FX Weekly
Group Economics Macro & Financial Markets Research
07 April 2016
Brexit uncertainty comes more to the fore Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com Roy Teo
Deterioration in risk sentiment dominates FX markets Brexit uncertainty comes more to the fore… …and the yen strongly outperforms this week AUD and NZD lower because of rising risks of rate cuts Improving outlook in China supports Asian currencies
Senior FX Strategist Tel: +65 6597 8616
Deterioration in risk sentiment dominates FX markets
roy.teo@sg.abnamro.com
Sentiment in currency markets deteriorated since the end of March. This is reflected by higher volatilities in the FX options market. The uncertainty surrounding the Brexit referendum has come more to the front. The main beneficiary in this environment is the ultimate safe-haven currency the yen. Meanwhile, currencies of commodity exporting countries and emerging markets have fallen. Domestic political developments and expectations about central banks played a role here.
Brexit uncertainty comes more to the fore… Early March we published a report on Brexit scenarios. Our base case that the UK remains in the EU is assigned a 65% chance, while we also present four Brexit scenarios. These depend on how constructive the exit negotiations between the UK and EU would be as well as on whether there is wider contagion, with rising fears of more EU exits, that could re-ignite the euro crisis. In general, the risk of a Brexit is negative for sterling. Therefore, we expect GBP/USD to weaken to 1.35 and EUR/GBP to rally to 0.85 before the referendum on 23 June 2016. In case of a Brexit, the impact on sterling depends on whether there is contagion to the eurozone or not. If there is no contagion we expect sterling to move lower versus US dollar and euro. In a scenario of a disorderly Brexit GBP/USD could drop to 1.15 and EUR/GBP could rally to 1.00. In case of an orderly Brexit, we still expect sterling weakness but to a lesser extent than is the case for a disorderly Brexit. In case of a Brexit resulting in contagion to the eurozone, we expect the euro to fall as well. Therefore, the upside in EUR/GBP could be modest. In the table below we have set out the various scenarios for sterling.
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FX Weekly y - Brexit uncertainty co omes more tto the fore - 07 April 2016
Brexiit sterling sce enarios No Brexit B 65% 07-Apr before 23 Jun ne 1.1 15 1.1392 1.3 35 1.4088 0.8 85 0.8100
Q4 201 16 1.1 15 1.4 48 0.7 78
Dis orderly o Brexit, without w contagi on to EU 15% 07-Apr before 23 Jun ne 1.1392 R/USD 1.1 15 EUR 1.4088 GBP P/USD 1.3 35 0.8100 EUR R/GBP 0.8 85
Q4 201 16 1.1 15 1.1 15 1.0 00
Dis orderly o Brexit, with w contagion to EU 5% 07-Apr before 23 1.1392 R/USD EUR 1.4088 GBP P/USD 0.8100 EUR R/GBP
Jun ne 1.1 15 1.3 35 0.8 85
Q4 201 16 0.9 98 1.1 15 0.8 85
Orde erly Brexit, with out contagion to EU 10% 07-Apr before 23 Jun ne 1.1392 R/USD 1.1 15 EUR 1.4088 GBP P/USD 1.3 35 0.8100 EUR R/GBP 0.8 85
Q4 201 16 1.1 15 1.3 30 0.8 88
Orde erly Brexit, with contagion to EU E 5% 07-Apr before 23 Jun ne 1.1392 R/USD 1.1 15 EUR GBP P/USD 1.3 35 1.4088 EUR R/GBP 0.8 85 0.8100
Q4 201 16 1.0 00 1.2 25 0.8 80
EUR R/USD GBP P/USD EUR R/GBP
Source: ABN AMRO Grouup Economics
…and d the yen outp performs this s week… For some time now a any upside in USD/JPY U has come c to a halt iin the 113-115 region. The interes sting behaviourr is that the yen n barely weake ens when equitty markets rally y and when investo or sentiment iss positive. In ad ddition, more ris sk averse envirronments are supportive s for the yen. This beh aviour has incrreased market confidence thaat the overall trrend in USD/J JPY has chang ed to negative. Since the end d of March, thee yen strengthe ened by close to t 4% to below w 108.50 agains st the US dollar due to safe-hhaven demand and market expecttations that the e Ministry of Fin nance (MoF) off Japan is unlikkely to interven ne in the currency markets anyytime soon. Ea arlier in the wee ek, Prime Minisster Abe said that they should d refrain from a arbitrary interve ention in curren ncy markets annd avoid compe etitive devalu uation. The Fe ed’s more dovi sh tone has raised the hurdle e for raising thee Fed Funds ta arget rate this ye ear. Therefore, the dollar has underperforme ed. As a result,, the yen has strengthened agains st the dollar by twice the magnitude compared to currenciees of Japan’s main m trading partners. After the re elease of FOMC C minutes on 6 April, gains inn the yen’s nom minal effectiv ve exchange ra ate (NEER) sta arted to pick up p at an even fasster pace. That triggered comme ents from the M MoF that one sided s moves in the yen is incrreasingly evide ent and that actions s will be taken if needed. Despitte the reluctancce of Japan’s authorities a to intervene, a shaarp strengthening of the yen wo ould be viewed d as undesirablle. They may first opt for moree monetary policy easing before aggressively iintervening in currency c marke ets. Given the ccurrent bullish trend in the yen, we w do not rule o out that USD/JP PY could exten nd its descent ttowards 106 in the absenc ce of FX intervvention and ahe ead of BoJ’s sc cheduled moneetary policy dec cision on 28 April. Looking L furtherr ahead, we ex xpect the yen to o weaken to aroound 115 against the dollar by the end of th his year as we expect risk se entiment in fina ncial markets to t improve and the BoJ to imple ement more mo onetary stimulus as soon as thhis month.
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FX Weekly y - Brexit uncertainty co omes more tto the fore - 07 April 2016
AUD and a NZD lowe er: rising risk ks of rate cuts s Both th he Australian d dollar (AUD) an nd New Zealand dollar (NZD)) underperformed in the past week. w Weak eco onomic data re eleases have in ncreased the rissk that central banks in Austra alia and New Ze ealand may ne eed to lower mo onetary policy ssooner than later. New Zealan nd’s key comm modity export prrice index in Ma arch fell to the lowest level since October 2009. House price ga ains also slowe ed for the fourth consecutive month in Marc ch. In on, the outlook for dairy prices s remains weak. As a result, ffinancial marke ets are now additio pricing g more than 40 % probability that the Reserv ve Bank of New w Zealand may y lower the Official Cash Rate (O OCR) by 25bp on o 28 April. In Australia, inflattion expectatio ons in March decline ed for the seco ond consecutive e month to 1.7%, the lowest rreading since August A 2015. Retail sales in February were e also weaker than t expected,, reflecting subdued consum mer confidence e. In addition, the t service sec ctor contracted in March, the fifth month of conttraction in the llast 6 months. The service PM MI employmennt sub index als so suggests that em mployment gain ns in March (14 4 April) are like ely to remain suubdued. Adding to the bearish sentiment, th he construction n sector has contracted for fouur consecutive months D last year. Finally th he Reserve Ba ank of Australiaa stated that an n since December apprec ciating AUD co ould complicate e the rebalancin ng in the econoomy. In our view, financial markets are underesstimating the ris sk of a 25bp rate cut in May. Improving outlook iin China supp ports Asian cu urrencies Asian currencies havve been relative ely resilient as China’s Marchh PMIs improve ed much better than expected . The Chinese yuan edged higher against ccurrencies of China’s main trading g partners. Nexxt week, first qu uarter economic growth print out of China will w be crucial for risk k sentiment in b both the yuan and a Asian currencies. We exppect the Chine ese economy to slow w to 6.7% yoy i n Q1 (Q4 2015 5: 6.8%). The So outh Korean w won (KRW) was s the worst perfformer due to ffears of interve entions from authorrities. The KRW W has strengthe ened by about 8% against thee USD in the past p month. As a re esult South Ko orea Finance Minister M Yoo said that they willl take measure es on the KRW if needed given n rising volatility in the currency. In our view w, the Bank of Korea K is erant towards th he KRW’s stren ngth given the strength in botth the euro likely to be more tole and Ja apanese yen (e exports from the euro area an nd Japan have high export sim milarities with So outh Korea exp ports). Earlierr this week, the e Reserve Bank of India (RBI)) cut the main ppolicy rate by another a 25 bps to 6.5%, while ta aking other mea asures in an atttempt to improove the transmission anism of monettary policy. As a result, the Indian rupee edgged lower as in nvestors mecha took profit after its 4% % gains since end e of Februarry. Inflation in Inndia is likely to o remain around d current levelss of 5% this yea ar. Hence there e are limits to ffurther monetary stimulus from th he central bankk to support ec conomic growth h.
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FX Weekly y - Brexit uncertainty co omes more tto the fore - 07 April 2016
ABN AMRO majorr currency forecasts Change es in red/bold
EUR/USDD USD/JPYY EUR/JPY GBP/USDD EUR/GBPP USD/CHFF EUR/CHFF AUD/USDD NZD/USDD USD/CADD EUR/SEKK EUR/NOKK EUR/DKKK
07-Apr 1.1392 108.36 123.43 1.4088 0.8100 0.9560 1.0891 0.7542 0.6795 1.3116 9.2904 9.4504 7.4422
Q2 2016 Q3 2016 QQ4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 20117 1.15 1.15 1.15 1.15 1.15 1.15 1.15 115 114 113 114 112 110 1008 132 131 129 127 1224 130 131 1.48 1.50 1.40 1.42 1.52 1.54 1.556 0.78 0.77 0.82 0.81 0.76 0.75 0.774 0.96 0.97 0.96 0.96 0.97 0.98 0.999 1.10 1.11 1.10 1.10 1.12 1.13 1.14 0.76 0.77 0.76 0.76 0.78 0.79 0.880 0.68 0.69 0.68 0.68 0.70 0.71 0.772 1.26 1.25 1.30 1.28 1.24 1.23 1.220 9.25 9.25 9.25 9.25 9.00 9.00 8.775 8.75 8.50 9.25 9.00 8.50 8.25 8.225 7.46 7.46 7.46 7.46 7.46 7.46 7.446
Source: ABN AMRO Grouup Economics
ABN AMRO emerg ging market currency c fore ecasts Chang ges in red/bold
USD/CNYY (onshore) USD/CNHH (offshore) USD/INR USD/KRW W USD/SGDD USD/THBB USD/TWDD USD/IDR USD/RUBB USD/TRYY USD/ZARR EUR/PLNN EUR/CZKK EUR/HUFF USD/BRLL USD/MXNN USD/CLPP
07-Apr 6.47 6.49 66.6 1,151 1.35 35.19 32.40 13,163 68 2.85 15.22 4.27 27.02 312 3.64 17.65 675
Q2 2016 Q3 2016 QQ4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 20117 6.55 6.60 6.80 6.80 6.880 6.70 6.75 6.80 6.80 6.880 6.55 6.60 6.70 6.75 66.0 65.5 655.0 66.5 67.0 67.0 67.0 1 1,140 1,130 1,1220 1,165 1,165 1,165 1,150 1.40 1.38 1.36 1.35 1.335 1.36 1.38 3 34.60 34.40 34.000 35.00 34.80 35.00 35.00 33.00 32.80 3 32.50 32.20 32.000 32.50 32.80 13,200 13,400 13,500 13,400 133,300 13,200 13,0000 60 59 58 57 5 55 66 64 2.75 2.75 2.775 2.75 2.75 2.85 2.80 1 14.00 13.75 13.550 14.50 14.25 15.00 14.75 4.25 4.20 4.15 4.15 4.10 4.30 4.30 2 26.25 26.00 25.550 27.00 26.50 27.00 27.00 305 300 300 295 2990 310 310 3.40 3.35 3.330 3.50 3.45 3.60 3.55 16.75 16.50 1 15.75 15.50 15.225 17.25 17.00 650 640 630 620 6000 670 660
Source: ABN AMRO Grouup Economics
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FX Weekly y - Brexit uncertainty co omes more tto the fore - 07 April 2016
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