FX Forecast Update 16 December 2013

Transcription

1 FX Forecast Update 16 December 2013 December: ECB deposit cut to weigh on EUR in 2014 Arne Lohmann Rasmussen Chief Analyst, Head of Rates, FX and Commodities Strategy Stefan Mellin Stanislava Pravdová-Nielsen Kristoffer Lomholt Senior Analyst Analyst Assistant Analyst Morten Helt Lars Christensen Christin Tuxen Vladimir Miklashevsky Senior Analyst Chief Analyst Senior Analyst Analyst Bloomberg: DRFX <GO> Investment Research Important disclosures and certifications are contained from page 30 of this report.

2 Main forecast changes We have kept our EUR/USD forecasts unchanged. But, compared with previously, our outlook for a weaker EUR/USD in 2014 now has more two-sided legs: we look for a steeper US money market curve to push USD higher and for an ECB which is decidedly on an easing bias to firmly anchor the short end of the euro curve thus weighing on EUR. We still target the cross at 1.26 in 12M and see potential for a clear move lower in Q1 towards We still look for a weaker yen against the dollar due to a continuous divergent monetary policy between the Fed and BoJ. We have rolled our USD/JPY forecast and we now expect USD/JPY at 108 (105) on a six-month horizon. We continue to see USD/JPY at 110 on a 12-month horizon. On the commodity currencies we have notably incorporated more downside in both AUD and CAD: with Fed set for tapering soon (December) and both the RBA and the BoC happy to accommodate more weakness in their currencies to stimulate domestic growth and fight disinflation and with commodities set for price downside next year, both the Loonie and especially the Aussie will be in for a hard time still. We have maintained our view that both the SEK and NOK will appreciate against the EUR in However, we highlight the risk of a further Scandi sell-off over the next couple of weeks. We expect the Riksbank to cut rates on 17 December and liquidity is often poor in the Scandinavian currency market in December. The latter could hurt the NOK in particular. We have 1M forecasts for EUR/NOK and EUR/SEK of 8.60 and 9.20, respectively. We forecast that EUR/NOK and EUR/SEK will fall to 8.00 and 8.50, respectively, during the course of We have not made any major forecast changes for the Central and Eastern European currencies. For PLN, HUF and CZK, we continue to see near-term weakness on the back of weak growth and a fairly strong disinflationary process, which likely will spark further monetary easing in the CEE3 countries. Long term we remain fairly bearish on both CZK and PLN, while we believe strong external balances will be supportive of the HUF. 2

3 EUR/USD Fed tapering and ECB cut to weigh after New Year Growth. Economic data have lost some steam in the eurozone lately, whereas US data have surprised on the positive side. We expect US growth in 2014 but believe the room for surprises is biggest in the eurozone. Monetary policy. With the Fed set for QE tapering in December and the ECB likely to cut to fight off disinflation via a rate cut in Q1, relative monetary policy is set to become a key source of downside for EUR/USD in the medium term. Notably, we see good potential for the short end of the US money-market curve to steepen. Flows. The eurozone current-account surplus continues to rise, while the US is stuck with a deficit. The combination of the ECB s OMT programme and the eurozone escaping recession should help attract capital again and support the EUR, ceteris paribus. Valuation. EUR/USD is not far from its PPP level. Also, our short-term models suggest that the fair value for the cross is above 1.36 at present. Risks. If we are wrong in projecting soft inflation prints in Q1 then the ECB would be likely to stay put and refrain from further easing; this would support the euro. Also, if the search for yield spurs significant peripheral inflows then EUR downside may be limited. Christin Tuxen, Senior Analyst, tux@danskebank.dk, Forecast: 1.32 (3M), 1.30 (6M) and 1.26 (12M) Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 EUR/USD 1M 3M 6M 12M Forecast (pct'ile) 1.35 (21%) 1.32 (14%) 1.30 (15%) 1.26 (15%) Fwd. / Consensus 1.37 / / / / % confidence int / / / / % confidence int / / / / 1.49 EUR/USD 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. While improving in both regions, the relative growth outlook is set to support the Fed moving away from extremely accommodative policy measures long before the ECB. This should set the scene for a cyclical USD uptrend, as the Fed will be looking to hike rates ahead of its eurozone counterpart. Compared with previously our outlook for a weaker EUR/USD in 2014 now has more two-sided legs: we look for a steeper US money-market curve to push USD higher and for an ECB that is decidedly on easing bias firmly to anchor the short end of the euro curve, thus weighing on EUR. 3

4 EUR/USD important issues to watch Euro in demand for now With Fed tapering in sight (and ECB set for more easing in our view) you may wonder why EUR/USD continues to trade close to year highs. The continued fall in eurozone excess liquidity has spurred a rise in EONIA rates and EUR-USD cross-currency spreads continue. This has been exacerbated recently by the following. 1. Year-end is approaching and many are hoarding EUR liquidity for accounting reasons. 2. The ECB asset-quality review coming up suggests the euro is in demand to improve balance sheets. Notably the first effect should wane come the new year and could help spur downside in the EUR in January. Effects of an ECB deposit not unambiguous We expect to see weak inflation prints in Q1 give way to an ECB rate cut in March, taking the deposit rate into negative territory. If the current mental barrier to a rate below zero is broken, the potential for downside to the euro moneymarket curve should weigh on the single currency. However, in such a situation a search for yield would be likely to be accelerated as cash deposits become (even) less attractive. In this process, euro peripherals could benefit, which could limit EUR downside. Christin Tuxen, Senior Analyst, tux@danskebank.dk, EUR liquidity in demand Source: Reuters EcoWin, Danske Bank Markets EUR/USD short-term financial model Source: Reuters EcoWin, Danske Bank Markets 4

5 EUR/GBP GBP to gain on a less dovish BoE in 2014 Growth. Economic activity has been strong recently but spare capacity remains high. GDP increased 0.8% q/q in Q3 and the strength of the main survey indicators for November suggests that growth has accelerated further into Q4. Monetary policy. The Bank of England (BoE) has said it will not consider tightening policy at least until the unemployment rate falls to 7%. However, in the November Inflation Report, it moved its forecast for this threshold to be met from Q3 16 to Q3 15. This is much more aligned with market expectations, as the market is currently pricing the first rate hike in summer Since the ECB has eased monetary policy further and is expected to remain on an easing bias relative monetary policy is now in favour of the GBP relative to the EUR. Flows. Speculative positioning seems to be neutral in GBP. Valuation. From a long-term perspective, GBP is still clearly undervalued (PPP around 0.77 for EUR/GBP). Risks. The strong numbers in the UK make a breach of one or more of the knockouts more likely. If this happens, a more pronounced GBP appreciation than we forecast could occur. Furthermore, the low euro area inflation may lead to the ECB easing monetary policy further. The BoE may stick to its very dovish stance despite strong numbers or UK numbers might start to disappoint pushing EUR/GBP higher. Forecast: 0.83 (3M), 0.82 (6M) and 0.80 (12M) Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 EUR/GBP 1M 3M 6M 12M Forecast (pct'ile) 0.83 (19%) 0.83 (29%) 0.82 (25%) 0.80 (21%) Fwd. / Consensus 0.84 / / / / % confidence int / / / / % confidence int / / / / 0.91 EUR/GBP 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. The combination of the BoE being less dovish and the prospect of euro weakness on the back of the ECB being on easing bias means we now see EUR/GBP moving lower over the coming year. However, despite the expected appreciation, we believe the GBP will stay in fundamentally undervalued territory in We assume that the current low correlation between the GBP and USD will be re-established in Jens Nærvig Pedersen, Analyst, jenpe@danskebank.dk,

6 EUR/GBP important issues to watch Less power for Carney than expected The BoE forward guidance implies that the Bank Rate will stay at 0.5% for three years. However, it is constrained not only by the unemployment threshold at 7.0% but also by three knockouts based on the outlook for inflation, inflation expectations and financial stability. Mark Carney has underlined that rates will not necessarily go up just because the unemployment threshold is breached. The BoE now expects the 7% threshold to be reached in BoE vs ECB The latest Bank of England report underlined that the BoE will be less dovish in 2014 than previously expected. On the other hand, we expect the ECB easing bias and a cut in the deposit rate to negative to weigh on the EUR in All in all, relative monetary policy has now tipped in favour of the GBP. UK numbers are strong but this is also expected UK numbers, e.g. housing data, continue to be very strong. However, the UK surprise index has actually been trending lower over the past two months, showing that the market is getting used to strong numbers. Hence, GBP support is fading from this source. MPC now expects unemployment threshold to be reached in 2015 Source: Macrobond, Bank of England, Danske Bank Markets Relative rates point to a lower EUR/GBP Source: Macrobond, Danske Bank Markets Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.dk,

7 USD/JPY no barriers for more upside Macro outlook. GDP growth in Q3 eased more than initially estimated and expanded only an annualised 1.1% (initial estimate was 1.9%). However, data suggest that we should see an improvement in Q4, as private consumption is poised for a rebound and as fixed investments should remain strong. We therefore expect GDP growth to rebound above 3.0% q/q ann. in Q4 13 and Q1 14. In Q2 14 growth is expected to slow, however, as substantial fiscal tightening is implemented. Current account unexpectedly fell to a deficit in October and could remain under pressure, which supports the case for a weaker JPY. Monetary policy. In our view BoJ is unlikely to add further stimulus in the coming months as Japan is still recovering. However, monetary policy will need to remain extremely accommodative in the near future and is likely to become even more pronounced in 2014 as it, in our view, will be impossible to reach the 2% inflation target soon without the continued support from a weaker JPY. Valuation. Additionally, the Danske Bank G10 PPP model does not indicate a barrier for JPY weakness. Risk. JPY has proven one of the most sensitive currencies to US political risks and also expectations about US monetary policy. The latest IMM data indicate that the market continues to be very short JPY, which given the past week s rally, represents a near-term downside risk to USD/JPY. Forecast: 104 (3M), 108 (6M) and 110 (12M) Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 USD/JPY 1M 3M 6M 12M Forecast (pct'ile) (66%) (54%) (77%) (76%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / USD/JPY 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion: Japan is expected to have the most currency negative policy mix (monetary easing and fiscal tightening) of the G10 currencies in This justifies the current undervaluation of JPY and given that the Fed scales back on its monetary easing we expect further upside in USD/JPY to unfold in H1 14. We target USD/JPY at 104 in 3M and 108 in 6M. Medium to long term, we still expect relative monetary policy to support the case for a higher USD/JPY. We target USD/JPY at 110 in 12M. Morten Helt, Senior Analyst, mohel@danskebank.com,

8 EUR/CHF ECB dovishness reduces upside potential Growth. Inflation surprised on the upside in November and on a yearly basis it edged higher to 0.1%. However, deflation risks still persist in Switzerland, especially as the global economy currently faces a positive supply shock from very low inflation. Monetary policy. SNB kept interest rates unchanged and maintained its 1.20 floor for EUR/CHF in December. It revised its inflation forecast down slightly for 2014 and All in all, SNB sees no inflation risks in Switzerland and no rate hikes are in sight for a long time, although the SNB still monitors the imbalances on real estate markets and regularly assesses whether the counter-cyclical capital buffer should be raised. Flows. The eurozone current account surplus is improving rapidly and the combination of the ECB s OMT programme and an exit from recession should help to attract capital, leaving upside risks to EUR/CHF. Valuation. The Swiss franc is around 7% overvalued against the euro, according to our G10 PPP model. Risks. The ECB becoming more dovish is likely to reduce upside risks to EUR/CHF. In particular, a deposit rate cut by the ECB into negative territory could, if not mirrored in Switzerland, force the SNB to intervene in order to keep EUR/CHF above Morten Helt, Senior Analyst, mohel@danskebank.com Forecast: 1.23 (3M), 1.23 (6M) and 1.23 (12M) Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 EUR/CHF 1M 3M 6M 12M Forecast (pct'ile) 1.22 (49%) 1.23 (74%) 1.23 (71%) 1.23 (65%) Fwd. / Consensus 1.22 / / / / % confidence int / / / / % confidence int / / / / 1.27 EUR/CHF 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. We continue to expect the EUR/CHF 1.20 minimum target to remain in place over the forecast horizon. The economic recovery in Europe has reduced euro tail risks significantly, which, in turn, has reduced the downside risks to EUR/CHF. While some of the recent years safe-haven flows into Switzerland might reverse, leaving upside risks to EUR/CHF, low European rates are likely to keep EUR/CHF range bound. We have revised down our outlook for EUR/CHF to 1.23 in the coming six to 12 months, as a deposit rate cut to negative looks increasingly likely to be the ECB s next move. 8

9 EUR/SEK SEK to remain under pressure near term Growth. This year has been a disappointment in terms of real growth, which has been close to flat over the past two quarters. This has weighed on the SEK. However, we expect to see a marked pickup in GDP next year, as expressed by our 2.5% full-year GDP forecast. Monetary policy. Inflation too has surprised on the downside, with direct implications for monetary policy expectations. This is the strongest argument for the Riksbank to cut the repo rate by 25bp on 17 December. If perceived as very dovish the Riksbank decision may push EURSEK higher near term but upside should be limited. Later in 2014, we expect the market to start pondering Swedish rate hikes instead we expect the Riksbank to move before the ECB, which would then weigh on EUR/SEK. Fundamentals. The Swedish fundamental backdrop is unambiguously SEK supportive. Flows. The structural flows that boosted the SEK in have gone away but not reversed. Valuation. Medium- and short-term models suggest EUR/SEK is far too high. While Swedish inflation continues to undershoot euroland, the SEK is becoming increasingly undervalued in terms of PPP. Risks. The Riksbank may surprise both ways, which would leave our 1-3M forecasts either too high or too low. Forecast: 8.90 (3M), 8.70 (6M) and 8.50 (12M) Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 EUR/SEK 1M 3M 6M 12M Forecast (pct'ile) 9.20 (79%) 8.90 (33%) 8.70 (21%) 8.50 (17%) Fwd. / Consensus 9.05 / / / / % confidence int / / / / % confidence int / / / / 9.81 EUR/SEK 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. Surprisingly weak hard data and low inflation have weighed on the SEK in H2. We argued last month that the SEK would come under pressure ahead of the Riksbank s rate decision. We projected EUR/SEK would breach 9.00 and stressed the risk it would get stuck above 9.00 for a period of time. If the projected Riksbank rate cut is associated with sufficiently soft guidance, EUR/SEK may remain bid near term. However, relative fundamentals suggest the rally will not last for longer. We maintain a bearish medium-term view on EUR/SEK. Stefan Mellin, Senior Analyst, mell@danskebank.com +46 (0)

10 EUR/SEK important issues to watch The Riksbank will be forced to cut to 0.75% then what? Surprise index near historical turning points The Riksbank makes its rate decision on 17 December and we expect a cut of 25bp, leaving the policy rate at 0.75%. The reason the majority is likely to give in is not growth, not the labour market and not that FSA has been given responsibility for macro prudential issues. The reason is inflation, which has undershot the bank s forecast to an extent that probably gives the majority camp no option but to cut. The first rate hike will probably be delayed as well, cf. Norges Bank low for longer. We think most market players now expect a cut, thus a cut per se should have a limited impact on EUR/SEK. (The real surprise would be if rates were left unchanged.) However, there is still an upside risk to EUR/SEK should the Riksbank be perceived as very dovish, e.g. hinting at more cuts to come. Hence, there is a risk that the SEK will remain under pressure in the near term. However, given that the December cut is indeed well priced and, as we suspect, likely to be the final one, we believe relative monetary policy will eventually back the fundamental case for an SEK recovery over the medium term (in 2014), especially as we see more easing coming from the ECB next year, while we expect the Swedish economy to pick up. Source: Macrobond Unusual divergence behind EURSEK rally Source: Macrobond Stefan Mellin, Senior Analyst, mell@danskebank.com

11 EUR/NOK markets have become too NOK negative Growth. Norges Bank s Regional Network report has become gradually weaker in 2013 but mainland GDP growth for Q3 still came in at 0.5% q/q. PMI numbers have also been well above 50 recently, which points to a slightly stronger picture than just a few months ago. We believe growth will be decent in 2014 supported by still strong oil investments. Monetary policy. Norges Bank revised lower its rate path at the December monetary policy meeting and is now saying that rates will not go up before However, contrary to the June report, the central bank saw no probability of a new rate cut in In our view, the latter has removed an important risk factor from the NOK, as the currency is still very sensitive to changes in relative rates. Hence, an ECB rate cut to push EUR/NOK lower. Flows. We have seen low foreign interest for NGBs this year Valuation. The NOK is now clearly on the weak side relative to our PPP estimates. Risks include the very poor liquidity in the NOK and soft rhetoric from Norges Bank. In 2014, a clear risk is that if foreign accounts continue to move out of Norwegian assets both bonds and equities could be exposed. Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.com, Forecast: 8.25 (3M), 8.00 (6M) and 8.00 (12M) 9.50 EUR/NOK Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst EUR/NOK 1M 3M 6M 12M Forecast (pct'ile) 8.60 (69%) 8.25 (18%) 8.00 (10%) 8.00 (17%) Fwd. / Consensus 8.53 / / / / % confidence int / / / / % confidence int / / / / 9.34 Conclusion. We expect EUR/NOK to edge slightly lower as we expect liquidity to improve, as a rate cut is now unlikely and as the economy recovers again. We strongly doubt, though, that we will see the 2012 lows in EUR/NOK again. The risk of a further NOK sell-off should not be neglected; in particular, the NOK might suffer just before year-end, when liquidity is often weak. If Norges Bank turns even more dovish in 2014, the NOK might be exposed further. In the very short-term poor liquidity and an expected Riksbank rate cut is a risk for the NOK. Our one month forecast for EUR/NOK is

12 EUR/NOK important issues to watch Core inflation back below Norges Bank forecast Over the summer, we saw a surprise spike in Norwegian core inflation. The CPI-ATE measure jumped to 2.5% in August. However, the spike turned out to be temporary and the core measure is now back at 2.0%. However, Norway is still one of the few countries now struggling with deflation. Given the recent weakening of the NOK, we doubt the trend now is for even lower inflation. Norges Bank is now low for longer In December, Norges Bank revised its rate path down some 30bp. It now says that interest rates will not be hiked before summer Effectively Norges Bank is now low for longer like several other central banks. However, importantly Norges Bank has not discussed a rate cut and, contrary to the June report, no likelihood of a rate cut in 2014 was seen. Norges Bank is also low for longer September rate path December rate path Source: Norges Bank Rising volatility a risk to NOK in December Risk of weak market liquidity in December In December, the NOK tends to be less liquid. Given the summer spike in volatility, it points to a high liquidity premium this year and the risk is skewed on the upside for EUR/NOK and NOK volatility as year-end approaches. This liquidity premium has lifted EUR/NOK recently but we expect the premium to become smaller in 2014 and thereby help the performance of the NOK. But note our one month forecast at 8.60 for EUR/NOK. Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.com, Source: Macrobond, Danske Bank Markets 12

13 EUR/DKK look out for the turn-of-the-year effect FX. As we approach the turn of the year the negative carry on short EUR/DKK positions has increased. As a result EUR/DKK has edged higher and has been above the central rate of since the beginning of December. We expect the pressure to ease somewhat at the beginning of next year, although we expect the negative carry to persist. Danmarks Nationalbank (DN) has not needed to intervene since January; hence, an independent DN rate hike is not imminent. However, with EUR/DKK currently above the central rate, the risk of DN intervening and subsequently hiking rates independently has increased. Rates. We now expect the ECB to cut key policy rates (refi and deposit rates) by 10bp early next year. While we expect DN to leave the lending rate at the current 0.20% de facto bottom, we also expect it to fully track any ECB deposit rate cut, consequently lowering the CD rate by 10bp. Furthermore, we still believe that DN will need to hike rates once by 10bp on a 12M horizon, leaving the lending rate at 0.30% and the CD rate at -0.10% in 12 months. Flows. The Danish current account continues to climb higher and moved close to 7% of GDP in October the highest in 60 years. The large and increasing current account surplus adds support to DKK, as does foreign investors appetite for Danish bonds. The foreign ownership share of DKK-denominated bonds reached a post-crisis high of 18.6% in October. Forecast: 7.46 (3M), 7.46 (6M) and 7.46 (12M) Central parity EURDKK EUR/DKK Spot Source: Reuters EcoWin, Danske Bank Markets Conclusion. We expect EUR/DKK to slide below the central rate again following the turn of the year and remain there. Any move above the central rate would be firmly offset by DN through intervention and rate hike(s). As a rule of thumb, it takes around DKK10-20bn of intervention before a rate change. Hence, we expect a very stable EUR/DKK over the next 12 months. Given our constructive view on the eurozone, we strongly doubt that EUR/DKK will move below over the next 12 months. Jens Nærvig Pedersen, Analyst, jenpe@danskebank.dk,

14 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 USD/CAD BoC signals low for even longer Growth. The otherwise strong momentum in Canadian data has deteriorated a little lately, notably with inflation on the soft side. At the same time, the US labour market continues to improve and we see good potential going into Canada should eventually benefit from this though. Monetary policy. The Bank of Canada (BoC) has maintained its overnight lending rate at 1.00% for the past two years. In its December statement, the BoC emphasised that 'downside risks to inflation appear to be greater. It is now very clear that the BoC will lag the Fed in scaling back on stimuli. We are not convinced the BoC will go as far as cutting rates but the market could start to price this. Flows. Speculators remain extensively short CAD. Valuation. CAD remains expensive on PPP measures. Commodities. We expect oil prices to head lower on a 12M horizon, which could weigh on CAD. However, oil production is rising in Canada and this suggests that oil revenue will remain significant. Risks. If household sector imbalances fail to evolve constructively, the BoC may have to follow the Fed in scaling back on stimulus earlier than currently expected. Forecast: 1.07 (3M), 1.08 (6M) and 1.10 (12M) USD/CAD 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst USD/CAD 1M 3M 6M 12M Forecast (pct'ile) 1.06 (58%) 1.07 (69%) 1.08 (73%) 1.10 (77%) Fwd. / Consensus 1.06 / / / / % confidence int / / / / % confidence int / / / / 1.14 Conclusion. Canada stands to benefit from a US recovery, which we see materialising next year. Recently, positive spillovers to the Canadian economy have been limited and with Fed tapering coming up, support for USD/CAD should remain in place. As the BoC has dropped its language about the need for future interest rate hikes and voiced worries over low inflation lately, we see potential for low for longer to be priced in Canada. This clearly contrasts with the Fed, where less easing is clearly in the cards. In our view, the divergent Fed-BoC outlook should support USD/CAD on a 3-12M horizon. Christin Tuxen, Senior Analyst, tux@danskebank.dk,

15 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 AUD/USD RBA intensifies rhetoric against strong Aussie Growth. Data out of Australia have improved somewhat recently with decent job figures and retail sales. However, the fundamental challenge of rebalancing the economy as the resource boom nears a peak remains. A less upbeat outlook for emerging markets, with China, in particular, tightening policy, dampens the outlook for Australian exports. Monetary policy. The Reserve Bank of Australia (RBA) has kept its cash target rate unchanged at 2.50% since the summer and maintains an easing bias. The RBA notably remains rather explicit in its desire to drive the AUD lower still denoting it uncomfortably high and governor Glenn Stevens has mentioned that the RBA eyes However, the RBA is also concerned about risks to financial stability from low interest rates. We would not rule out intervention from the RBA to send the AUD lower, although the bank has so far refrained from using this tool to any great extent. The pricing of further rate cuts could also be on the cards. Flows. Speculators are still extremely short AUD. Valuation. The AUD remains fundamentally overvalued but, notably, overvaluation is only half its post-crisis peak. Risks. If the RBA remains reluctant to take decisive measures to weaken the AUD, the currency could take a breather following this year s extensive sell-off. Forecast: 0.87 (3M), 0.86 (6M) and 0.85 (12M) AUD/USD 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst AUD/USD 1M 3M 6M 12M Forecast (pct'ile) 0.88 (27%) 0.87 (25%) 0.86 (24%) 0.85 (25%) Fwd. / Consensus 0.89 / / / / % confidence int / / / / % confidence int / / / / 0.99 Conclusion. The AUD needs to fall to foster a rebalancing of the Australian economy away from the resource sector to make the non-resource sector more competitive as the mining boom fades. Whether this be via RBA cuts or intervention is less of a done deal. However, on the whole, AUD/USD should thus remain under pressure as a struggling economy contrasts with a decent US outlook. The RBA and the Fed are likely to act accordingly and make the AUD carry trade less of an appealing bet on a 3-12M horizon. Christin Tuxen, Senior Analyst, tux@danskebank.dk,

16 NZD/USD RBNZ keen to hike but constrained by NZD Growth. The downturn seen in New Zealand s economy over the summer seems to have stabilised and data surprises are creeping gradually into positive territory. The earthquake reconstruction boom continues to prop up activity. Monetary policy. The Reserve Bank of New Zealand (RNBZ) has kept rates at 2.50% since the earthquake-related cut early in Following a range of warnings since his inauguration, RBNZ Governor Graeme Wheeler has intervened to curb NZD strength. However, the RBNZ is struggling with the risks to financial stability of a booming construction sector, whereas the rest of the economy is suffering from an overvalued NZD. The RBNZ has explicitly said it expects to raise rates in 2014 but new macro-prudential measures may ease the need for rate hikes. Flows. Speculators remain long NZD, in contrast with carry-commodities counterparts such as AUD and CAD. Valuation. The NZD is still heavily overvalued in PPP terms. Commodities. While energy prices could trend lower in 2014, the prices of New Zealand s many agricultural products may stay at decent levels. Risks. If the construction boom feeds into inflation and/or poses risks to financial stability, the RBNZ may be forced to hike rates sooner than we currently project. Christin Tuxen, Senior Analyst, tux@danskebank.dk, Forecast: 0.81 (3M), 0.81 (6M) and 0.80 (12M) NZD/USD 0.70 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst NZD/USD 1M 3M 6M 12M Forecast (pct'ile) 0.82 (36%) 0.81 (31%) 0.81 (34%) 0.80 (32%) Fwd. / Consensus 0.83 / / / / % confidence int / / / / % confidence int / / / / 0.92 Conclusion. With house rather than consumer price inflation the key worry for RBNZ at present and governor Wheeler having revealed his willingness to resort to intervention to curb NZD peaks, upside for the kiwi should be limited from current levels despite the prospect of rate hikes. As for most USD crosses, we see downside in 2014, as the USD stands to receive support from Fed tapering at a time when the RBNZ remains focused on curbing NZD strength. Relative to the AUD, we see potential in the NZD, with RBNZ looking at hikes and the RBA set to be on hold (if not cutting). 16

17 EUR/RUB tapering and rising liquidity to weigh on RUB Growth. Russian economic growth continues to disappoint, expanding 1.2% y/y in Q3 13, the same path as a quarter earlier. We cut our 2013 forecast by 30bp to 1.5%, but expect a rebound to 2.6% y/y in Monetary policy. The Russian central bank left its main rates unchanged again in December 2013, expecting CPI to hit the target of 5% in H2 14. We expect Bank Rossii to cut its main rates by 25bp in Q2 14 the earliest. Flows. Net capital outflows increased to almost USD13bn in Q3 13 versus USD7bn a quarter earlier, posting USD48bn for January-September 2013, while in 2012 capital outflows totalled USD54.6bn. Russia expects outflows to hit USD57bn in Valuation. EUR/RUB is trading above its 1M average of Risks. Bank Rossii s rate cuts, its QE steps adding liquidity, the deterioration in the current account surplus and the Fed s tapering of economic stimulus in upcoming months are weighing on the RUB as the oil price remains high. Vladimir Miklashevsky, Economist/Trading Desk Strategist, vlmi@danskebank.com, Forecast: (3M), (6M) and (12M) 54 EUR/RUB Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst EUR/RUB 1M 3M 6M 12M Forecast (pct'ile) (11%) (11%) (45%) (41%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / Conclusion. As we expected in early 2013, Russia s central bank Bank Rossii is continuing to act according to its plans on a weaker rouble. The RUB is set to stay weak over the next 12 months as part of the government s plan to stimulate economic growth. We see downside risks for the EUR/RUB in the coming three months, as Q1 is set to post a stronger current account surplus. However, in our view, possible Fed steps to start tapering would keep the RUB under pressure. 17

18 EUR/RUB important issues to watch Weakness set to continue in 2014 Over the past month, the RUB continued to perform poorly against the EUR in the EMEA FX universe, losing 2% as main losers were IDR (-5.8%) and ARS (-6.6%). Bank Rossii has intervened in December to mitigate the RUB s weakening, cutting from USD400m to USD350m the cumulative volume of FX interventions which lead to the shift of RUBBASK trading band s borders by 5 kopecks to ensure further increase of the rouble exchange rate flexibility in the context of the ongoing transition towards the floating exchange rate by Despite the weaker rouble looking attractive for local industries, we believe the government is not in favour of a dramatic devaluation, letting Bank Rossii weaken the RUB by a maximum of against the basket in Q1 14 (35.00 against the USD and against the EUR), shifting our previous expectations from for RUBBASK and for USD and for EUR, which was hit on strong euro on 27 November We are bearish on the RUB in 12 months as the Russian economy is not getting any notable boost and the global environment remains challenging for emerging market assets RUB's trading band vs. RUBBASK old no intervention zone (informal) lower border upper border RUBBASK (45%EUR+55%USD) Source: Bank Rossii, Bloomberg, Danske Bank Markets Bank Rossii sells USD350m/day Bank Rossii sells USD200m/day new no intervention zone Bank Rossii buys USD200m/day Bank Rossii buys USD350m/day The rouble gets a symbol from Bank Rossii after a national vote Vladimir Miklashevsky, Economist/Trading Desk Strategist, vlmi@danskebank.com,

19 USD/TRY dollar s strength to depress lira Growth. The Turkish economy continues to expand at a fast pace, posting 4.4% y/y GDP growth in Q3 13. The steady support came from private consumption and fixed investments expansion. We expect the economy to grow 4.8% y/y in The current account deficit shrank in October to USD2.9bn, from USD3.4bn (revised) in September, slightly more than consensus expected. However, both exports and imports have increased. We expect the gap to stay wide in future and weigh on TRY. Monetary policy. Turkey s central bank continues the break in its ultra hawkish policy, leaving the overnight lending rate unchanged at 7.75% in November. However, we would not rule out further tightening as the TRY has a strong downside risk under possible Fed tapering plans for December early Valuation. USD/TRY remains above its monthly average of Risks. The announcement of Fed tapering in December early 2014 could hit the TRY further together with other emerging market currencies. An escalation in Turkey s political environment would bring strong upside risks for USD/TRY. Forecast: 2.05(3M), 2.07(6M) and 2.10(12M) 2.45 USD/TRY Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst USD/TRY 1M 3M 6M 12M Forecast (pct'ile) 1.99 (12%) 2.05 (51%) 2.07 (49%) 2.10 (48%) Fwd. / Consensus 2.05 / / / / % confidence int / / / / % confidence int / / / / 2.41 Conclusion. We continue to see risk from the Fed s tapering and strong dollar as we expect 8% strengthening of USD against EUR in 12 months. Carry remains attractive but, in the longer term, we expect the rebound to be curbed by the very large current account deficit and the Fed s tapering plans. That said, we are bearish on the lira relative to market pricing on a 12-month horizon. Vladimir Miklashevsky, Economist/Trading Desk Strategist, vlmi@danskebank.com,

20 EUR/PLN rate cut expectations will hit the zloty Growth. Recent Polish macroeconomic data have pointed to a slight pickup in Polish growth. This said, Polish growth remains subdued and well below potential growth and unemployment seems set to continue increasing. Monetary policy. Polish growth remains weak and inflation is well below the central bank s 2.5% target. Indeed, there is now a clear risk of outright deflation in the Polish economy. Therefore, we now think the Polish central bank (NBP) will reinitiate its rate cutting cycle in coming months. We expect the NBP to cut rates by in total 75bp over the coming six months. This is not priced in by the markets. Valuation. The PLN is trading close to its fair value level, so valuation is unlikely to have any major near-term impact on the zloty. Risks. The biggest risk to the PLN is weak growth in the Polish economy and the need for further monetary easing. Forecast: 4.25 (3M), 4.30 (6M) and 4.30 (12M) Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 EUR/PLN 1M 3M 6M 12M Forecast (pct'ile) 4.20 (63%) 4.25 (73%) 4.30 (75%) 4.30 (65%) Fwd. / Consensus 4.19 / / / / % confidence int / / / / % confidence int / / / / 4.57 EUR/PLN 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. The outlook for lower Polish interest rates is likely to weigh on the zloty in coming months. However, over the medium term (six to 12 months), we believe a continued fairly benign global financial environment and a more attractive valuation of the zloty are likely to provide a bit of support. Lars Christensen, Chief Analyst, larch@danskebank.com,

21 EUR/HUF monetary policy outlook weights on HUF Growth. Domestic demand remains very weak, which together with subdued export growth weighs on economic activity. However, there are some signs that the economy has stabilised and finally seems to be out of recession. However, we expect GDP growth to remain well below its potential over the next three years. Monetary policy. The Hungarian central bank (MNB) has initiated a policy of baby step rate cuts. We expect the MNB to continue this policy and we expect yet another 20bp rate cut at the Monetary Council meeting in December. This would bring the key policy rate down to 3.00%. Valuation. The forint has fairly attractive long-term fundamentals and, in particular, a fairly large current account surplus is helpful. Risks. The biggest risk to the HUF remains the political uncertainty in Hungary and the risk that the Hungarian government will once again take a misstep in economic policy. Forecast: 305 (3M), 305 (6M) and 300 (12M) Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 EUR/HUF 1M 3M 6M 12M Forecast (pct'ile) (60%) (67%) (66%) (56%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / EUR/HUF 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. We could see a bit of softness for the forint in the near term as more rates cuts are likely to be priced in on the back of continued disinflation. However, given the attractive valuation of the forint, we expect it to remain fairly stable over the coming six to 12 months. Lars Christensen, Chief Analyst, larch@danskebank.com,

22 EUR/CZK set to move higher on further action by the CNB Growth. Given that the recovery in the eurozone is set to continue and due to the Czech central bank s (CNB) bold action, the Czech economy should revive next year, albeit moderately. We expect GDP to contract by 1.5% y/y this year (after worse-than-expected Q3 GDP) and grow by around 1% y/y in 2014 and by 1.7% y/y in The CNB s current forecast of GDP of 2.1% in 2014 and 2.5% in 2015 too optimistic, in our view. Monetary policy. The CNB announced that it would target EUR/CZK at around 27 on November 7. Although the risk of FX intervention was high, the approval and actual direct FX intervention immediately after this announcement was surprising. The CNB will intervene with any amount needed and made it clear that it is in this for the long run. The decision to use FX intervention was due to the increased risk of deflation and the urgent need for looser monetary policy conditions in order to anchor inflation expectations. We expect the CNB to move the floor for EUR/CZK higher in 2014 as we think that the CNB needs to be more aggressive and scale up monetary easing in order for inflation to return to target as quickly as planned. Debt risks are low. The Czech government forecasts the public finance deficit to be below 3% next year. Valuation. From a long-term perspective, the CZK is undervalued (fair value is around 23.8 against the EUR). Risks. Further fall in inflation and the need for a weaker CZK. Forecast: 27.7 (3M), 28.0 (6M) and 28.5 (12M) Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 EUR/CZK 1M 3M 6M 12M Forecast (pct'ile) (53%) (75%) (84%) (90%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / EUR/CZK 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. Following the direct FX intervention, the CZK has lost more than 4% and moved to around EUR/CZK 27. However, after the CNB stepped up its rhetoric and reiterated its commitment, the EUR/CZK has moved higher close to EUR/CZK In our view, the monetary policy actions taken by the CNB to actively weaken the koruna to 27 against the euro are likely to increase nominal GDP growth by around 1 percentage-point over the next four-six quarters, rather than if no policy had been implemented. However, growth real and nominal is still likely to remain subdued, underlining the need for additional monetary easing. We therefore expect the CNB to move the EUR/CZK floor higher going forward. Stanislava Pravdová-Nielsen, Analyst, spra@danskebank.com,

23 USD/ZAR Fed tapering remains the main risk to the rand Growth. Q3 GDP surprised on the downside when it showed weaker-than-expected GPD growth of 1.8% y/y in Q3, down from the upwardly revised 2.3% y/y in Q2. On the back of weaker-thanexpected economic activity recently, we have revised our GDP outlook for all three forecast years. We estimate average GDP growth of 1.8% this year, 2.6% in 2014 and 3.2% in Monetary policy. The South African Reserve Bank (SARB) MPC kept interest rates on hold in November, maintaining the key policy rate at 5.0%. Despite inflation inching down and economic activity being weaker, the MPC statement was surprisingly hawkish. The SARB remained concerned about upside risks to inflation and remaining uncomfortably close to the upper end of the inflation target. The exchange rate was mentioned as the main upside risk. The MPC clearly said that there was no room for further monetary easing and it even discussed a rate hike but found the timing impropriate. We expect the SARB to stay on hold in coming months but if the exchange rate comes under strong selling pressure on the back of the Fed s tapering, we cannot rule out that it will be forced to hike interest rates in the near future. Debt risks. A deficit of 4.2% is projected for the current fiscal years and is expected to narrow to 3.0% by 2015/2016. Valuation. ZAR remains fundamentally overvalued (fair value around 10.95). Risks. Loss of investor confidence due to socioeconomic problems, further downgrade by the rating agencies, a widening current account deficit. Forecast: (3M), (6M) and (12M) USD/ZAR Dec-12 Mar-13 Jul-13 Oct-13 Jan-14 Apr-14 Aug-14 Nov-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst USD/ZAR 1M 3M 6M 12M Forecast (pct'ile) (55%) (64%) (63%) (61%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / Conclusion. The pressure on the South African rand is persistent as Fed tapering draws nearer. The risk of a more severe sell-off is high. Our EMEA FX Scorecard has turned quite negative on the rand on all forecast horizons. Short term, Fed tapering remains the main risk for the ZAR though the technical picture might also weigh negatively on the rand. In the long run, on a 12-month horizon we remain bearish due to the fundamental overvaluation of the ZAR (given the large, unsustainable current account deficit). Stanislava Pravdová-Nielsen, Analyst, spra@danskebank.com,

24 USD/CNY renewed appreciation pressure Growth. Latest data suggest that the Chinese economy has again started to recover moderately on the back of a government mini stimulus. We expect GDP growth to be above trend in H2 13 but to ease again next year as the impact of stimulus wanes. Monetary policy. Money market rates have largely normalised after the stress in the money market in June. However, the People s Bank of China (PBoC) has de facto tightened monetary policy by draining liquidity through its open market operations and guiding money market rates slightly. With growth expected to slow next year, we do not expect a hike in the official leading interest rates. FX policy. China is gradually moving towards full convertibility and a floating exchange rate. The implication is for less intervention and increasing two-way volatility in the exchange rate. The PBoC has moved the reference exchange rate for USD/CNY lower in recent months, underscoring that CNY remains on a moderate appreciation trend. We expect the daily trading band to be widened soon from +/-0.5% currently. Valuation. The current account surplus and FX reserves have again started increasing, suggesting the CNY is still slightly undervalued. However, we do not regard it as substantially undervalued. Risks. The CNY could depreciate if GDP growth slows below 7% and/or money market stress returns. Longer term liberalisation of China s capital account could weaken the CNY. Forecast: 6.04 (3M), 6.00 (6M) and 5.96 (12M) Apr Aug 11 Dec Apr Aug Dec 12 Source: Reuters EcoWin, Danske Bank Markets USD/CNY exchange rate PBoC reference rate Daily trading band Spot Apr Aug Conclusion. We still recommend hedging CNY expenditure on the back of our expectations of moderate CNY appreciation and continued CNY depreciation expectations in FX forwards. However, the risk-reward pay-off has become less favourable. We recommend using offshore CNY forwards, as they currently discount the largest depreciation. In addition, the alternative offshore non-deliverable forwards are an increasingly imperfect hedge. Flemming Jegbjærg Nielsen, Senior Analyst, flemm@danskebank.com,