FX Weekly
Group Economics Macro & Financial Markets Research
21 January 2016
Oil rout impacts FX Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789
Oil rout triggers deterioration in risk sentiment year to date… …and strongly supports the yen Pegs under pressure
georgette.boele@nl.abnamro.com
Oil rout triggers deterioration in risk sentiment… Since the start of this year, oil prices have dropped by close to 25%. This has not only resulted in a sharp sell-off in currencies of oil exporting countries (or their pegs coming under pressure such as Saudi Arabia and Nigeria) but also in a general deterioration in sentiment in financial markets. Both developments have weighed heavily on currencies of commodity exporters and currencies that are sensitive to global growth. The Russian ruble has been the weakest currency dropping by more than 12% ytd to a new all-time low. The ruble was followed by the Mexican peso, South African rand and Colombian peso. Also, major currencies of commodity exporting countries such as the New Zealand dollar, the Australian dollar and the Canadian dollar have been under heavy pressure; losing between 4.5-6.0% versus the US dollar. Our energy analyst believes that oil prices should gradually recover in the coming weeks. See for more details our latest Energy Monitor. This should alleviate the pressure on currencies of oil exporting countries and improve investor sentiment.
EM FX performance ytd In %, with USD as basis
5
0 -5 -10
RUB
ZAR
PLN
MXN
TRY
BRL
KRW
INR
CLP
TWD
SGD
IDR
CNY
THB
CZK
HUF
-15
Source: Bloomberg
Insights.abnamro.nl/en
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FX Weekly - Oil rout impacts FX - 21 January 2016
… and strongly supports the yen The recent wave of deterioration in investor sentiment has strongly supported the Japanese yen, which rallied more than 3% versus the US dollar ytd. A further appreciation in the yen could trigger more monetary policy easing by the Bank of Japan which meets on 29 January. As we expect investor sentiment to improve going forward, it is likely that the yen will weaken again. The euro has been relatively resilient because weaker US economic data and a downward adjustment in expectations about the number of Fed rate hikes this year weighed on the US dollar. After financial markets were surprised by a lack of ECB action at the end of last year, they now take a more cautious approach towards the ECB. We feel that they are now too cautious. We expect the ECB to cut interest rates in two steps (March and June) to -0.5% and an increase of 10bn in asset buying programme (March). This action, an improvement in investor sentiment, and better US data should push EUR/USD towards parity later this year. Sterling has fallen sharply because a weakening outlook about its economy, possibility of later BoE rate hikes and uncertainty about a possible Brexit. We expect weakness in GBP/USD to continue for these reasons and due to a stronger US dollar if investor sentiment improves.
Major FX performance ytd In %, with USD as basis
4
2 0 -2 -4 -6 -8 JPY
EUR
CHF
NOK
SEK
GBP
CAD
AUD
NZD
Source: Bloomberg
Pegs under pressure In currency markets currencies that are pegged or have less than flexible foreign exchange regimes have increasingly come under pressure. There is market speculation that pegs may loosen or abandoned following the Kazakhstan tenge’s example in August 2015 and Azerbaijani’s manat in December 2015. Since the 80s, Hong Kong has in place a full-blown currency board. The adjustment in FX policy by the PBoC has resulted in expectations that the USD/HKD peg could be abandoned or loosened. The pressure on the peg has increased after the PBoC curbed speculation in the off-shore yuan closing the gap between on-shore and off-shore yuan. We hold the view that the peg will remain in place. The sharp drop in oil prices has also put in question the currency regimes of Saudi Arabia and Nigeria. Even though FX reserves are falling sharply, with the vast amount of FX
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FX Weekly - Oil rout impacts FX - 21 January 2016
reserves that Saudi Arabia has in place they remain excessive. Therefore, we judge it is unlikely that its peg will be abandoned. In the case of Nigeria, the Naira is pegged to the US dollar at 197-199 since March of last year. But in the unofficial market the Naira has dropped sharply to 300 because of a shortage of US dollars. On 26 January the central bank will meet and there is speculation that the peg will be abandoned.
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 NZD/USD USD/CAD EUR/SEK EUR/NOK EUR/DKK
21-Jan Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 1.0903 1.06 1.04 1.02 1.00 1.00 1.02 1.05 1.10 116.88 120 123 126 130 126 123 120 120 127.42 127 128 129 130 126 125 126 132 1.4175 1.41 1.37 1.32 1.33 1.35 1.40 1.46 1.57 0.7691 0.75 0.76 0.77 0.75 0.74 0.73 0.72 0.70 1.0038 1.04 1.08 1.12 1.15 1.15 1.13 1.14 1.09 1.0945 1.10 1.12 1.14 1.15 1.15 1.15 1.20 1.20 0.6893 0.68 0.66 0.64 0.62 0.64 0.68 0.70 0.72 0.6422 0.62 0.60 0.58 0.58 0.60 0.62 0.64 0.66 1.4490 1.44 1.46 1.47 1.48 1.40 1.38 1.35 1.30 9.3471 9.50 9.50 9.50 9.50 9.25 9.00 8.75 8.50 9.7217 9.50 9.25 9.00 9.00 8.75 8.50 8.25 8.00 7.4632 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46
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
21-Jan Q1 2016 6.58 6.55 6.61 6.65 67.9950 67.00 1,214 1,200 1.44 1.45 36.26 36.70 33.79 33.50 13,906 14,200 85 74 3.05 3.00 16.82 16.50 4.49 4.35 27.06 27.00 315 315 4.10 4.00 18.56 17.75 729 720
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
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
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FX Weekly - Oil rout impacts FX - 21 January 2016
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