FX Weekly
Group Economics Macro & Financial Markets Research
23 March 2016
New FX forecasts Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
The dollar rally is over in our view We are more optimistic on commodity currencies… …and positive on currencies of oil exporters However, we expect some pressure on the yen this year… …and sterling to weaken ahead of Brexit referendum We have kept USD/CNY unchanged as it is in a long-term process to move to a more flexible regime We are less negative on Asia FX The dollar rally is over The US dollar has seen a strong rally over the last few years. The US dollar index rose by 36% from September 2012 to February 2016. However, it is down by close to 7% since February of this year. The rally did not come in one straight line. The largest moves were in the following periods: September 2012 to May 2013 and July 2014 to March 2015. We have been positive on the US dollar since the end of 2012. We now think that the dollar’s upswing is over (see our FX Watch – The dollar rally is over). In this FX weekly we provide more details on the individual pairs.
Calculated effective Exchange rate US Index
130 120 110 100
90 80 70 00
02
04
06
08
10
12
14
16
Calculated Effective Exchange rate US Source: BoE, Bloomberg
More optimistic on commodity currencies… We think that commodity prices and currencies of commodity exporting countries have bottomed out. Higher commodity prices will initially improve the sentiment towards
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FX Weekly - New FX forecasts - 23 March 2016
commodity exporters and their currencies. Later on, this will be felt in their economies. We now expect commodity currencies like the Australian dollar (AUD) and New Zealand dollar (NZD) to be more resilient due to their attractive carry. Our view that the Reserve Bank of Australia is likely to lower the Official Cash Rate (which is not priced in by financial markets) and the Fed to keep monetary policy rates unchanged (a lower rate profile than implied by Fed funds futures) could result in price swings between 0.71 to 0.80 over the course of this year. Iron ore prices (Australia’s key commodity export) have risen sharply this year, which has provided strong support to AUD/USD. From current levels we expect prices to move sideways. We have upgraded our year-end AUD/USD from 0.65 to 0.76. The NZD is also expected to be more resilient as financial markets have priced in our view that the Reserve Bank of New Zealand (RBNZ) is likely to cut the OCR by 25bp later this year. Nevertheless, the RBNZ is expected to remain dovish given the strength in the NZD, while dairy prices remain weak. Hence that should cap the upside in NZD. The recovery in emerging market commodity currencies will reduce inflation pressures in countries such as Brazil, Chile, Mexico, South Africa and Russia. As a result, central banks in these countries could focus more on supporting growth. This will be a positive development. Central banks in Russia and Brazil could use a recovery in their currencies as an opportunity to reduce interventions and/or build up FX reserves. This could dampen the upside in the ruble and the real.
Calculated effective Exchange rate US Oil prices
USD/Oil FX index (reverse scale)
70
400
60
500
50 600 40
700
30 20 Jan 15
Apr 15
Jul 15
Oct 15
Brent oil price (lhs)
Jan 16
800 Apr 16
USD/Oil FX (rhs)
Source: ABN AMRO Group Economics, Bloomberg
‌ and positive on oil currencies Oil prices have already recovered substantially from the below USD 30 per barrel level. However, our energy analyst expects that there is more upside. His forecast for the end of 2016 for Brent oil prices is USD 55 per barrel and for the end of 2017 USD 60 per barrel. Currencies of oil exporting countries have moved in tandem with oil prices (see graph above). We expect this to continue going forward. As a result, we are positive on these currencies and we have upgraded our forecasts to reflect this. Long Norwegian krone versus the euro is already one of our high conviction views. The fiscal stimulus that was announced in Canada on 23 March should also give more flexibility for the Bank of Canada to keep monetary policy unchanged this year.
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FX Weekly - New FX forecasts - 23 March 2016
Yen under some pressure this year The recent weakness in the Japanese yen (JPY) has been encouraging with prices moving from below 111 to above 112 as risk sentiment in financial markets improved and yields in the US edged higher. Nevertheless, we see material resistance towards the 113115 region. On the downside verbal intervention from Japanese authorities are likely around the 110 region. Looking ahead we expect some downward pressure on the yen during the course of this year, though less than previously given our change in view on the US dollar. We expect a combination of interest rates cuts and/or expansion of qualitative and quantitative easing program most likely in April. In addition, domestic investor’s portfolio rebalancing towards overseas assets in search of higher returns is likely to continue. Last but not least, speculative long yen futures positions are also overcrowded. Safe-haven flows into the yen should decline as financial markets stabilise. Our year-end USD/JPY forecast has been revised lower from 120 to 115. For next year we expect the yen to strengthen versus the US dollar because of a combination of dollar weakness and the yen being undervalued.
We remain negative on sterling in the near-term We expect GBP/USD to weaken in the coming months because of uncertainty surrounding the Brexit referendum on 23 June. We expect GBP/USD to move towards 1.35 ahead of the referendum. However, GBP/USD should recover sharply afterwards as our base case is that the British public will vote to remain in the EU. No change in our USD/CNY forecasts We have not changed our forecasts of the USD/CNY. We still expect a modest depreciation of the CNY versus the USD in line with longer-term fundamentals. Last January, when market bets that the yuan will weaken sharply were extreme, we argued that it is not the objective and interest of China to devalue the currency sharply. Since then, financial markets have reduced their year-end yuan depreciation expectations. In our view, the current environment of a more cautious Fed and weaker US dollar will allow authorities in China to keep the yuan depreciation versus the USD under control. This also implies a bit more depreciation against its basket of currencies, which would support export competitiveness. Local firms are likely to take advantage of current yuan recovery to reduce their foreign currency liabilities. The PBoC is also expected to replenish their foreign currency reserves which have fallen by around 20% since mid-2014. Hence we stick our year-end yuan forecast of 6.70. Since the beginning of this year, the yuan has depreciated by about 3% against currencies of China’s main trading partners (TWI). Based on our currency forecasts, this would imply a total of 7% depreciation of the yuan TWI in 2016. We are less negative on Asian FX A more accommodative Fed policy, an improvement in investor sentiment and the recovery in commodity prices are positive for Asian currencies. Hence we have become less negative on Asian currencies. On the other hand, we do not expect the recent recovery in Asian currencies to continue, as Asian central banks are unlikely to tolerate strong gains in their domestic currencies given subdued inflation and still struggling exports. We expect further monetary easing in a number of countries, including China, India and Taiwan. In addition, central banks in Indonesia and Thailand are expected to replenish their foreign currency reserves given their drawdowns over the past year. A
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FX Weekly - New FX forecasts - 23 March 2016
further slowdown of the Chinese economy is also a headwind to further gains in Asian currencies. The Singapore dollar and Taiwan dollar will remain vulnerable due to their stronger sensitivity to a weaker Chinese yuan. Strong gains in the S$NEER in recent months have also increased the risk that the Monetary Authority of Singapore will shift to a neutral exchange rate bias in April. Despite our view of a recovery in commodity prices which is positive for the Indonesia rupiah (IDR), we doubt that Bank Indonesia will tolerate further gains in the IDR after its 10% outperformance since the beginning of this year. Indonesia’s external imbalance and elevated foreign investor’ positioning in local government debt remains a source of vulnerability to the IDR. A recovery in oil prices will have a larger impact on inflationary pressures in Indonesia and India. This will dampen the attractiveness of the IDR and Indian rupee high real interest rates. The Bank of Korea (BoK) is likely to be tolerant of recent recovery in the South Korean won (KRW) given the strength in the euro and Japanese yen. However, the risk of a weaker KRW remains if the BoK cuts interest rates in the coming months (which is not priced in by financial markets) given the spike in unemployment rate.
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FX Weekly - New FX forecasts - 23 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
23-Mar 1.1195 112.59 126.03 1.4181 0.7895 0.9733 1.0896 0.7599 0.6722 1.3055 9.2483 9.4437 7.4534
Q2 2016 1.15 113 130 1.40 0.82 0.96 1.10 0.76 0.68 1.30 9.25 9.25 7.46
Q3 2016 1.15 114 131 1.42 0.81 0.96 1.10 0.76 0.68 1.28 9.25 9.00 7.46
Q4 2016 1.15 115 132 1.48 0.78 0.96 1.10 0.76 0.68 1.26 9.25 8.75 7.46
Q1 2017 1.15 114 131 1.50 0.77 0.97 1.11 0.77 0.69 1.25 9.25 8.50 7.46
Q2 2017 1.15 112 129 1.52 0.76 0.97 1.12 0.78 0.70 1.24 9.00 8.50 7.46
Q3 2017 1.15 110 127 1.54 0.75 0.98 1.13 0.79 0.71 1.23 9.00 8.25 7.46
Q4 2017 1.15 108 124 1.56 0.74 0.99 1.14 0.80 0.72 1.20 8.75 8.25 7.46
Q3 2016 6.60 6.60 67.0 1,165 1.38 35.00 32.80 13,400 64 2.80 14.75 4.30 27.00 310 3.55 17.00 660
Q4 2016 6.70 6.70 67.0 1,165 1.40 35.00 33.00 13,500 60 2.75 14.50 4.25 27.00 305 3.50 16.75 650
Q1 2017 6.75 6.75 67.0 1,150 1.38 34.80 32.80 13,400 59 2.75 14.25 4.20 26.50 300 3.45 16.50 640
Q2 2017 6.80 6.80 66.0 1,140 1.36 34.60 32.50 13,300 58 2.75 14.00 4.15 26.25 300 3.40 15.75 630
Q3 2017 6.80 6.80 65.5 1,130 1.35 34.40 32.20 13,200 57 2.75 13.75 4.15 26.00 295 3.35 15.50 620
Q4 2017 6.80 6.80 65.0 1,120 1.35 34.00 32.00 13,000 55 2.75 13.50 4.10 25.50 290 3.30 15.25 600
Source: ABN AMRO Group Economics
ABN AMRO Emerging market currency 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
23-Mar 6.50 6.50 66.6 1,161 1.37 35.12 32.40 13,183 68 2.87 15.28 4.26 27.03 313 3.58 17.35 672
Source: ABN AMRO Group Economics
Q2 2016 6.55 6.55 66.5 1,165 1.36 35.00 32.50 13,200 66 2.85 15.00 4.30 27.00 310 3.60 17.25 670
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FX Weekly - New FX forecasts - 23 March 2016
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