1.53 0.66 1.67 1.30 8.50 8.00 7.46
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 EM currency forecasts Change in bold/red 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
14-Jan Q1 2016 6.59 6.55 6.61 6.65 67.2950 67.00 1,213 1,200 1.44 1.45 36.33 36.70 33.60 33.50 13,907 14,200 76 74 3.03 3.00 16.50 16.50 4.38 4.35 27.02 27.00 316 315 4.02 4.00 17.91 17.75 726 720
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
Source: ABN AMRO Group Economics
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
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FX Weekly - New forecasts - 15 January 2016
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