Minna Emilia Kuusisto Analyst Jakob Ekholdt Christensen Chief Analyst

Transcription

1 FX Forecast Update The USD has peaked, medium-term weakness 16 August 2016 Thomas Harr Global Head of FICC Research, Christin Tuxen (on-leave) Senior Analyst Morten Helt Senior Analyst Jens Nærvig Pedersen Senior Analyst Kristoffer Kjær Lomholt Analyst Minna Emilia Kuusisto Analyst Jakob Ekholdt Christensen Chief Analyst Stefan Mellin Senior Analyst Vladimir Miklashevsky Senior Analyst Allan von Mehren Chief Analyst Nicolai Pertou Ringkøbing Assistant Analyst Follow us on Investment Research Important disclosures and certifications are contained from page 30 of this report

2 Forecast review part I EUR/NOK. We think it is premature to rule out short-term easing from Norges Bank and expect it to address liquidity directly and/or cut rates in September. Indeed, Norges Bank is aware that keeping policy unchanged would implicitly ratify the Nibor-based monetary tightening, triggering additional NOK strength (see Norges Bank Dilemma, 12 August). Therefore, we see risks asymmetrically skewed towards a higher EUR/NOK following the latest fall. We forecast EUR/NOK at 9.30 in 1M (from 9.50), 9.30 in 3M (9.40), 9.10 in 6M (9.20) and 8.90 in 12M (9.00). EUR/SEK. We expect the Riksbank to stay focused on the exchange rate and the ECB and we expect it to match the ECB with further stimulus measures later this year. A growth slowdown is removing some of the previous tailwind for the krona. The Swedish economy is still in good shape though and most macroeconomic metrics still stand out versus European peers. Fundamentally the krona is a strong buy, in our view, but at the same time we expect monetary policy to remain extremely loose, which is why the krona is weak and is expected to remain weak, around the current level, for the next couple of months. Our forecast profile is almost unchanged at 9.40 in 1M, 9.30 in 3M, 9.30 (previously 9.20) in 6M and 9.10 in 12M. EUR/DKK. We forecast EUR/DKK will trade at in 1M and 3M, revised up from and , respectively. Over the medium term, we still expect EUR/DKK to trade close to the strong end of the historical trading range, targeting in 6-12M. We still look for Danmarks Nationalbank (DN) to cap EUR/DKK downside around by selling DKK in FX intervention. EUR/USD. We adjust upward our EUR/USD forecasts to 1.12 in 1M (1.09 previously), 1.12 in 3M (1.07), 1.14 in 6M (1.10) and 1.18 in 12M (1.14). Brexit has not had the expected negative growth implications on the eurozone. While we still expect that the eurozone will be hit with a lag we do not expect the ECB will cut interest rates. Political uncertainty in both the eurozone and the US will weigh on markets. However, this could be both EUR and USD positive. We maintain our long-held view that over the medium-term EUR/USD will head higher due to the undervaluation of the EUR and the large eurozone-us current account differential which is currently at the record level of Q4 04. EUR/GBP. We expect EUR/GBP to continue to trade higher in the coming 3-6 months. Our bearish view on GBP is not just a story of monetary policy easing in the UK, but the case for a weaker GBP is also very much a macroeconomic story about an adjustment of a large current account (CA) imbalance. The GBP has to weaken to adjust the large CA deficit. We have lifted our 3-12M forecasts targeting EUR/GBP at 0.90 (0.88) in 3M, and 0.95 (0.90) in 6M. Longer-term, we still expect the GBP will stabilise to some extent given attractive valuations. We target EUR/GBP at 0.90 (0.88) in 12M. 2

3 Forecast review part II USD/JPY. We no longer expect the BoJ to cut interest rates further, which for the FX market implies less potential for JPY depreciation over the medium and long term. Thus, we have lowered our 3-12M USD/JPY forecast. We target 101 in 1M but expect USD/JPY to gain a little support going into the important 21 September BoJ meeting. We target USD/JPY at 102 (1.07) in 3M and 104 in 6-12M. (revised down from 1.08). EUR/CHF. We expect the SNB to remain active in the FX market and expect EUR/CHF to remain range bound in the coming months, targeting the cross at 1.09 in 1M and 3M (revised higher from 1.07). Longer term, we continue to expect fundamentals to support a higher EUR/CHF and keep our 6M and 12M forecasts unchanged at 1.10 and 1.13, respectively. USD/CNY. CNY has been stable lately but the trend is still for a weaker CNY. We continue to look for a move to 7.00 for USD/CNY in one year. Growth continues to be under pressure in coming years and the debt concern will not go away. We expect the direction of interest rates to be down in 2017, while the Fed is lifting rates. EMEA. Fading Brexit risk and positive emerging markets sentiment have strengthened the PLN and HUF. As a result of diminished policy risks due to a less aggressive Swiss conversion plan, we lower our forecasts for EUR/PLN to 4.30 in 1M and 3M (previously 4.36 and 4.30, respectively), 4.28 in 6M (4.27 before) and 4.22 (unchanged) in 12M. We expect EUR/HUF to be 310 (1M and 3M), 308 (6M) and 306 (12M) compared with our previous forecasts of 312, 310 and 308, respectively. USD/RUB. Russia s currency profited from the post-brexit vote emerging markets rally diverging from the crude price. We continue to be moderately bullish on the RUB in the long term. However, the political risk and possible intensification of Western sanctions should be kept constantly in mind, as possible black swan events could prevail over the fundamentals. We cut our USD/RUB profile slightly and see the cross at in 1M (65.60 previously) and in 3M (63.70 previously) while keeping our 6-12M estimates unchanged at in 6M and in 12M. USD/TRY. Given the prevailing political uncertainty while geopolitical tensions have eased and economic ties with Russia are being restored, we cut our USD/TRY short- and medium-term post-coup attempt forecasts from July to 2.98 in 1M (previously 3.12), 3.05 in 3M (previously 3.20),3.07 in 6M (previously 3.25) and 3.15 in 12M (previously 3.35). 3

4 EUR/NOK short-term risks skewed on the upside Growth. While core inflation and the house price release for July surprised strongly on the upside (see overleaf), the Norwegian data calendar has otherwise delivered few surprises and still generally suggests an improved growth outlook, albeit from weak levels. As such, the most important economic developments for Norway have been higher Nibor fixings (see overleaf) and the 15% decline in the oil price. Importantly, cost reductions on the Norwegian shelf have reduced breakeven costs for the big oil projects and the oil price would have to fall an additional 15-20% to have a significant effect on Norwegian oil investments and economic growth. Monetary policy. As expected, Norges Bank left the sight deposit rate unchanged at the June monetary policy meeting. The revised rate path suggested a 100% probability of a September cut. Importantly, the June projections were based on a Bremain scenario. Flows. Foreign banks (proxy for speculative flows) have net sold the NOK over the past month. From an historical perspective, speculative NOK positioning is neutral. Valuation. While the NOK from a long-term perspective seems fundamentally undervalued, the relative development in unit labour costs suggests limited short-term upside potential. Our PPP model has EUR/NOK at MEVA has 9.49 as fair. Risks. Short term, the biggest risk factor to our forecast is that Norges Bank accepts the implicit tightening of monetary policy via higher Nibor fixings, which is likely to drive additional NOK strength. In the medium term, the main risk is that the lagged effects of the oil price collapse have a more severe impact on the Norwegian economy than we expect. Kristoffer Kjær Lomholt, Analyst, klom@danskebank.com, Forecast: 9.30 (1M), 9.30 (3M), 9.10 (6M), 8.90 (12M) Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k EUR/NOK 1M 3M 6M 12M Forecast (pct'ile) 9.30 (70%) 9.30 (61%) 9.10 (41%) 8.90 (32%) Fwd. / Consensus 9.21 / / / / % confidence int / / / / % confidence int / / / / EUR/NOK Conclusion. NOK rates have risen substantially over the past month, driving a significant NOK appreciation. While higher NOK rates partially reflect markets pricing out the probability of Norges Bank delivering its promised rate cut in September on the back of house price and CPI inflation surprising on the upside the move also reflects upward pressure stemming from tight NOK liquidity and a high USD shortage premium (see overleaf). As such, we think it is premature to rule out short-term easing from Norges Bank and expect it to address liquidity directly and/or cut rates in September. Indeed, Norges Bank is aware that keeping policy unchanged would implicitly ratify the Nibor-based monetary tightening, triggering additional NOK strength (see Norges Bank Dilemma, 12 August). Therefore, we see risks asymmetrically skewed towards a higher EUR/NOK after the latest fall. We forecast EUR/NOK at 9.30 in 1M (from 9.50), 9.30 in 3M (9.40),9.10 in 6M (9.20) and 8.90 in 12M (9.00). 4

5 EUR/NOK important issues to watch Norges Bank dilemma too early to rule out monetary policy easing In June, Norges Bank kept the key policy rate unchanged at 0.50%, while signalling a 100% probability of a 25bp September rate cut under a Bremain main scenario. Since then, domestic economic developments still suggest a gradually improving private sector outlook albeit from very weak levels. While negative macro implications of Brexit so far seem limited to the UK, we still think it is too early to conclude that euro area companies are immune to the UK EU vote. House price and CPI inflation have surprised significantly on the upside, casting doubt over whether Norges Bank will change its risk assessment and leave rates unchanged at the September meeting. Meanwhile, the US money market reform has contributed to sending Nibor fixings higher (more details: The US Money Market Reform: The Scandi angle, 9 August). For instance, the 3M Nibor-sight deposit spread is currently 62bp, while Norges Bank assumed a Q3 average of only 28bp. We emphasise that if Norges Bank does not react over the next six weeks (including the next monetary policy meeting on 22 September) by either cutting rates or addressing tight NOK liquidity, the higher Nibor fixings will have driven a de facto monetary tightening in Norway at a time of a continued weak growth outlook, a lower oil price and Brexit uncertainties. In our view, Norges Bank is also aware that unchanged policy would implicitly ratify this tightening, triggering additional NOK strength (even tighter monetary conditions). Therefore, we think it is still too early to call off short-term Norges Bank easing and we expect it to address liquidity directly and/or cut rates in September. Norges Bank facing house price and inflation worries Source: Macrobond Financial, Norges Bank, Danske Bank Markets amid weak growth and implicit monetary tightening Source : Macrobond Financial, Danske Bank Markets Kristoffer Kjær Lomholt, Analyst, klom@danskebank.dk,

6 EUR/SEK Riksbank set to stay obsessed with krona exchange rate Growth. The very strong growth that we saw in 2015 was bound to recede sooner or later. Anything else would be sensational. Data for Q2, albeit a preliminary estimate, suggests the slowdown began in H1. Although we believe Sweden is likely to outgrow the eurozone going forward, the cyclical gap is becoming less of a tailwind for the krona. In principle, other cyclical metrics, such as the labour market, support the downside in EUR/SEK (although investors focus is clearly somewhere else). Monetary policy. As expected, the Riksbank stayed on hold in July while lowering the rate path amid increasing downside risks following the Brexit referendum. Our inflation path falls below the Riksbank s next month and stays there, which coupled with extended QE from the ECB (which we project), is likely to force the Riksbank to expand its QE programme as well (October/December) in order to keep the krona in check. Flows. Corporates and institutions may see an increasing need to sell currencies after the summer season lull. Valuation. EUR/SEK is close to fair value according to shortterm models. The SEK is substantially undervalued based on medium- to long-term perspective fundamental models. Risks. A sharp collapse in the house market is potentially a downside risk for the krona (and the economy). Risk aversion would also typically weigh on the SEK. Upside surprises in GDP or inflation could send the krona higher than we forecast. Forecast: 9.40 (1M), 9.30 (3M), 9.30 (6M), 9.10 (12M) EUR/SEK 8.75 Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k EUR/SEK 1M 3M 6M 12M Forecast (pct'ile) 9.40 (34%) 9.30 (29%) 9.30 (37%) 9.10 (29%) Fwd. / Consensus 9.47 / / / / % confidence int / / / / % confidence int / / / / Conclusion. EUR/SEK unexpectedly decoupled from risk sentiment in July after trading close to each other for most of this year. We think this partly reflected summer markets (see next slide). In our view, the Riksbank is likely to stay obsessed with the krona exchange rate and as such closely track the ECB, trying to keep the krona in check at current levels in an attempt to prevent inflation falling back. We think the Riksbank and a slowdown in growth will keep the krona fundamentally weak throughout this year. We maintain our forecast profile at 9.40 in 1M, 9.30 in 3M, 9.30 in 6M and 9.10 in 12M. Stefan Mellin, Senior Analyst, mell@danskebank.se,

7 EUR/SEK important issues to watch Krona unduly weak over the summer The krona weakened as predicted following the Brexit referendum but then failed to rebound when risk appetite returned; in this sense, the krona s summer weakness was unexpected. Had it continued to move with risk sentiment, EURSEK would trade around 9.30 instead of close to 9.60 (see Chart 1). We have downplayed the imminent house market collapse argument as a reason for the sell-off. Instead, we blame part of the krona s underperformance on the holiday season when the activity of normal SEK buyers, commercial and institutions, normally lessens. This summer we have seen foreign equities moving higher, arguably prompting a need to rebalance currency exposure (buy SEK). We believe pent-up demand from these accounts could help the krona to take back most of its summer losses in the weeks to come. Closing of what we could call the rebalancing gaps (see Chart 1) supports this view. Relative monetary policy back on track Correlation between EUR/SEK and relative rates has rebounded and so has the beta (see Chart 2) sensitivity from rates. This may suggest that relative monetary policy, which lost some of its importance to general risk appetite earlier this year, is back on track as a key driver of the exchange rate. Chart 1: EUR/SEK vs eurozone equities Source: Macrobond Financial Chart 2: EURSEK vs rate spread beta Stefan Mellin, Senior Analyst, mell@danskebank.se, Source: Macrobond Financial, Danske Bank Markets 7

8 EUR/DKK no DKK appreciation pressure as tight liquidity eases FX. DN did not intervene in the FX market in July to support the EUR/DKK peg by buying foreign currency. There has been some speculation whether a Brexit event could trigger an FX inflow into DKK as DN sold DKK49bn in FX intervention in total in May and June in the run-upto the UK s EU referendum. However, this has not been the case and as EUR/DKK has increased to 7.44 over the past few weeks, there is little need for DN to sell DKK in FX intervention now. We forecast EUR/DKK will trade at in 1-3M, revised up from and , respectively). Over the medium term, we still expect EUR/DKK to trade close to the strong end of the historical trading range targeting in 6-12M. We still look for DN to cap EUR/DKK downside around by selling DKK in FX intervention. Rates. We expect DN to keep the rate of interest on certificates of deposit unchanged at minus 0.65% in 12M. However, if the need to sell DKK in FX intervention accelerates, or if the ECB decides to cut its deposit rate further (not our main scenario), DN may opt to cut to minus 0.75% a level we still view as the lower bound for the key policy rate in Denmark. Liquidity. Tight excess liquidity in the DKK money market has eased on the back of DN selling DKK in FX intervention and buybacks of government bonds. With further buybacks in the pipeline, we expect the liquidity situation to ease further in coming months. This should maintain a moderate downward pressure on Danish money market fixings (CITA), while the impact on EUR/DKK FX forwards is relatively limited due to the simultaneous increase in the EUR/DKK cross currency basis. Jens Nærvig Pedersen, Senior Analyst, jenpe@danskebank.dk, Forecast: (1M), (3M), (6M) and (12M) Source: Macrobond Financial, Danske Bank Markets Flows. The Danish current account surplus was 6.9% of GDP last year. This supports a stronger DKK. We expect a large surplus over the next few years. Conclusion. In our view, EUR/DKK is set to trade close to the strong end of the historical trading range on a 12M horizon. We see limited downside risk from the current level, as DN stands ready to intervene in the FX market to cap EUR/DKK downside. 8

9 EUR/USD range trading near term, higher medium term Growth. US growth surprised on the downside in Q2 but recent labour market data has surprised on the upside. Private consumption should be supported in coming months despite the weak July retail sales. European data have been stronger than we expected given Brexit but the sharp slowdown in the UK is likely to impact the eurozone with a lag. As such, we expect to see some softness in European data in the coming months. Monetary policy. The Fed was slightly more hawkish than expected at its July meeting. Fed chairman Janet Yellen is likely to give more clarity on her thinking regarding monetary policy at her Jackson Hole speech on 26 August. We believe that the Fed will wait until H1 17 to raise interest rates again. The market is pricing around 40% probability for a 25bp rate hike before end which appears fair. Meanwhile, we expect that the ECB as a minimum will have to extend its QE purchases beyond March 2017 but it is unlikely that it will cut interest rates further. Flows. The market is short EUR/USD according to IMM data but not in stretched territory. As such, this increases the sensitivity of the cross to any impetus from relative rates. Valuation. Both our PPP and MEVA models suggest the mid- 1.20s are fundamentally justified and thus that the cross remains undervalued. Risks. Political risks in the eurozone and in the US will weigh on markets in coming months. However, this can be both EUR and USD negative. Forecast: 1.12 (1M), 1.12 (3M), 1.14 (6M), 1.18 (12M) EUR/USD 1.00 Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k EUR/USD 1M 3M 6M 12M Forecast (pct'ile) 1.12 (32%) 1.12 (38%) 1.14 (53%) 1.18 (68%) Fwd. / Consensus 1.13 / / / / % confidence int / / / / % confidence int / / / / 1.23 Conclusion. We are adjusting up our EUR/USD forecasts to 1.12 in 1M (from 1.09) 1.12 (1.07), 1.14 (1.10) and 1.18 (1.14). These are the forecasts we had before Brexit. Brexit has not had the economic impact on the eurozone as we expected. While we believe that there will be some slowdown in the eurozone in coming months, we still do not expect that the ECB will cut rates. Political uncertainty could weigh on both the EUR and the USD. We maintain our long-held view that the undervaluation of the EUR and the wide eurozone-us current account differential are longerterm EUR positives. (See Charts next page). Hence, EUR/USD will reach 1.20 before it reaches Thomas Harr, Global Head of FICC Research, thhar@danskebank.dk,

10 EUR/USD important issues to watch Political risks in the eurozone and in the US EUR/USD negatives - In the eurozone, there are important political events over the coming year: 1) the Italian constitutional referendum in November; 2) the French presidential election in April/May 2017 and then the German election in September/October Meanwhile, the UK s negotiations with the EU following Brexit are likely to begin in early 2017 when PM Theresa May is likely to have triggered Article In the US, the presidential election takes place on 8 November. - We view European politics as a negative for the EUR but only modestly so, as long as it does not put the EU/euro project in too much doubt. The French election is in our view the biggest risk as main opposition leader, Marine Le Pen, has stated that she will call an EU referendum if she becomes President. - In the US, we view a Trump win as negative for the USD given his focus on protectionist policies which we view as a negative dollar policy. A Clinton win, which the market is expecting, will be slightly USD positive. Medium term the EUR remains substantially undervalued - Danske Bank G10 medium-term valuation (MEVA) model points to EUR/USD at The Danske Bank G10 PPP calculation suggests 1.25 is long-term fair value. - The EU-US current account differential is at its widest level since , providing fundamental support for the EUR. Thomas Harr, Global Head of FICC Research, thhar@danskebank.dk, Danske Bank MEVA model points to EUR/USD at 1.27 Source: Bloomberg, Macrobond Financial, Danske Bank Eurozone-US current account differential at Q4-04 levels Eurozone-US CA in ppt of GDP Source: Bloomberg, Danske Bank Markets 10

11 EUR/GBP higher medium term on fundamentals and BoE easing Growth. Post-Brexit data have been very weak, as consumer confidence, business confidence and housing market expectations have declined. Most noticeably, the PMIs have fallen below 50 supporting our view that the UK is heading into a recession in H2 16. The NIESR GDP estimate for July suggests that the UK economy in the month post Brexit shrank by a substantial 0.2%. Historically the indicator has been a reliable indicator for economic growth in the UK and it is therefore noteworthy that NIESR put a 50% probability of a technical recession in the UK within 18 months. Monetary policy. As expected the Bank of England (BoE) delivered a substantial easing package and maintained a very dovish stance at the 4 August MPC meeting. The package included a 25bp Bank Rate cut to 0.25%, GBP70bn QE (GBP60bn government bond and GBP10bn corporate bond purchases), and a new Term Funding Scheme (TFS). We expect the BoE to cut the Bank Rate by 15bp to 0.10% and to increase both APF and CBPS at the November meeting. Note that the BoE has said explicitly that the new lower bound is close to but above 0% and ruled out negative interest rates. Flows. Investors have built up speculatively short GBP positions following the Brexit vote. Positioning looks increasingly stretched. Valuation. EUR/GBP is trading above the fair value estimates implied by our PPP model (0.77) and our MEVA model (0.755). Risks. Uncertainty about the future relationship between UK and EU after the Brexit vote has increased uncertainty about nearterm FDI and portfolio flows into the UK, which in combination with the large current account deficit in the UK imply a significant downside risk to GBP. Morten Helt, Senior Analyst, mohel@danskebank.dk, Forecast: 0.88(1M), 0.90 (3M), 0.95 (6M) and 0.90 (12M) Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k EUR/GBP 1M 3M 6M 12M Forecast (pct'ile) 0.88 (71%) 0.90 (79%) 0.95 (90%) 0.90 (66%) Fwd. / Consensus 0.87 / / / / % confidence int / / / / % confidence int / / / / 0.97 EUR/GBP Conclusion. We expect EUR/GBP to continue to trade higher in the coming 3-6 months. Our bearish view on GBP is not just a story of monetary policy easing in the UK, but the case for a weaker GBP is also very much a macroeconomic story about an adjustment of a large current account (CA) imbalance. We think that the substantial CA deficit of around 5% of GDP in the UK combined with high uncertainty about near-term FDI and portfolio flows into the UK, imply a sharp fall in domestic demand and a weaker GBP to support exports. Both our MEVA and PPP models suggest that with EUR/GBP at 0.93 GBP would be significantly undervalued with a 2 sigma deviation from fair value estimates of and (MEVA and PPP, respectively). We think EUR/GBP is likely to overshoot this level for a period of time (this was also the case in ). We have thus lifted our 3-12MM forecast targeting EUR/GBP at 0.90 (0.88) in 3M, and 0.95 (0.90) in 6M. Longer-term, we still expect the GBP will stabilise to some extent given attractive valuations. We target EUR/GBP at 0.90 (0.88) in 12M. 11

12 EUR/GBP important issues to watch Bank of England s easing package As expected the Bank of England delivered a substantial easing package in August. The package was very much in line with our expectations: 1) A cut in the Bank Rate by 25bp to 0.25% from 0.50% 2) Expansion of the asset purchase scheme for UK government bonds by GBP60bn to GBP435bn from GBP375bn (purchases over the next six months) 3) Corporate Bond Purchase Scheme (CBPS) for up to GBP10bn over the next 18 months 4) A new Term Funding Scheme (TFS) was introduced with the aim to reinforce the pass-through of the rate cut Moreover, the BoE maintained a very strong easing bias saying it can act further along each of the dimensions of the package by lowering Bank Rate, by expanding the TFS [ ] and by expanding the scale or variety of asset purchases. Also, a majority of members expect to support a further cut in Bank Rate if data are in line with the updated projections. In the updated projections, the Bank of England expects growth to decline close to 0% in the second half but stay positive. We think this is too optimistic. In fact, we are forecasting a technical recession in the UK with negative GDP growth in Q3 and Q4 16, and hence we expect Bank of England to ease further in November, when the next Super Thursday takes place. We expect BoE to cut the Bank Rate by 15bp to 0.10% and to increase both APF and CBPS at the November meeting. Note that BoE has said explicitly that the new lower bound is close to but above 0% and ruled out negative interest rates. A 15bp rate cut to 0.1% is already priced for November, while the Bank rate is priced to fall to 0.05% in the coming 2 years. BoE to buy GBP60bn gilts over the coming 6M Source: Macrobond Financial, Danske Bank Markets 15bp cut to 0.1% already priced for November Pricing GBP-OIS 1m swap 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Aug16 Aug17 Jul18 Jul19 Current live Morten Helt, Senior Analyst, mohel@danskebank.dk,

13 USD/JPY more BoJ easing, but less yen negative Macro outlook. Japan preliminary GDP for Q2 fell short of expectations being flat on the quarter (GDP consensus 0.2% q/q). A drop in business spending of 0.4% q/q was the main drag. The data adds to the picture of a struggling Japanese economy where business surveys (PMI and Tankan) indicate further deterioration in the manufacturing sector in coming quarters. The government has adopted a large-scale fiscal stimulus package totaling JPY28trn (5.6% of annual GDP). The fiscal stimulus will be spread over several years but will likely support the economy from Q4 16. We expect the fiscal measures to boost GDP by around 1% (JPY5trn) in the first year. In fiscal year terms, the package is expected to lift GDP growth 0.3% in FY 2016 and 0.9% in FY2017. Monetary policy. At the July MPC meeting, the Bank of Japan (BoJ) increased its purchases of ETFs, but kept the policy interest rate and bond purchase programme unchanged at -0.1% and JPY80trn, respectively. While this overall was a disappointment, the BoJ managed to avoid a massive appreciation of JPY as it kept the door open for additional easing in September. We expect it to deliver on the 21 September. However, given that the BoJ refrained from cutting interest rates further into negative territory, we no longer expect it to cut interest rates further. Flows. Japan s trade balance improved substantially in 2015 to a current account surplus of 3.3% of GDP, providing increasing support to JPY. Valuation. PPP is around 82, while our MEVA model suggests that is fundamentally justified. Risk. USD/JPY remains highly correlated with investors risk appetite. Non-commercial positioning is very long JPY suggesting an increased correction risk towards a weaker JPY. Morten Helt, Senior Analyst, mohel@danskebank.dk, Forecasts: 100(1M), 102 (3M), 104(6M) and 104(12M) Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k USD/JPY 1M 3M 6M 12M Forecast (pct'ile) (41%) (60%) (68%) (64%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / USD/JPY Conclusion. The upcoming BoJ meeting on 21 September, when the BoJ will present a comprehensive assessment of its monetary policy strategy, will in our view prove pivotal for the medium-term outlook for the yen. We no longer expect the BoJ to cut interest rates further which for the FX market implies less potential for JPY depreciation over the medium and long term, and we have consequently lowered our 3-12M USD/JPY forecast. However, given the market s low expectations for further BoJ rate cuts, short-term valuations and positioning, we expect that JPY appreciation pressure to lose momentum, and in the absence of sharp deterioration in risk sentiment and/or substantial declines in crude oil prices, we do not expect USD/JPY to break below significantly 100. On a 3-12M horizon, we do not see any strong case for a trend in USD/JPY. On the one side, the prospect of a monetary policy surprise (either from the BoJ or the Fed) is low, and while the underlying support for JPY stemming from fundamental flows is likely to remain intact, we see the effects diminishing as the yen no longer is undervalued. We target USD/JPY at 102 (107) in 3M and 104 (108) in 6-12M. 13

14 USD/JPY important issues to watch No more rate cuts from BoJ implies less JPY depreciation potential The BoJ s inaction over the past months has led to increased uncertainty among investors over whether the BoJ has run out of tools. We do not think so. In our view, the BoJ signaled a high probability of additional easing at the next meeting on 21 September, when the BoJ has said it will present an evaluation of its monetary policy strategy. Given that the BoJ refrained from cutting interest rates further into negative territory, we no longer expect it to cut interest rates further. While there is a possibility that BoJ could come up with something new, we think that it is most likely the BoJ will expand its annual target for asset purchases by some JPY 15-20trn. For the FX market, the move away from the negative interest rate strategy (under which the BoJ could pursue a weaker yen) implies less potential for JPY depreciation over the medium and long term.. but, fundamentals will be less yen supportive going forward Japan s trade balance improved substantially over the past years, to a current account surplus of around4% of GDP. The improvement of external balances has provided increased support to the yen. Besides the weakening of the yen which has improved competitiveness in the Japanese export sector, the past year s collapse in the oil price has also played an important role in the current account improvement. In the coming years, we expect that fiscal stimulus (less domestic savings) and a higher oil price to weigh on Japan s current account balance. Moreover, the yen is no longer stretched. According to our Medium- Term Valuation model (MEVA), USD/JPY at is fundamentally justified. Hence, the underlying support to the yen from fundamental flows and valuation is likely to ease going forward. Morten Helt, Senior Analyst, mohel@danskebank.dk, Rate cut expectations lowered substantially Pricing JPY-OIS 1m swap -0.10% -0.15% -0.20% -0.25% -0.30% -0.35% -0.40% -0.45% Jul16 Jul17 Jul18 Jul19 Current live 28-Jul-16 Yen no longer undervalued Source: E-Views, Bloomberg, Danske Bank Markets 14

15 EUR/CHF SNB remains active in the market Growth. Real GDP grew at an annualised rate of 0.4% in the first quarter. Data released so far suggest the recovery continued in Q2. However, following a period of improvement in the outlook for the Swiss economy, the forward-looking KOF indicator seems to have stabilised while manufacturing PMI fell to 50.1 in July pointing to a more moderate outlook in coming quarters. Hence, the uncertainty about Brexit has also hit Swiss business sentiment. CPI inflation remains in negative terrain at -0.2% y/y in July. Monetary policy. The Swiss National Bank (SNB) has continued to intervene substantially in the FX market post the Brexit vote in order to curb CHF appreciation pressure. The SNB s currency reserve rose to a record high in July at CHF615.4bn. As the ECB has moved its finger from the ratecut button, the pressure on CHF from relative rates has eased. We expect the SNB to keep both the Libor target midpoint and the sight-deposit rate at -0.75% for the near future. We expect the SNB to continue using intervention as a first line of defence should the franc appreciate further. Flows. Positioning remains broadly neutral on the CHF and is less stretched on EUR shorts than at the start of the year. Valuation. Both our PPP and our MEVA model suggest that 1.30 is fundamentally justified; hence, the cross is undervalued on both measures. Risks. The SNB s commitment to preventing sustained CHF appreciation has limited the downside risks to EUR/CHF. However, the SNB has no specific target for EUR/CHF but focuses more on a trade-weighted CHF measure. Jens Nærvig Pedersen, Senior Analyst, jenpe@danskebank.dk, Forecast: 1.09 (1M), 1.09 (3M), 1.10(6M) and 1.13(12M) Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k EUR/CHF 1M 3M 6M 12M Forecast (pct'ile) 1.09 (63%) 1.09 (53%) 1.10 (63%) 1.13 (79%) Fwd. / Consensus 1.08 / / / / % confidence int / / / / % confidence int / / / / 1.15 EUR/CHF Conclusion. EUR/CHF has been trading in the range over the summer as the SNB has capped CHF appreciation via FX interventions. We expect the SNB to remain active in the FX market and expect EUR/CHF to remain range bound in the coming months targeting the cross at 1.09 in 1M and 3M (revised higher from 1.07). Longer term, we continue to expect fundamentals to support a higher EUR/CHF and keep our 6M and 12M forecasts unchanged at 1.10 and 1.13, respectively. 15

16 USD/CAD gradually lower Growth. After a strong start to the year economic data have generally surprised on the downside with the economic surprise index having fallen steadily since April. For instance, while the manufacturing PMI rose slightly after the previous months falls, actual manufacturing production figures have disappointed, with the quarterly fall marking a multi-year record fall. The monthly GDP releases have also shown a growth slowdown, which is explained partially by the devastating Alberta fires. Finally, export figures and labour market reports have also been worse-than-expected readings. Monetary policy. As widely expected, the Bank of Canada kept the policy rate unchanged at 0.5% at the July meeting, referring to the continued structural adjustment to the oil price shock. Markets currently assign a 40% probability of an additional 25bp rate cut in 12M. We maintain the call that the Bank of Canada will leave rates unchanged over the coming year. Flows. According to IMM data, speculative CAD positioning is in neutral territory. Valuation. Our MEVA estimate for USD/CAD is around 1.18, while our PPPmodel points to Commodities. Oil constitutes a substantial part of Canadian activity and is generally high cost. Canada thus stands to lose from a new and lower normal level for the oil price. A large share of Canada s oil is of a poorer quality and trades at a substantial discount to WTI. Risks. The Bank of Canada is set to renew its monetary policy target at end Kristoffer Kjær Lomholt, Analyst, klom@danskebank.dk, Forecast: 1.30 (1M), 1.29 (3M), 1.27 (6M) and 1.25 (12M) Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k USD/CAD 1M 3M 6M 12M Forecast (pct'ile) 1.30 (67%) 1.29 (56%) 1.27 (45%) 1.25 (42%) Fwd. / Consensus 1.29 / / / / % confidence int / / / / % confidence int / / / / 1.41 Conclusion USD/CAD We still expect the fundamentally undervalued loonie to appreciate gradually over the coming year on the back of valuation, a gradually higher oil price, markets repricing Bank of Canada monetary policy and a generally improved growth outlook in North America. In light of the reduced outlook for USD strength, we lower our USD/CAD forecast to 1.30 in 1M (from 1.33), 1.29 in 3M (1.31), 1.27 in 6M (1.28) and 1.25 in 12M (unchanged). 16

17 AUD/USD market ignores RBA, for now Growth. As a result of the low interest rate environment globally and continued recovery in base metal prices, AUD has remained attractive, appreciating by over 4% since our last update. The rising AUD is adding to central bank worries of ever-slowing inflation. In Q2, the pace of consumer price increases slowed to a new all-time low of 1% from 1.3% in Q1. Economic growth is expected to slow from the 3.1% in Q1 as both business conditions and confidence have failed to impress recently. Monetary policy. In August, the RBA ran out of patience with the stronger AUD and cut the OCR rate by 25bp to an all-time low of 1.50%. Markets are pricing a 50% chance of another cut this year. The recent stabilisation in residential house prices, and above all, the significant deceleration of price rises in Sydney give some comfort to the central bank and make room for further cuts. In its August monetary policy statement, the RBA sounded less worried about the impact of lower interest rates on dwelling prices. A lot depends on whether a stabilisation of the Chinese economy and a recovery in commodity prices continue and how limited the impact of Brexit will be globally. Flows. According to CFTC data, speculative net long positions are their highest since May. Skewed positioning increases the risk of a sharp AUD depreciation if the current trend reverses as we expect. Valuation. Fundamentally, AUD/USD looks significantly overvalued, with our PPP and MEVA models having 0.71 and 0.70 as fair, respectively. Risks. Continued recovery in metal prices together with postponed Fed rate hikes and very accommodative monetary policy in other countries could uphold investors appetite for AUD and keep its strength in check. Minna Kuusisto, Analyst, mkuu@danskebank.com, Forecast: 0.76 (1M), 0.74 (3M), 0.73 (6M) and 0.72 (12M) Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k AUD/USD 1M 3M 6M 12M Forecast (pct'ile) 0.76 (29%) 0.74 (21%) 0.73 (24%) 0.72 (27%) Fwd. / Consensus 0.77 / / / / % confidence int / / / / % confidence int / / / / 0.85 AUD/USD Conclusion. Against our expectations, the UK voted to leave the EU. Ensuing global risk-off led to further re-pricing of Fed hikes and we do not expect the next hike till next year. Accommodative monetary policy abroad together with a stabilisation in the Chinese economy and recovery in commodity prices have provided significant support for AUD. Thus, the RBA was forced to cut earlier than we expected. We see the bar for further cuts as lower now that the RBA has explicitly shown less worry about the potential negative impact of low rates domestically. The prospect of further rate cuts from the RBA together with continued uncertainty about global growth should gradually drive the AUD lower in the months to come. In 6-12M, AUD depreciation should continue as the Fed resumes its hiking cycle and the RBA supports the economy with low rates. Due to recent AUD strength, we have made a level shift to our forecast profile. 17

18 NZD/USD more easing in the pipeline Growth. Growth in New Zealand continues to be driven by positive net migration, construction, tourism and accommodative RBNZ policy. Low dairy prices continue to depress incomes in the sector and reduce farm spending and investment. Still, GDP growth surprised on the upside in Q1, as the economy expanded by 0.7% versus consensus of 0.5%. Simultaneously, inflation remained near the all-time low in Q2, as consumer prices increased by 0.4%. We expect inflation to weaken further in Q3. Monetary policy. In August, the Reserve Bank of New Zealand cut the OCR by 25bp to 2.0%. The statement was very dovish as the central bank hinted at further cuts in upcoming meetings. At the moment, the market is pricing around 35% probability of a cut in September and a 75% probability of a cut later this year. Simultaneously, the central bank is challenged by rising house prices. Residential property prices increased by 14% in July. The central bank is considering stronger macro prudential measures, which should help mitigate financial system risks. Despite the heating up of the property market, we expect RBNZ to loosen policy further as disinflationary risks dominate the agenda. Valuation. According to our MEVA model, the NZD is overvalued. MEVA and PPP estimates are both Risks. The NZD remains exposed to global risk sentiment and commodity prices: should the former take a turn for the better and/or if a strong La Niña fuels upward pressure on food prices, the RBNZ may adopt a neutral stance. Forecast: 0.71 (1M), 0.68 (3M), 0.70 (6M) and 0.70 (12M) Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k NZD/USD 1M 3M 6M 12M Forecast (pct'ile) 0.71 (22%) 0.68 (14%) 0.70 (33%) 0.70 (39%) Fwd. / Consensus 0.73 / / / / % confidence int / / / / % confidence int / / / / 0.81 NZD/USD Conclusion. The NZD has rallied more than 2% since we published FX Forecast Update: The GBP sell-off has just started on 28 June despite global uncertainty related to Brexit. Markets have priced out Fed hike expectations and, overall, globally accommodative monetary policy and the low interest rate environment have supported demand for higher yielding currencies such as the NZD. We raise our forecast level due to recent NZD appreciation. Nevertheless, we expect further RBNZ easing to reverse the current NZD appreciation trend. Longer term, stronger global growth and higher commodity prices should, in our view, drive NZD higher again. Minna Kuusisto, Analyst, mkuu@danskebank.com,

19 USD/CNY more CNY weakness ahead Monetary policy. Chinese growth recovered in Q2 driven by the construction sector and probably a moderate recovery in exports. However, a decline in credit growth in the past few months suggests that the boost from infrastructure spending will fade soon and growth is likely to lose some momentum again in We expect the People s Bank of China to be on the sidelines for the rest of 2016, as China has signalled it will turn to fiscal policy if more policy support is needed to keep up growth. However, in 2017, we expect renewed monetary easing as economic momentum fades. FX policy. China has made two important changes to policy over the past year. First, the daily reference rate has become more market based. Second, the CNY is now explicitly managed against a basket of currencies rather than just the USD. China aims for a stable currency around the equilibrium level but has not been explicit about how large a fluctuation it will tolerate. The CNY is still labelled as stable by the PBoC despite a 10% depreciation from the peak in We believe China will quietly aim for a continued gradual weakening of the CNY but step in if the move becomes too fast to secure financial stability. Capital outflows could easily pick up again if the debt concern intensifies when growth eases again. Valuation. Despite the CNY s appreciation in recent years, we do not regard it as overvalued, as (1) China s share of global export markets continues to improve and (2) China still has a robust current account surplus of close to 3% of GDP. Risks. There is still a risk that the CNY could depreciate faster in the medium term if growth slows down and/or debt worries create a new confidence crisis. Allan von Mehren, Chief Analyst, alvo@danskebank.com, Forecast: 6.65 (1M) 6.70 (3M), 6.80 (6M) and 7.00 (12M) Source: Macrobond Financial, Danske Bank Markets Conclusion. We look for the CNY to weaken gradually against the USD as the Fed resumes raising rates and China resumes easing monetary policy in However, we do not expect a bigger devaluation, as the CNY is not overvalued and China wants stability in its currency. Against the EUR, we expect CNY to depreciate close to 10% over 12M. The CNH-CNY spread has been quite stable since calm was restored in February. We expect the spread to stay at around zero or slightly above throughout the forecast horizon. Hence, we expect basis risk in hedging CNY exposure through CNH to be limited. If the spread moves out, we believe the PBoC is likely to use higher CNH money market rates (by draining liquidity) to pull it down close to zero again. 19

20 USD/RUB diverging slightly from oil, keeping an eye on geopolitics Growth. According to the preliminary data, Russia s GDP shrank 0.6% y/y in Q2 16 versus a 1.2% y/y fall a quarter earlier, which is better than consensus expected (-0.8% y/y). In January-June 2016, the economy contracted 0.7% y/y, stopping at 0.0% m/m S.A. in June as a stronger RUB and disinflation helped private consumers and several local industries continue to expand. We keep our 2016 GDP growth forecast at -0.6% y/y (given the Brent year average at USD48.6/bl) and 2017 GDP growth at 1.2% y/y. Monetary policy. On 29 July, Russia s central bank (the CBR) kept its key rate at 10.5% as consensus and we expected. The main reasons given by the central bank for keeping the key rate unchanged were the stalling decline in inflation expectations, the CBR s comfortable stance on an upcoming economic recovery and its uncertainty about reaching its inflation target by the end of 2017 (4% y/y). We expect the total cut to be 100bp in 2016 on gradual monetary easing. Flows. Over the past five months, capital outflows slowed significantly to USD12.7bn from USD33.0bn in Q1 15. We expect total capital outflows to fall under USD40bn in Valuation. Given an 8.7% m/m fall in the 30-day average of the Brent price, the RUB 30-day average fell just 1% m/m as the post-brexit referendum emerging markets rally backed the currency. As the RUB has started diverging slightly from the oil price, the USD/RUB pair is hovering around its fair value. Forecast: (1M), (3M), (6M) and (12M) 84 USD/RUB Aug-15 Nov-15 Mar-16 Jun-16 Sep-16 Dec-16 Apr-17 Jul-17 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst k USD/RUB 1M 3M 6M 12M Forecast (pct'ile) (54%) (38%) (23%) (11%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / Risks. As the geopolitical tensions surrounding the Ukraine crisis returned to the news on 10 August 2016 in relation to the situation in Crimea, it could open another Pandora s box in geopolitics weighing on the RUB. A change in the Fed s dovish monetary stance in H2 16 would weigh on the RUB further. Conclusion. Russia s currency profited from the post-brexit emerging markets rally, diverging from the crude price. We continue to be moderately bullish on the RUB in the long term. However, the political risk and possible intensification of Western sanctions should be constantly kept in mind as possible black swan events could prevail over fundamentals. Vladimir Miklashevsky, Senior Economist/Trading Desk Strategist, vlmi@danskebank.com,