FX Forecast Update 15 May 2014

Transcription

1 FX Forecast Update 15 May 2014 Draghi s promise to weaken the euro Arne Lohmann Rasmussen Chief Analyst, Head of Rates, FX and Commodities Strategy Stefan Mellin Stanislava Pravdová-Nielsen Jens Nærvig Pedersen Kristoffer Lomholt Senior Analyst 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 33 of this report.

2 Main forecast changes part I Mario Draghi s promise of further ECB easing in June could very well be the turning point for the euro and in general we have pencilled in more euro weakness to our FX forecast as it now appears more likely that the ECB will actually deliver further monetary policy easing in response to low inflation. In terms of EUR/USD, the soft rhetoric from the ECB has indeed eased medium- and long-term upside risks to EUR/USD significantly. In addition, we note the downside risks to the US economy have faded following a temporary dip at the beginning of the year and as US recovery is expected to gain pace in coming quarters so Fed tapering will remain on course. We expect the Fed to hike rates in mid-2015 in line with the Fed s own projection. However, we believe the risk is skewed towards earlier tightening and, as the market is currently pricing in the first hike in autumn 2015 and for prices to increase only very gradually thereafter, we expect a repricing of the Fed funds curve to take place over coming quarters. Hence, we still see potential for a cyclical downtrend in EUR/USD through a trend in relative rates and we now target EUR/USD at 1.35 in 3M (previously 1.40), 1.32 in 6M (previously 1.36) and 1.28 in 12M (previously 1.30). We stick to our view that EUR/NOK will continue to edge lower over the next 12 months. However, given our view that the ECB will ease monetary policy in June, that Norges Bank will start to hike rates in Q2 15 and the recovery in the Norwegian economy, we have pencilled in a slightly more negative profile for EUR/NOK. We now forecast that the cross will drop to 8.00 (8.15) in 3M, 8.00(8.10) in 6M and 7.85 (7.95) in 12M. An extra supportive factor for the NOK going forward would be if Norges Bank (due to the rising before-oil deficit) starts purchasing NOK in the market to fill the funding gap instead of purchasing foreign currency on behalf of the Pension Fund Global (Petroleum Fund) which has been the norm for many years. The SEK is likely to come under some pressure going into the Riksbank meeting in July, but it will not be a major drag given what is already priced in. Furthermore, M&A-related flows will ebb out and cancel some of the help for SEK that we have seen recently. Hence, we still see risks skewed to the upside in the near term for EUR/SEK and target the cross at 9.10 in 1M. The global and the Swedish growth outlook are medium-term supportive factors for the krona and we have kept our six- and12-month targets unchanged at 8.90 and 8.75, respectively. 2

3 Main forecast changes part II The combination of the BoE moving towards the first rate hike and the prospect of euro weakness on the back of ECB easing means we expect EUR/GBP to move lower over the coming year. Given that we now expect more aggressive easing from the ECB, we have pencilled in slightly more sterling strength over the next 12 months. We now expect EUR/GBP drop to 0.80(0.81), 0.79(0.80) and 0.77 on three-, six- and 12-month horizons. In particular, on a 12M horizon, we expect sterling to appreciate against the euro as the BoE is way ahead of the ECB in the monetary policy cycle and as an expected stronger US dollar tends to support sterling. We have kept our USD/JPY forecast unchanged and still target USD/JPY at 106 in 3M, 110 in 6M and 114 in 12M. However, we highlight that weak economic growth has increased the probability of the BoJ easing earlier. In the short run, further ECB easing is likely to cap EUR/CHF upside and we have consequently lowered our 3M forecast to 1.23 (1.24). In the next six-12 months, however, we still expect EUR/CHF to gradually edge higher towards 1.24 (before 1.25 and 1.26), mainly driven by a reversal of safe-haven flows and an increase in Swiss portfolio investments abroad. The positive risk sentiment in global markets is boosting most of the EMEA currencies. In particular, the Turkish lira and the South African rand are benefiting from the risk-on mood among other EMEA currencies. Hence, while political risk has declined considerably in Turkey and positive risk sentiment is intact, the Turkish lira could gain further. In this respect, we have revised our USD/TRY short-term forecast in a more positive direction. The same applies for the South African rand on which we have also become more positive on the short-term horizon of three months. Regarding CEE, we have not made any big changes compared with last month. We have revised up our HUF forecast slightly as the economy is showing signs of a faster-than-expected recovery. 3

4 EUR/USD Draghi s promise limits upside risks Growth. Economic data indicates that the US recovery is likely to gain pace again following a weak Q1. Eurozone data has also remained decent, although there have been less positive surprises recently. We expect US GDP to grow close to 3% this year, well above the 1.3% expected for the euro area. However, there is room for surprises in the euro area. Monetary policy. Relative monetary policy is a key factor for EUR/USD in the medium term. The ECB is on an easing bias and it now appears more likely that the ECB will actually deliver further monetary policy easing in response to low inflation. At the same time, Fed tapering is on course and as the timing of the first Fed hike very much depends on how much slack is prevalent in the US labour market, we believe the risk is skewed towards earlier tightening that what the market is currently pricing in. Flows. The eurozone has a current account surplus, while the US is stuck with a chronic deficit. The rating cycle has turned for the peripheral countries and the strong bond performance should continue to attract foreign investors in Valuation. EUR/USD is not far from its PPP level. Our short-term models suggest that current fair value is around Risks. If the ECB fails to deliver substantial monetary easing at its June meeting, EUR downside will be limited. On the other hand, if the ECB delivers more than a refi and a deposit rate cut (our main scenario), more short-term downside could be seen. Forecast: 1.36 (1M), 1.35 (3M), 1.32 (6M),1.28 (12M) May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 EUR/USD 1M 3M 6M 12M Forecast (pct'ile) 1.36 (33%) 1.35 (29%) 1.32 (18%) 1.28 (15%) Fwd. / Consensus 1.37 / / / / % confidence int / / / / % confidence int / / / / 1.46 EUR/USD 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. The current growth and inflation outlook in both regions indicates significant potential for a trend in relative rates supporting the case for a cyclical downtrend in EUR/USD. However, we stress that in order to see EUR/USD below 1.30 in six to 12 months time, both central banks have to take action on either side. In respect of the ECB, it now appears much more likely that the bank will actually deliver. Hence, medium- and longterm upside risks to EUR/USD have, in our view, eased markedly following the soft rhetoric from the ECB and consequently we have lowered our short- and medium-term forecasts for EUR/USD. Morten Helt, Senior Analyst, mohel@danskebank.dk,

5 EUR/USD important issues to watch How tight is the US labour market? The timing of the first Fed hike depends very much on how much slack is prevalent in the US labour market. While the unemployment rate has come down significantly over the past four years, the Fed has made it clear it still sees lots of slack in the labour market. The key indicator to watch over the coming quarters is wage growth as an indication of how much the US labour market is tightening. We think wage growth will rise gradually over the coming year and pave the way for the first rate hike in mid-2015 in line with the Fed s own projection. However, we believe the risk is skewed towards earlier tightening. As the market is currently pricing in a first hike in autumn 2015 and prices in only a very gradual increase thereafter, we expect a repricing of the Fed funds curve to take place in coming quarters. There is large potential for higher US money market rates... Source: Macrobond Financial, Danske Bank Markets...and large potential for a trend in relative rates Morten Helt, Senior Analyst, mohel@danskebank.dk, Source: Macrobond Financial, Danske Bank Markets 5

6 EUR/GBP divergent policy outlook to push cross lower Growth. The first release of Q1 14 GDP confirmed a sustained recovery with 0.8% growth q/q. Recent PMI surveys point to strong activity in the current quarter. We see upside risk to our growth forecasts of 2.8% y/y for 2014 and 2.3% y/y for CPI inflation is currently at 1.9% y/y and we expect it to remain below 2% for some time and move upwards only slowly in coming years. Monetary policy. The Bank of England (BoE) still argues that there is a lot of slack in the economy. We are not so sure and expect the first rate hike in spring next year. Hence, a very different monetary policy outlook compared with the ECB. Flows. Investors have recently added to long GBP positions. 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 it increasingly likely that we are underestimating the need for monetary tightening, which will add further to GBP. On the other hand, the BoE might stick to a dovish stance for a prolonged period of time as we have seen with the FOMC. Key indicators might also start to disappoint. Our EUR/GBP forecast is also based on the view that the ECB, unlike the BoE, will ease monetary policy further in If not, the sterling appreciation might not materialise. Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.dk, Forecast: 0.80(3M), 0.79 (6M) and 0.77 (12M) EUR/GBP 0.75 May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst EUR/GBP 1M 3M 6M 12M Forecast (pct'ile) 0.81 (28%) 0.80 (20%) 0.79 (19%) 0.77 (16%) Fwd. / Consensus 0.82 / / / / % confidence int / / / / % confidence int / / / / 0.88 Conclusion. The combination of the BoE moving towards the first rate hike and the prospect of euro weakness on the back of the ECB easing means we expect EUR/GBP to move lower over the coming year. Especially, on a 12M horizon we expect sterling to appreciate against the euro as the BoE is way ahead of the ECB in the monetary policy cycle. We assume that the correlation between GBP and USD will stay positive in 2014, indicating that our strong dollar view also will benefit sterling. 6

7 EUR/GBP important issues to watch New Inflation report Not much had changed in the May Inflation report. The BoE continues to argue that there is a lot of spare capacity and with inflation projected to be below target two to three years ahead, the MPC has signaled that the economy still needs a low-rate policy and that once the Bank Rate does begin to rise, hikes are likely to be gradual and limited compared with pre-crisis hiking cycles. Against market expectations, the MPC kept the view that spare capacity remains in the region of % of GBP. We expect the first rate hike in the spring of 2015 in expectation of macro data continuing to be consistent with an above-average pace of expansion gradually removing economic slack in the economy. The timing of the first rate hike will be pivotal for the FX market. UK numbers are very strong, but will it last? The UK economy is on track for 0.8% q/q growth in Q1 and 2.8% in 2014 as a whole the fastest growth since The recovery has been underpinned by a revival in confidence and an easing in credit conditions, which has prompted a strong rebound in the housing market. However, if, contrary to our view, we start to see disappointing numbers, it could weigh strongly on GBP. There is little doubt that the market is now used to strong UK numbers. Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.dk, Much steeper money market curve in the UK Source: Macrobond, Bank of England, Danske Bank Markets Strong housing market supporting the UK economy Source: Macrobond, Danske Bank Markets 7

8 USD/JPY BoJ awaiting full effect of sales tax hike Macro outlook. On 15 May, Japanese GDP figures were released showing a stronger-than-expected economy in the quarter leading up to the consumption tax hike on 1 April Q1 GDP growth was 5.9% q/q annualised primarily driven by a one-off rise in private consumption ahead of the tax hike. Monetary policy. In line with expectations, the Bank of Japan (BoJ) left its monetary policy unchanged at its 30 April meeting and expressed no imminent plans of further easing, with the bank expecting inflation to accelerate towards 2% in H2 15. Although Q1 growth was stronger than expected, we do not think it has influenced the BoJ s strategy to await the full impact of the sales tax hike before deciding on its next move. The full impact of the consumption tax can be evaluated at end-q2 at the earliest and, consequently, we expect further easing in Q3, probably in the form of an increase in the target for the yearly monetary base change from JPY60-70trn to JPY80-90trn. It is worth emphasising that current monetary policy is already extremely accommodative and the effect of expanding the current purchasing programme would primarily be through the signaling value. Flows. The latest balance of trade figures showed a record-low currentaccount surplus. Additionally, foreign direct investments have risen in recent years, creating an increased funding need. Consequently, fundamental flows have become much more yen negative (see next page). Valuation. USD/JPY s fair value is around 83, according to our general PPP model. Risk. According to CFTC IMM data, speculative short JPY positions have recently become markedly less stretched, leaving more room for more JPY downside (see next page). Morten Helt, Senior Analyst, mohel@danskebank.com, Kristoffer Lomholt, Assistant Analyst, klom@danskebank.com Forecast: 106 (3M), 110 (6M) and 114 (12M) May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 USD/JPY 1M 3M 6M 12M Forecast (pct'ile) (72%) (87%) (92%) (92%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / USD/JPY 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. Relative monetary policy still supports the case for further USD/JPY upside. With the Japanese government s plan to contain the world s highest debt ratio through measures such as an additional sales tax hike in October 2015, the BoJ will eventually be forced to ease its accommodative monetary policy further. We believe the BoJ will expand the target for its balance sheet increase in Q3 when the full impact of April s sales tax hike on Japanese growth is evident. In addition, a repricing of the Fed funds curve, which is likely to take place over coming quarters, should also support further USD/JPY upside through relative rates. We maintain our targets for USD/JPY of 106 in 3M, 110 in 6M and 114 in 12M. 8

9 USD/JPY important issues to watch Fundamental flows have become yen negative The lower-than-expected current account surplus in March was due partly to an increase in imports on the back of inflated energy imports and last minute imports of durable goods before the 3 percentage point tax hike. More worryingly, however, Japanese exports continue to disappoint despite the substantial weakening of the JPY. Notably, Japanese exports has lost market share to its closest competitors such as South Korea (again despite a weaker JPY). Adjusting for seasonality particularly important for March due to dividend and interest rate payments the current account remained in deficit in March and for Q1 as a whole the current account deficit was 1.2% of GDP. Additionally foreign direct investments abroad, measured as percentage of GDP, have risen in recent years, creating an increase in the funding need. In sum, fundamental flows have become much more yen negative over the past 12 months and our expectation of a weaker yen is no longer based on a story of positioning alone. Speculative JPY positioning less stretched short CFTC IMM positioning data show that speculative accounts have unwound net JPY shorts in recent weeks. The latest report revealed the third largest single-week bullish build of 2014, sending non-commercial JPY positioning above the 16th percentile a level not seen since June Consequently, positioning data suggests the JPY has become markedly more sensitive on the downside. Japanese current account deficit (seasonally adjusted) Source: Macrobond Financial, Danske Bank Markets Speculative JPY positioning Morten Helt, Senior Analyst, mohel@danskebank.com, Kristoffer Lomholt, Assistant Analyst, klom@danskebank.com Source: Macrobond Financial, Danske Bank Markets 9

10 EUR/CHF flows to mitigate effect of ECB easing Growth. Inflation for Switzerland remains very low, with the April figures revealing increases of just 0.04% y/y and 0.07% m/m. Deflation risk is therefore still very much a concern. What is more, recent survey data most noteworthy the KOF continues to disappoint. This suggests that economic growth will not be a boosting factor for inflation in the coming year. Monetary policy. The Swiss National Bank (SNB) is caught between two stools: on the one hand, inflation and growth outlooks are worryingly low while on the other, credit growth rates have recently risen, sparking new worries of an overheating housing market. Adding to this the ECB is expected to ease in June, increasing the pressure on the SNB further. We expect that the 1.20 EUR/CHF floor will remain the SNB s key monetary instrument. Hence, in the event of a weakening of the euro, we expect the SNB first to intervene in the FX market if EUR/CHF drops to 1.20 before it might consider alternative measures. Flows. A reversal in safe haven flows together with continued investor appetite for eurozone peripheries will weigh on the Swiss franc going forward. Valuation. The Swiss franc is c.9% overvalued against the euro, according to our G10 PPP model. Risks. Falling global risk sentiment could spark a flight to safe havens, which would strengthen CHF. An ECB introduction of a QE programme would cap the upside potential in EUR/CHF. Last, the large and increasing Swiss current account surplus provides a fundamental headwind to our projections. Forecast: 1.23 (3M), 1.24 (6M) and 1.24 (12M) EUR/CHF 1.15 May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst EUR/CHF 1M 3M 6M 12M Forecast (pct'ile) 1.22 (46%) 1.23 (81%) 1.24 (87%) 1.24 (81%) Fwd. / Consensus 1.22 / / / / % confidence int / / / / % confidence int / / / / 1.25 Conclusion. In the short run, further ECB easing is likely to cap EUR/CHF upside and we have consequently lowered our 3M forecast to 1.23 (1.24). In the next six-12 months, however, we still expect EUR/CHF to gradually edge higher towards 1.24 (before 1.25 and 1.26), mainly driven by a reversal of safe-haven flows and an increase in Swiss portfolio investments abroad. We continue to expect the SNB-imposed EUR/CHF 1.20 minimum target to remain in place. If the ECB introduces a QE programme, we cannot rule out that the SNB will cut rates to negative territory or even lift the 1.20 floor in order to cap CHF strength. However, the SNB s reaction is likely to be a function of EUR/CHF. Morten Helt, Senior Analyst, mohel@danskebank.com Kristoffer Lomholt, Assistant Analyst, klom@danskebank.com 10

11 EUR/CHF important issues to watch SNB s reaction as a function of EUR/CHF The SNB has repeatedly stressed that a flexible balance sheet is the cornerstone in its monetary policy and that the 1.20 EUR/CHF floor remains its key monetary instrument. Hence, in the event of a weakening euro, we expect the SNB to initially intervene in the FX market should EUR/CHF drop to 1.20 before it might consider alternative measures. In the event of a significant weakening of the euro, the SNB at some point could be seen cutting rates into negative territory in order to reduce the amount of intervention needed to keep EUR/CHF above Also, an increase of the 1.20 EUR/CHF floor cannot be ruled out in this scenario. The SNB is in a situation where it has to fight deflation risk while avoiding the Swiss housing market overheating. Although credit growth is lower than in 2013 it has recently risen, sparking new worries of a housing bubble. The counter-cyclical-buffer (CCB) has been raised from 1% to 2%. However, the SNB is not yet comfortable with the data as momentum in real estate prices seems to be similar to the previous year and therefore has not further diminished. Hence, a rate cut, which might add further support to the housing market through lower borrowing rates, is not going to be the SNB s number one choice of instrument right now. Swiss credit growth rising in 2014 Source: Macrobond, Danske Bank Markets Leading indicators disappointing Morten Helt, Senior Analyst, mohel@danskebank.com, Kristoffer Lomholt, Assistant Analyst, klom@danskebank.com Source: Macrobond, Danske Bank Markets 11

12 EUR/SEK Riksbank cut almost fully priced in Growth. GDP is picking up. The Swedish growth outlook remains favorable and we see this as a medium-term supportive factor for the krona. The macro surprise index is hovering at low levels (chart next page) and could turn bullish for the SEK even in coming month(s). Monetary policy. The Riksbank will cut rates in July. That should be almost a done deal and hardly surprise anyone. The money market is pricing in a full 25bp cut before year-end and a 75% chance of a cut in July. We think the SEK will come under some pressure ahead of the decision but it should not be a major drag. Fundamentals. The current account, public finances, solid triple A, real interest rates and relative inflation among other things are factors that are important for the long-term SEK outlook in favor of a stronger krona. Flows. Commercial interests are expected to cap the upside in EUR/SEK as export recovers. Known M&A-related SEKpositive flows should gradually disappear. Valuation. Our medium-term valuation models suggest that EUR/SEK is overvalued. Risks. Softer-than-expected Riksbank action could send EUR/SEK higher than forecast. If the ECB adopts aggressive QE policies, EUR/SEK is likely to go significantly lower than we forecast. Forecast: 9.00 (3M), 8.90 (6M) and 8.75 (12M) May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 EUR/SEK 1M 3M 6M 12M Forecast (pct'ile) 9.10 (80%) 9.00 (55%) 8.90 (42%) 8.75 (33%) Fwd. / Consensus 8.98 / / / / % confidence int / / / / % confidence int / / / / 9.62 EUR/SEK 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. The global and the Swedish growth outlook are medium-term supportive factors for the krona. M&A-related flows will ebb out and cancel some of the help for SEK that we have seen recently. The ECB will take decisive action in June, which could weigh on the EUR in general including EUR/SEK. The Riksbank will almost certainly cut the repo rate in July. The SEK is likely to come under some pressure going into that meeting, but not be a major drag given what is already priced in. Stefan Mellin, Senior Analyst, mell@danskebank.com +46 (0)

13 EUR/SEK important issues to watch The ECB, the Riksbank and Swedish inflation Swedish CPIF inflation below Riksbank forecast The EUR should remain under pressure against most currencies including the SEK going into the ECB meeting on 5 June, where decisive action is expected. After the ECB meeting, the market will start aiming at the Riksbank rate decision on 3 July. We expect a 25bp rate cut. We are in good company as almost all forecasters share this view. So, a rate cut would hardly be a surprise. The money market is pricing in a full 25bp cut before year-end (75% for July). The SEK should come under some pressure ahead of the decision but a 25bp cut shouldn t be a major drag. If the ECB move sends EUR/SEK significantly lower, it will probably be taken into account by the Riksbank. However, be aware that the SEK trades below the Riksbank s forecast. Hence, a fair amount of SEK appreciation from current levels should not disturb the Riksbank. Excessive appreciation is another story. Too low inflation is the key argument why the Riksbank must cut again. The April reading almost fully closed the gap versus the Riksbank s forecast. Come 12 June and the May inflation figures, we forecast a 0.3 pp gap to open up again as most of the surprise in April is likely to bounce back. We think that such a large gap is more than enough for the Riksbank to deliver. Stefan Mellin, Senior Analyst, mell@danskebank.com Source: Macrobond, the Riksbank, Danske Bank Markets EUR/SEK sensitive to real macro data Source: Macrobond 13

14 EUR/NOK higher inflation to support the NOK Growth. The economic growth pace in Norway seems to be marginally higher than expected. Retail sales continue to increase and point to a solid contribution from private consumption to mainland GDP in Q1. Manufacturing production is also heading upwards despite some signs of weaker soft data and new orders are actually accelerating despite the slowdown in oil-related industries. Monetary policy. Norges Bank sounded slightly more optimistic at the May monetary policy meeting and together with core inflation being slightly above the central bank s forecast, it is now likely that the rate path will be lifted marginally in the June monetary policy report. We forecast the first rate hike in May 2015; hence, divergent monetary policy versus the ECB. Flows. Demand for Norwegian government bonds has improved this year. It is likely that Norges Bank will start to purchase Norwegian kroner on a daily basis instead of the normal purchase of foreign currency to fill the (before oil) government deficit. Valuation. NOK is weak relative to our PPP estimates. Risks. Norges Bank once again turns dovish especially if the currency appreciates too rapidly. Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.com, Forecast: 8.00 (3M), 8.00 (6M) and 7.85 (12M) May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 EUR/NOK 1M 3M 6M 12M Forecast (pct'ile) 8.05 (31%) 8.00 (28%) 8.00 (32%) 7.85 (23%) Fwd. / Consensus 8.12 / / / / % confidence int / / / / % confidence int / / / / 8.78 EUR/NOK 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. We expect EUR/NOK to edge slightly lower as the ECB eases monetary policy and as Norwegian growth continues to improve. The market will probably expect Norges Bank to be one of the first G10 central banks to hike rates in However, we strongly doubt 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, NOK might suffer if Norges Bank turns even more dovish or if house prices drop significantly. Our 1M forecast is

15 EUR/NOK important issues to watch Inflation pushed higher by weaker NOK and higher service prices Norwegian core inflation rose 2.5% in April. Inflation was pushed higher by import prices due to a weaker NOK in However, services where wages are a dominant factor also rose markedly, rising 3.7% y/y. Norway is still one of the few countries not struggling with deflationary risks. Norges Bank to hike rates in H1 next year Given the inflation outlook and our view that the Norwegian economy will improve throughout 2014, we expect the market to price in that Norway will be one of the first central banks to hike rates in Hence, we continue to believe that relative rates will be NOK-positive going forward. Housing market is now stabilising The Norwegian housing market weakened in the latter part of However, the 2014 numbers show that the market has now recovered. Prices rose 0.8% and 0.6% m/m s.a. In March and April. A collapse in the housing market was a major concern for the NOK in 2013 and this risk should now be significantly lower. Relative rates point to a lower EUR/NOK Source: Macrobond The Norwegian housing market has recovered Source: Macrobond, Danske Bank Markets Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.com,

16 EUR/DKK Danmarks Nationalbank stepped in FX. Following the intervention and the 24 April unilateral rate hike, EUR/DKK has stabilised at a more comfortable level around Although EUR/DKK remains on the weak side of the central rate, it does leave some upside to the level which triggered action by Danmarks Nationalbank (DN). Furthermore, there is still a decent negative carry on short EUR/DKK positions, which puts depreciation pressure on DKK, while the benign external position on the other hand adds fundamental support to DKK. Hence, we expect EUR/DKK to remain stable around the 7.46 level on 3M, 6M and 12M horizons. Rates. In April, DN intervened with DKK20.1bn to support DKK and on 24 April it increased the rate on certificates of deposits (CDs) by 15bp to 0.05% thereby ending the regime of negative rates which has lasted since July We expect DN to track a rate cut from the ECB in June and lower the rate on CDs by 10bp to minus 0.05% and thus reintroduce negative rates in Denmark. EUR/DKK remains on the weak side of the central rate and DN may therefore need to step in again to support DKK. We thus expect DN to make one 10bp unilateral hike of the rate on CDs on a 6M horizon, bringing it back up to 0.05%. On 12M that leaves the lending rate at 0.20% and the rate on CDs at 0.05%; hence, unchanged from the current level. Forecast: 7.46 (3M), 7.46 (6M) and 7.46 (12M) Source: Macrobond, Danske Bank Markets Flows. The large current account surplus, currently around 7% of GDP, counts in favour of DKK and any outflow from Denmark would have to overcome this mounting fundamental inflow. Conclusion. The two strong mitigating factors of a negative carry and a benign external position will keep EUR/DKK fairly stable around 7.46 over the coming 12M. DN will limit renewed upwards pressure on EUR/DKK through intervention and subsequent rate increases. Jens Nærvig Pedersen, Analyst, jenpe@danskebank.dk,

17 USD/CAD higher as BoC remains on neutral Growth. Growth in the Canadian economy looks to be rebounding following the temporary setback over the winter. The economy will further embrace the recent string of positive news from the US economy that indicates that the recovery is back on track. Economic growth in Canada is set to gradually gain strength over the coming years. Monetary policy. The Bank of Canada (BoC) has maintained its overnight lending rate at 1.00% for the past two years. At April s meeting it kept its neutral stance and did not exclude further easing, while furthermore emphasising that it will ignore transitory effects on headline inflation. Even though Canadian inflation and growth have picked up, we still believe that the BoC will lag the Fed in scaling back on stimuli. Flows. Speculators are still extensively short the CAD. Valuation. The CAD remains expensive by PPP measures also after the latest sell-off. Commodities. We expect oil prices to head lower in years to come and this could weigh on the CAD. However, oil production is rising and thus oil-related revenues will remain decent. Risks. If household sector imbalances fail to evolve constructively, the BoC may have to scale back stimuli earlier. Jens Nærvig Pedersen, Analyst, jenpe@danskebank.dk, Forecast: 1.08(3M), 1.09 (6M) and 1.12 (12M) USD/CAD 1.00 May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst USD/CAD 1M 3M 6M 12M Forecast (pct'ile) 1.09 (59%) 1.08 (39%) 1.09 (53%) 1.12 (70%) Fwd. / Consensus 1.09 / / / / % confidence int / / / / % confidence int / / / / 1.17 Conclusion. Canada stands to benefit from a US recovery, which we see materialising next year. However, so far positive spill-overs to the Canadian economy have been limited and with Fed tapering on autopilot for now and BoC on neutral, support for USD/CAD should remain in place. However, the very negative CAD sentiment that prevailed in Q4 13 has now improved. We also note that the market is already speculative short CAD. This makes room for some further short-covering over the spring if the current CAD sentiment improves further. 17

18 AUD/USD AUD may be too high for the RBA Growth. Employment has grown for four consecutive months signalling a further strengthening of the weak Australian labour market. The Australian economy will find some comfort in the recent stabilisation of the Chinese economy along with indications that China s demand for commodities is rebounding. The current slack in the economy is keeping inflation in check. El Niño weather later this year could spell trouble for the economy. Monetary policy. The Reserve Bank of Australia (RBA) has kept its cash target rate unchanged at 2.50% since last summer but has shifted away from an easing bias to neutral. It made no major changes to its policy stance at the meeting in May, while noting that the recent economic improvement was the result of the accommodative monetary policy. Flows. Speculators have recently slashed short AUD positions, but are still generally short the AUD. Hence, there is a risk of further short covering. Valuation. The AUD remains overvalued but, notably, overvaluation is now less than half its post-crisis peak. Commodities. Supply worries on the nickel market should increase demand for Australian nickel and support the AUD. Risks. Risk appetite is high and signs of China stabilising could further support the AUD. Forecast: 0.92 (3M), 0.91 (6M) and 0.90 (12M) May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 AUD/USD 1M 3M 6M 12M Forecast (pct'ile) 0.93 (35%) 0.92 (33%) 0.91 (33%) 0.90 (36%) Fwd. / Consensus 0.94 / / / / % confidence int / / / / % confidence int / / / / 1.00 AUD/USD 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. Despite the recent AUD performance, we doubt that we are in for further strong performance in 2014 and we see the latest performance as overdone, especially as 1) we are now approaching a level where the RBA will try to verbally intervene (RBA said in May that AUD remains high). We also doubt that the RBA will even consider hiking rates on the short-term horizon, 2) we doubt concerns about China are a thing of the past and 3) US tapering is likely to strengthen the USD on a six- to 12- month horizon. Jens Nærvig Pedersen, Analyst, jenpe@danskebank.dk,

19 NZD/USD limited upside potential Growth. New Zealand s economy is in good shape supported by the construction boom (to repair the earthquake damages). Employment growth remains strong, which is gradually lowering unemployment. El Niño weather later this year could spell trouble for the economy. Monetary policy. The Reserve Bank of New Zealand (RNBZ) hiked its official cash rate by another 25bp to 3.00% at the April meeting. The RBNZ seems determined to hike in order to fight inflationary pressures and may already hike again in June. However, inflationary pressure eased a bit in Q1 to 1.5% y/y and is thus below the mid-point of RBNZ s inflation target range of 1-3%, which reduces the pressure on RBNZ to aggressively hike rates. 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. The market currently prices in another three 25bp rate hikes on a 12M horizon, which, in our view, seems somewhat aggressive. Combined with speculators being very long the NZD, this indeed poses a risk of a significant repricing. Jens Nærvig Pedersen, Analyst, jenpe@danskebank.dk, Forecast: 0.87 (3M), 0.87 (6M) and 0.87 (12M) May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 NZD/USD 1M 3M 6M 12M Forecast (pct'ile) 0.87 (59%) 0.87 (58%) 0.87 (60%) 0.87 (63%) Fwd. / Consensus 0.86 / / / / % confidence int / / / / % confidence int / / / / 0.93 NZD/USD 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. Despite the prospect of further rate hikes this year, we see the upside potential of NZD/USD as fairly limited as a lot of tightening is already priced in on RBNZ. In addition, RBNZ is likely to maintain the view that the current high level of NZD is not sustainable longer term if the economy is to stay competitive and foster growth once the construction boom wanes. Hence, further Kiwi strength could eventually limit the central bank s desire to hike rates. Our short-term financial models suggest that NZD/USD is currently significantly overbought and we look for a stabilisation around the 0.87 level in coming months. On a 6-12M horizon, we target the cross at

20 EUR/RUB ECB and sanctions to weigh on the pair Growth. Economic growth in Russia is slowing further, probably already under 1% y/y growth in Q1 14. Our 2014 GDP forecast stays at -0.3% y/y due to a surge in geopolitical risks, which have introduced both supply and demand side shocks: extreme acceleration in capital outflows in Q1 14 and continuing monetary tightening. Monetary policy. The Russian central bank surprisingly hiked its main rates by 50bp on 25 April 2014 to curb accelerating inflation and support RUB. Bank Rossii does not intend to lower the key rate in the coming months. We believe that a total 50bp rate cut is possible in H2 14 if CPI falls under 6% y/y and remains below this for a couple of months at least. However, our CPI forecast for December 2014 is 6.2% y/y. Flows. Net capital outflows accelerated to USD64bn in Q1 14 if the banks FX operations are taken into account. This is the highest outcome since late In 2013, total outflow was USD63bn. We expect 2014 net outflows to hit USD120bn and the official estimate is USD100bn. Valuation. EUR/RUB is trading under its 1M average of Risks. Bank Rossii s sudden rate hikes to support RUB and curb accelerating inflation. The ECB s more dovish stance will push EUR/RUB down. Forecast: 52.10(3M), (6M) and (12M) 58 EUR/RUB May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst EUR/RUB 1M 3M 6M 12M Forecast (pct'ile) (90%) (90%) (84%) (75%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / Conclusion. We see downside risks to EUR/RUB as the ECB is ready to ease monetary policy and Russian banks with corporations are expected to leave further EUR and USD in order to avoid asset freezing in EU and the US as more sanctions could hit. The geopolitical situation is weighing on capital outflow acceleration. Worsening sentiment on Russian markets remains the main upside risk for EUR/RUB. Vladimir Miklashevsky, Economist/Trading Desk Strategist, vlmi@danskebank.com,

21 EUR/RUB important issues to watch Weakness set to continue in 2014 Over the past month, RUB was the best gainer against EUR in the EMEA FX universe surging 4% as Russia s monetary policy is tightening, locals are returning into RUB to hedge against new sanctions, the ECB has turned more dovish and expectations of Russia s military intervention in Ukraine have globally eased. Yet, we believe that the geopolitical situation remains very uncertain as presidential elections in Ukraine are due to be held on 25 May RUB's trading band vs. RUBBASK lower border upper border *RUBBASK (45%EUR+55%USD) Bank Rossii has reiterated its commitment to a freely floating RUB in 2015 and its rigid sticking to inflation targeting. FX interventions and basket corridor shiftings have continued, but less aggressively. We see upside risks for RUB rates as surprising key rate hikes are possible during 2014 to curb CPI and calm RUB s free fall. As FX risks are very small among ordinary citizens and RUB s real effective exchange rate remains high to help significantly local producers, we believe that the government sees more room for a weaker RUB Russian private sector's capital net flows, USD bn Other sectors Banks Source: Bank Rossii, Bloomberg, Danske Bank Markets Vladimir Miklashevsky, Economist/Trading Desk Strategist, vlmi@danskebank.com,

22 EUR/PLN a mixed bag: low inflation, higher growth Growth. The latest GDP data shows that growth seems to be picking up slightly faster than previously expected. On the other hand the ongoing Ukrainian-Russian conflict could potentially harm Polish growth going forward even though we think the effect has so far been very limited. We expect real GDP growth of 2.9% y/y in Monetary policy. The pick-up in Polish growth could potentially push the Polish central bank (NBP) in a slightly more hawkish direction. However, the Ukrainian crisis is certainly helping moderate this hawkishness and more importantly the latest inflation data shows that inflation remains well below the NBP s official inflation target. Indeed, there is a risk of outright deflation in Poland in the coming months. This, combined with the potential for monetary easing from the ECB, could mean that the NBP will keep its key policy rate unchanged until the end of the year and probably well into Valuation. The PLN is trading close to its fair value level, so valuation is unlikely to have any major near-term impact. Risks. The biggest risk to the PLN in the near term is the possibility of an escalation in the Ukrainian-Russian conflict. Forecast: 4.15 (3M), 4.18 (6M) and 4.20 (12M) May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 EUR/PLN 1M 3M 6M 12M Forecast (pct'ile) 4.18 (52%) 4.15 (36%) 4.18 (47%) 4.20 (48%) Fwd. / Consensus 4.19 / / / / % confidence int / / / / % confidence int / / / / 4.53 EUR/PLN 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. Geopolitics have moved centre stage for the CEE currencies but for now, the PLN is holding up. Furthermore, Polish fundamentals are fairly strong, which provides some support for the PLN. Longer term (six-12 months), the PLN should stabilise at levels moderately weaker than the current level against the EUR. Lars Christensen, Chief Analyst, larch@danskebank.com,

23 EUR/CZK CNB to keep the EUR/CZK floor for longer Growth. Q4 13 GDP growth was boosted by stronger-thanexpected investments but private consumption contributed somewhat positively to growth. The weakening of the Czech koruna by the central bank (CNB) at the end of 2013 played a role in both higher investment and private consumption before year-end. We expect the Czech economy to continue its recovery with average 2014 GDP growth of 2.1% y/y and 2.4% y/y in The CNB has just revised its GDP forecast up and it now expects 2014 GDP growth of 2.6% (versus 2.2% y/y previously) and 3.3% in 2015 (2.8%). Monetary policy. At the monetary policy setting meeting in May, the CNB remained committed to using the exchange rate as a nonstandard monetary policy. In its new inflation forecast, the CNB revised its forecast for inflation down. It now expects inflation at 2.3% on Q2 15 and 2.2% in Q3 15. In connection with lower-thanexpected inflation the CNB said that the probability of a later exit from the exchange rate commitment was increasing. This means that while we no longer expect the CNB to lift the EUR/CZK floor higher than 27, we expect it to keep the koruna cap for longer beyond the Q1 15 as assumed. Debt risks are low. The Czech government sees the 2014 public finance gap at 1.8% of GDP and government debt at 44% of GDP. Valuation. From a long-term perspective, the CZK is undervalued (fair value is around 25 against the EUR). Risks. Further fall in inflation and the need for a weaker CZK. Forecast: 27.5 (3M), 27.4 (6M) and 27.4 (12M) May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 EUR/CZK 1M 3M 6M 12M Forecast (pct'ile) (74%) (72%) (61%) (60%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / EUR/CZK 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. The Czech koruna remains stable around EUR/CZK The CNB continues to be committed to maintaining the CZK cap at 27. Given that the CNB seems to have no intention of lifting the EUR/CZK floor higher despite lower-than-forecast inflation, we adjust our EUR/CZK forecast accordingly. We expect the EUR/CZK to stay basically flat at current levels going forward and expect the CNB to maintain the CZK cap beyond Q1 15. We forecast EUR/CZK at 27.50, and on three-, six- and 12-month horizons. Stanislava Pravdová-Nielsen, Analyst, spra@danskebank.com,

24 EUR/HUF strong external balances support the HUF Growth. Growth is clearly picking up in Hungary and after years of stagnation, it is becoming one of the fastest growth economies in central and eastern Europe. We now expect real GDP growth of 2.9% y/y in 2014 and 2.9%y/y in However, both structural problems and weak demand continue to hold back growth. Monetary policy. The Hungarian central bank (MNB) has initiated a policy of baby-step rate cuts. Further monetary easing is justified as there is actually now deflation in Hungary (despite higher growth) and there is certainly a risk of further deflation in coming months. However, rates have now come down to the point where the MNB might start to worry that the stability of the HUF is jeopardised. Furthermore, higher GDP growth might also turn the MNB slightly less dovish. Valuation. The HUF has fairly attractive long-term fundamentals and the relatively large current account surplus is particularly helpful. Risks. The biggest risks to the HUF remain the political uncertainty and the Hungarian government once again taking a misstep in economic policy. The Ukrainian-Russian conflict is also a key risk. Forecast: 300 (3M), 300 (6M) and 300 (12M) May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 EUR/HUF 1M 3M 6M 12M Forecast (pct'ile) (31%) (43%) (49%) (55%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / EUR/HUF 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. We continue to believe that Hungary s fairly strong external position is likely to be supportive for the HUF in the medium term as will the increasingly stronger recovery in growth. As a consequence, the HUF could even strengthen moderately against the EUR on a 12-month horizon, while the short-term outlook is likely to be dependent on the general Emerging Markets outlook as well as developments in the Russian-Ukrainian conflict. Lars Christensen, Chief Analyst, larch@danskebank.com,

25 USD/TRY attractive valuation and high carry Growth. Growth has slowed down over the past couple of years due to increased political risk, significant volatility and a sharp monetary tightening but we are now beginning to see a bit of stabilisation in Turkish growth. We expect 2.3% y/y real GDP growth in 2014 and 2.6% y/y in Monetary policy. Turkish inflation expectations have risen sharply on the back of the significant sell-off in the lira, which was one of the main drivers behind the TCMB s emergency rate hike at the end of January. Recently higher food prices have pushed up inflation further. This is likely to make the TCMB more reluctant to cut interest rates as fast as previously expected. Valuation. The sell-off in the lira over the past year in our view means that the lira is no longer overvalued despite some rebound recently. However, a continued large current account deficit and high inflation continue to be a problem from a fundamental perspective. Risks. Continued large macroeconomic imbalances, political risks and the overall fragile global emerging market environment continue to be the key risks for the lira. Forecast: 2.02(3M), 2.07(6M) and 2.15(12M) USD/TRY 1.50 May-13 Aug-13 Dec-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst USD/TRY 1M 3M 6M 12M Forecast (pct'ile) 2.05 (20%) 2.02 (15%) 2.07 (32%) 2.15 (47%) Fwd. / Consensus 2.09 / / / / % confidence int / / / / % confidence int / / / / 2.48 Conclusion. Continued fairly high inflation and a large current account deficit are likely to continue to weigh on the lira in the longer term. However, these imbalances are to a large extent already reflected in the lira and it continues to trade at what we consider to be fairly cheap levels from a fundamental perspective. Furthermore, high Turkish interest rates are likely to provide some support. Hence, while we expect further moderate depreciation of the lira, we are more bullish on a 3-12 month horizon than market pricing currently indicates. Lars Christensen, Chief Analyst, larch@danskebank.dk,