FX Weekly
Group Economics Macro & Financial Markets Research
28 April 2016
More positive on the JPY Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
2016 year end USD/JPY forecast lowered from 115 to 110 USD stabilises post FOMC meeting GBP recovers due to profit taking of short positions AUD slumps as weak inflation reignites RBA easing bets EM FX: commodity and domestic drivers 2016 year end USD/JPY forecast lowered from 115 to 110 The Japanese yen (JPY) rallied 3% from above 111.50 against the US dollar towards 108 after the Bank of Japan (BoJ) decided to leave monetary policy unchanged today. This is despite the fact that they have downgraded their GDP and inflation forecast for fiscal years 2016 and 2017. This disappointed market expectations (including our own) that the BoJ would increase its monetary stimulus given weaker exports and inflation outlook. It does seem that the BoJ is more tolerant towards short term weakness in exports and inflation with the view that both economic indicators will increase moderately as the outlook for emerging economics and crude oil prices improve. The BoJ also estimates that the output gap will turn positive in the second half of fiscal year 2016 given that the potential growth rate in Japan is estimated to be in the range of 0-0.5%. Hence the hurdle rate for further monetary stimulus in the coming months seems to be higher. JPY NEER; 1 wk USD/JPY realized volatility Level
Volatility
135
25
125
20
115
15
105
10
95
5
85 Jan-11
0 Apr-12 JPY NEER (lhs)
Jul-13
Oct-14
Jan-16
1wk USD/JPY volatility (rhs)
Source: BoJ, Bloomberg
Insights.abnamro.nl/en
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FX Weekly - More positive on the JPY - 28 April 2016
As a result, we now expect the JPY to strengthen to around 105 in the second quarter of this year. Ahead of the G7 summit on 26-27 May, the Ministry of Finance is unlikely to intervene in the currency market to weaken the JPY unless volatility in the currency market is extreme or one sided. Nevertheless, the risk of currency intervention will increase if USD/JPY declines closer to 100. Given our view that the BoJ is still likely to step up their monetary stimulus in the second half of this year, a weaker JPY towards 110 at the end of this year is still envisaged. USD stabilize post FOMC meeting The US dollar was broadly stable against currencies of the US’ main trading partners this week. The FOMC statement was largely in line with market expectations that the Fed is unlikely to raise interest rates anytime soon despite that global risks have abated. As a result the probability of a 25bp rate hike by the end of this year remains relatively stable at 40%, according to Fed funds futures. GBP recovers due to profit taking of short positions Despite continued uncertainty surrounding Brexit, sterling’s (GBP) recovery has continued for the last three weeks as Brexit fears have eased following a slight gain in the polls for the Remain camp and the intervention of President Obama in favour of UK membership of the EU. Investors have chosen to take profit on short positions in the GBP spot market, while maintaining their hedge against a possible Brexit via the currency options market. In our view, GBP is still likely to head lower ahead of the UK referendum as polls are still very close. Our base case assumes that there will be a vote to remain in the UK, so GBP should subsequently recover to 1.47 at the end of this year.
US dollar trade weighted index
GBP/USD and 2 month options market bias
Level
Level
125
1.60
120
1.55
2mth GBP/USD 25d risk reversal
0 -1
1.50
115
-2 1.45
110
-3
1.40 105 Jan-15
Apr-15
Jul-15
Oct-15 USD TWI
Source: BIS, ABN AMRO
Jan-16
Apr-16
1.35 Jan-15
-4 Apr-15
Jul-15
GBP/USD (lhs)
Oct-15
Jan-16
Apr-16
2mth GBP 25d RR (rhs)
Source: Bloomberg
AUD slumps as weak inflation in 2016 Q1 reignites RBA easing bets The Australian dollar (AUD) fell sharply after inflation in the first quarter of this year was weaker than expected. The Reserve Bank of Australia (RBA) preferred measure of inflation fell from 2.1% to 1.7%yoy, the lowest level since the second quarter of 1999. Financial markets are now pricing in about a 60% probability that the RBA will lower the Official Cash Rate (OCR) by 25bp to 1.75% on 3 May. Though we do not rule out that the RBA may choose to wait a bit longer to assess the trend in the job
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FX Weekly - More positive on the JPY - 28 April 2016
market and inflation outlook, we are of the view that there is sufficient evidence for the RBA to resume its monetary easing bias sooner rather than later. The AUD is likely to head lower towards 0.74 as a result. Inflation in Australia is trending lower
AUD/USD; Cash rate futures implied OCR %
%
5 4 3 2 1 0 -1 -2 -3 Mar-11
%
Level
2.00
0.80
1.95
0.78 0.76
1.90
0.74 1.85
0.72
1.80 Jun-12
Sep-13
CPI non tradables YoY %
Dec-14
Mar-16
1.75 Jan-16
RBA trimmed mean YoY%
0.70 Feb-16
Mar-16
Apr-16
0.68 May-16
May 16 cash rate futures implied OCR % (lhs)
CPI tradables YoY%
AUD/USD (rhs)
Source: ABS
Source: Bloomberg
EM FX: Commodity and domestic drivers Firmer commodity prices and domestic developments were the main drivers of emerging market currencies. The Russian ruble was the star performer due to market expectations that firmer oil prices and easing inflation expectations will allow more flexibility for the Bank of Russia to stimulate the economy through interest rate cuts. On the other hand, the South Korean (KRW) underperformed due to market speculation that the Bank of Korea may need to ease monetary policy later this year as exports and private consumption remained weak in the first quarter of this year. Losses in the KRW were limited after the JPY strengthened. ABN AMRO major currency forecasts
EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD NZD/USD USD/CAD EUR/SEK EUR/NOK
28-Apr 1.1353 108.49 123.19 1.4576 0.7790 0.9679 1.0988 0.7636 0.6958 1.2553 9.1507 9.2286
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 1.15 1.15 1.15 1.15 1.15 1.15 1.15 105 108 110 110 110 108 105 121 124 127 127 127 124 121 1.40 1.42 1.48 1.50 1.52 1.54 1.56 0.82 0.81 0.78 0.77 0.76 0.75 0.74 0.96 0.96 0.96 0.97 0.97 0.98 0.99 1.10 1.10 1.10 1.11 1.12 1.13 1.14 0.76 0.76 0.76 0.77 0.78 0.79 0.80 0.68 0.68 0.68 0.69 0.70 0.71 0.72 1.30 1.28 1.26 1.25 1.24 1.23 1.20 9.25 9.25 9.25 9.25 9.00 9.00 8.75 9.25 9.00 8.75 8.50 8.50 8.25 8.25
Source: ABN AMRO Group Economics
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FX Weekly - More positive on the JPY - 28 April 2016
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