FX Forecast Update 15 November 2013

Transcription

1 FX Forecast Update 15 November 2013 EUR underperformance expected in 2014 Arne Lohmann Rasmussen Chief Analyst, Head of Rates, FX and Commodities Strategy Kasper Kirkegaard Stefan Mellin Stanislava Pravdová-Nielsen Kristoffer Lomholt Senior Analyst Senior Analyst Analyst Assistant Analyst Morten Helt Lars Christensen Christin Tuxen Vladimir Miklashevsky Senior Analyst Chief Analyst Senior Analyst Analyst Bloomberg: DRFX <GO> Investment Research Important disclosures and certifications are contained from page 30 of this report.

2 Main forecast changes We continue to have a positive USD view for Relative monetary policy with the ECB on easing bias and tapering from the Fed should continue to push EUR/USD lower. We now forecast EUR/USD at 1.26 (was 1.27) on a 12-month horizon. We have changed our outlook for EUR/GBP. We now expect relative monetary policy to be supportive of sterling to a higher degree. We expect the ECB to continue with its easing basis in 2014 and introduce a new LTRO. On the contrary, it seems that the Bank of England has moved a bit closer to market pricing clearly acknowledging that the UK economy improved over the summer. We now expect EUR/GBP to fall to 0.80 (previously 0.84) on a 12M horizon. We also assume that the current low correlation between the GBP and USD will be re-established in However, despite the expected appreciation, the GBP will stay in fundamentally undervalued territory in We have kept our view that both the SEK and NOK will appreciate against the EUR in However, we highlight the risk of a further Scandi sell-off over the next six weeks. We expect the Riksbank to cut rates on 17 December and liquidity is often poor in the Scandinavian currency market in December. The latter could hurt the NOK in particular. We have 1M forecasts for EUR/NOK and EUR/SEK of 8.30 and 9.00, respectively. We continue to forecast that EUR/NOK and EUR/SEK will fall to 7.80 and 8.40, respectively. We still expect AUD, NZD and CAD to weaken against the US dollar on a six- to 12-month horizon. However, in the near term, we could see a pause in the downturn in the three commodity currencies supported by improved risk appetite, a possible delay in the Fed s tapering and the ongoing recovery in China. 2

3 EUR/USD relative monetary policy to push the cross lower Growth. Economic data continue to surprise on the upside in both the US and the eurozone but momentum has clearly been fading in both regions lately. We expect US growth in 2014 but room for surprises biggest in the eurozone. Monetary policy. With the Fed set for QE tapering in Q (likely January) and the ECB on easing bias after the November rate cut, relative monetary policy is set to become a key source of downside for EUR/USD in the medium term. New ECB LTRO expected in Q Flows. The eurozone current account surplus continues to rise, while the US is stuck with a deficit. The combination of the ECB s OMT programme and the eurozone escaping recession should help attract capital again and support the EUR. Valuation. EUR/USD is not far from its PPP level. Also, our short-term models suggest that fair value for the cross is close to 1.35 at present. Risks. ECB cutting deposit rates to negative could weigh significantly on EUR. Fed tapering delayed even more and economic surprises in the eurozone could, on the other hand, push EUR/USD above Forecast: 1.32 (3M), 1.30 (6M) and 1.26 (12M) Nov-12 Feb-13 Jun-13 Sep-13 Dec-13 Mar-14 Jul-14 Oct-14 EUR/USD 1M 3M 6M 12M Forecast (pct'ile) 1.35 (55%) 1.32 (25%) 1.30 (21%) 1.26 (18%) Fwd. / Consensus 1.35 / / / / % confidence int / / / / % confidence int / / / / 1.46 EUR/USD 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. While improving in both regions, the relative growth outlook is eventually set to support the Fed moving away from extremely accommodative policy measures long before the ECB. This should set the scene for a cyclical USD uptrend, as the Fed will be looking to hike rates ahead of its eurozone counterpart. However, in our view, Q1 will be dominated by both EUR and USD short-end rates having limited potential to deviate much in the near term. Thus, we expect to see EUR/USD range-trading for the next three months with risk skewed to the downside for the cross. Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.dk,

4 EUR/USD important issues to watch Market is still speculative short EUR/USD The latest IMM data indicate that speculative investors moved out of long EUR positions and into the US dollar ahead of the November ECB meeting. However, the market is still speculative long EUR/USD, which should support the view that EUR/USD has more downside when the divergent monetary policy between the eurozone and the US becomes evident in Q1 14. Positioning also underlines that the upside should be limited even if eurozone numbers surprise positively as we expect. EUR/USD short-term financial model points to a lower EUR/USD ECB vs Fed outlook At its November meeting the ECB surprised the market and slashed the repo rate by 25bp to 0.25%. This has weighed slightly on the EUR and if the markets start to price a probability of a cut in the deposit rate into negative territory, the euro might suffer further. The move in relative rates is reflected in our short-term financial model which indicates downside risks to EUR/USD. The latest strong US labour market numbers indicate that Fed tapering is indeed around the corner, which could support USD in Q1. Source: EcoWin, Danske Bank Markets Market still speculative long EUR/USD 60 % o f o p e n in t e r e s t 50 N o n - c o m m e r c ia l E U R p o s it io n s / - 1 s t d e v f r o m m e a n Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.dk, Source: EcoWin, Danske Bank Markets 4

5 EUR/GBP GBP to gain on a less dovish BoE in 2014 Growth. Economic activity has been strong recently but spare capacity remains high. GDP increased 0.8% q/q in Q3 and the strength of the main survey indicators for October suggests that growth has accelerated further into Q4. Monetary policy. BoE has said it would not consider tightening policy at least until the unemployment rate has fallen to 7%. However, in the November Inflation Report BoE moved its forecast for this threshold to be met from Q3 16 to Q3 15. This is much more aligned with market expectations as the market is currently pricing the first rate hike in summer Since, the ECB has eased monetary policy further and is expected to remain on an easing bias relative monetary policy is now in favour of GBP relative to EUR. Flows. Speculative positioning seems to be neutral in GBP. Valuation. From a long-term perspective, GBP is still clearly undervalued (PPP around 0.77 for EUR/GBP). Risks. The strong numbers in the UK make a breach of one or more of the knockouts more likely. If that happens, a more pronounced GBP appreciation than we forecast could occur. Furthermore, the low euro area inflation may lead to ECB easing monetary policy further. BoE may stick to its very dovish stance despite strong numbers or UK numbers might start to disappoint pushing EUR/GBP higher. Jens Nærvig Pedersen, Analyst, jenpe@danskebank.dk, Forecast: 0.83(3M), 0.82(6M) and 0.80 (12M) Nov-12 Feb-13 Jun-13 Sep-13 Dec-13 Mar-14 Jul-14 Oct-14 EUR/GBP 1M 3M 6M 12M Forecast (pct'ile) 0.83 (27%) 0.83 (35%) 0.82 (29%) 0.80 (23%) Fwd. / Consensus 0.84 / / / / % confidence int / / / / % confidence int / / / / 0.91 EUR/GBP 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. The combination of the BoE being less dovish and the prospect of euro weakness on the back of ECB moving to an easing bias means that we now see EUR/GBP moving lower over the coming year. However, despite the expected appreciation, GBP will stay in fundamentally undervalued territory in We have assumed that the current low correlation between GBP and USD will be re-established in

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

7 USD/JPY no barriers for more upside Macro outlook. GDP growth in Q3 eased to 1.9% q/q ann. from 3.9% q/q ann. in Q2. The slowdown was primarily driven by weaker private consumption and exports. Recent data, however, suggest that private consumption is poised to rebound in Q4, that fixed investments are strong and not least that there is no indication of a persistent weakness in exports. We therefore expect GDP growth to rebound above 3.0% q/q ann. in Q4 13 and Q1 14. In Q2 14 growth is expected to slow, however, as substantial fiscal tightening is implemented. Monetary policy. In our view BoJ is unlikely to add further stimulus as Japan is still recovering relatively fast. Hence, BoJ remains on auto-pilot and we see no change to its aggressive easing monetary policy in coming months. Having said that, while tapering will not be on the agenda for the foreseeable future, BoJ could be forced to step up its monetary easing as growth slows down in Q2 14. Valuation. Additionally, the Danske Bank G10 PPP model does not indicate a barrier for yen weakness. Risk. The yen has proven one of the most sensitive currencies to US political risks and also expectations about US monetary policy. The latest IMM data indicate that the market continues to be very short JPY and consequently any expectation of a further postponement of QE tapering poses a downside risk to USD/JPY. Forecast: 102 (3M), 105 (6M) and 110 (12M) USD/JPY 80.0 Nov-12 Feb-13 Jun-13 Sep-13 Dec-13 Mar-14 Jul-14 Oct-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst USD/JPY 1M 3M 6M 12M Forecast (pct'ile) (49%) (67%) (76%) (83%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / Conclusion: Japan is expected to have the most currency negative policy mix (monetary easing and fiscal tightening) of the G10 currencies in This justifies the current undervaluation of the yen and given that the Fed scales back on its monetary easing in Q1 14 we expect further upside in USD/JPY. We target USD/JPY at 102 in 3M and 105 in 6M. Medium to long term, we still expect relative monetary policy to support the case for a higher USD/JPY. We target USD/JPY at 110 in 12M. Morten Helt, Senior Analyst, mohel@danskebank.com, Kristoffer Lomholt, Assiatant Analyst, klom@danskebank.com 7

8 EUR/CHF ECB dovishness reduces upside risks Growth. Inflation unexpectedly dropped 0.1% m/m in October. On a yearly basis inflation has dropped 0.3%, hence deflation risks still persist in Switzerland. Monetary policy. The buffer of additional capital (currently at 1%), which has been introduced for banks, came into force on 30 September. The capital buffer is likely to dampen the very high credit growth and eventually reduce risks to the Swiss housing market. In addition, it should provide some room for SNB to maintain its 1.20 EUR/CHF floor in order to deal with an overvalued Swiss franc and subdued inflation expectations. Flows. The eurozone current account surplus is improving fast and the combination of the ECB s OMT programme and an exit from recession should help to attract capital. Some of the recent years safe-haven flows into Switzerland might reverse, leaving upside risks to EUR/CHF. Valuation. The Swiss franc is about 7% overvalued against the euro, according to our G10 PPP model. Risks. ECB becomes more dovish and in addition to the unexpected rate cut in October, we look for new LTRO in Q1, which should flatten the EONIA curve and in turn reduce upside risks to EUR/CHF. Forecast: 1.24 (3M), 1.24 (6M) and 1.24 (12M) Oct-12 Jan-13 May-13 Aug-13 Nov-13 Feb-14 Jun-14 Sep-14 EUR/CHF 1M 3M 6M 12M Forecast (pct'ile) 1.24 (79%) 1.24 (72%) 1.24 (68%) 1.24 (62%) Fwd. / Consensus 1.23 / / / / % confidence int / / / / % confidence int / / / / 1.29 EUR/CHF 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. We continue to expect the EUR/CHF 1.20 minimum target to remain in place on the forecast horizon. The economic recovery in Europe has reduced euro tail risks significantly, which in turn has reduced the downside risks to EUR/CHF. While some of the recent years safe-haven flows into Switzerland might reverse, leaving upside risks to EUR/CHF, low European rates are likely to keep EUR/CHF range-bound. Hence, we still look for EUR/CHF to trade around 1.24 in the coming six to 12 months. Morten Helt, Senior Analyst, mohel@danskebank.com

9 EUR/SEK SEK under pressure through year end Growth. Soft data continue to indicate expansion but hard data have not responded as we had expected. As a result, Q3 GDP (due 29 November) is set to be bleak. Our estimate is 0.3% y/y wda (Riksbank 0.4%). We expect growth to pick up in Q4 and 2014 the catch up is delayed, not cancelled. Monetary policy. On the back of a shockingly low inflation outcome for October 0.4pp below the Riksbank s fresh forecast we have revised our call on the Riksbank and now expect a 25bp rate cut in December. We expect this to weigh on the SEK in coming weeks. Fundamentals. The fundamental backdrop unambiguously supports the downside in EUR/SEK over the medium term. Flows. The structural flows that boosted the SEK in have gone away but not reversed. These flows have become more neutral. Valuation. Medium- and short-term models suggest EUR/SEK is far too high. While Swedish inflation continues to undershoot Euroland, the SEK is becoming increasingly undervalued in terms of PPP. Risks. The Riksbank may surprise both ways, which would leave our 1-3M forecasts either too high or too low. Stefan Mellin, Senior Analyst, mell@danskebank.com Forecast: 8.80 (3M), 8.60 (6M) and 8.40 (12M) Nov-12 Feb-13 Jun-13 Sep-13 Dec-13 Mar-14 Jul-14 Oct-14 EUR/SEK 1M 3M 6M 12M Forecast (pct'ile) 9.00 (64%) 8.80 (31%) 8.60 (18%) 8.40 (15%) Fwd. / Consensus 8.95 / / / / % confidence int / / / / % confidence int / / / / 9.68 EUR/SEK 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. The rally in EUR/SEK over the past few weeks has been driven by weaker-than-expected data and repricing of the Riksbank. A rate cut in December could weigh further on the SEK through year-end. Therefore, we have raised our 1M target to 9.00, while acknowledging that the pair might get stuck above that level for a period of time. At the end of the day, this is a relative play where, on every account, Sweden comes out better than Euroland. Therefore, we stick to our 12M forecast of We envisage a relatively slow adjustment though, with the 3M forecast at 8.80 and 6M at

10 EUR/SEK important issues to watch We now expect the Riksbank to cut 25bp on 17 December Consumer prices fell in October and underlying inflation (CPIF) printed 0.6% y/y, 0.4pp below the Riksbank forecast. Coupled with the lack of momentum in hard data and the surprise cut by the ECB, this has, according to us, shifted the risk balance in favour of a rate cut in December. It is far from certain though as suggested by the strong October labor market data, which show that unemployment is in line with their forecast. We look for 25bp and think it is likely the bank will maintain a slight easing bias even after the cut and perhaps postpone the first hike into 2015 (from Q4 14). The money market is pricing in less than a 50% chance of a December cut. Hence, we think the SEK will remain under pressure through yearend. Bigger reaction in EUR/SEK than in rates Source: Macrobond SEK set to underperform vs NOK near term December flows and seasonality? The PPM money is a recurring flow story in December. The exact date and sum is yet to be announced but we expect around SEK30bn around December. If anything, the market has pretraded on this information in past years. So any PPM-induced weakness in the SEK is likely to come before, not after the PPM date. The former seasonality observed in the SEK around year-end has disappeared over the past few years. Source: Macrobond Stefan Mellin, Senior Analyst, mell@danskebank.com

11 EUR/NOK markets have become too NOK negative Growth. Norges Bank s Regional Network report has become gradually weaker in 2013 and mainland GDP growth for Q2 disappointed at 0.2% q/q. However, PMI numbers have been well above 50 recently. Unemployment has adjusted down slightly and manufacturing production and retail sales have increased a bit. It all points to a slightly stronger picture than a few months ago. Monetary policy. In our view Norges Bank at its next meeting on 5 December will only opt for a minor downward revision for growth. On the other hand, the weaker NOK could push the rate path higher. All in all, Norges Bank might finally give some support to NOK after many dovish surprises in Flows. Norges Bank is currently purchasing a very modest amount of foreign currency. We have also seen low foreign interest for NGBs this year Valuation. NOK is on the weak side relative to our PPP estimates. Risks. The very poor liquidity in NOK and soft rhetoric from Norges Bank. Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.com, Forecast: 8.10 (3M), 7.90 (6M) and 7.80 (12M) Nov-12 Feb-13 Jun-13 Sep-13 Dec-13 Mar-14 Jul-14 Oct-14 EUR/NOK 1M 3M 6M 12M Forecast (pct'ile) 8.25 (51%) 8.10 (30%) 7.90 (18%) 7.80 (19%) Fwd. / Consensus 8.26 / / / / % confidence int / / / / % confidence int / / / / 9.07 EUR/NOK 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. We expect EUR/NOK to edge slightly lower as liquidity is expected to improve in 2014 and a rate cut in our view is unlikely. We strongly doubt, though, that we will see the 2012 lows in EUR/NOK again. The risk of a further NOK sell-off should not be neglected. Especially in December, when liquidity is weak, NOK might suffer. If Norges Bank turns even more dovish, NOK might also be exposed short term. 1M forecast for EUR/NOK is

12 EUR/NOK important issues to watch Core inflation back below Norges Bank forecast Over the summer we have seen a surprise spike in Norwegian core inflation. The CPI-ATE measure jumped to 2.5% in August. However, the spike turned out to be temporary and the core measure dropped to 1.7% in September and rose slightly to 1.9% y/y in October. One reason why inflation dropped was lower imported inflation but given the recent weakening of NOK we doubt the trend is now for even lower inflation. Norges Bank s view that the spike in inflation was temporary was confirmed, however. Only a small upward revision of the rate path in September In September there was only a small upward revision of the rate path despite the weaker NOK and the higher inflation over the summer. Norges Bank assumed that NOK would appreciate and that inflation would drop back. Core inflation is now at 1.9% y/y but the import-weighted NOK is now more than 5% weaker than presumed by Norges Bank in September. Hence, no expectations of a new dovish monetary policy report in December or a rate cut. NOK much weaker than assumed by Norges Bank Source: Bloomberg, Macrobond Rising volatility a risk to NOK in December Risk of weak market liquidity in December In December NOK tends to be less liquid. Given the summer spike in volatility it points to a high liquidity premium this year and risk is tilted to the upside for EUR/NOK and NOK volatility in December Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.com, Source: Macrobond, Danske Bank Markets 12

13 EUR/DKK staying close to the central rate FX. Since Danmarks Nationalbank (DN) raised interest rates on 24 January, EUR/DKK has been relatively stable slightly below the central rate and DN has not needed to intervene in the FX markets to support DKK. Hence, we do not expect any immediate rate changes. DN did not track the ECB refi rate cut in November. It is clearly not comfortable lowering the corresponding lending rate below the current historical low of 0.20%. This should not have implications for the pegged exchange rate policy, as it is the rate on certificates of deposits that guides short-term money market rates. Rates. The ECB refi rate cut will dampen increases in EONIA rates and the subsequent negative carry on long DKK positions in the FX market. Therefore, we have removed our spring rate hike but still expect one 10bp rate hike on a 12-month horizon. This would leave the lending rate at 0.30% and the rate on certificates of deposits and 0.00% in 12-months. Flows. The Danish current account surplus remains recordhigh above 6% of GDP. The large and increasing current account surplus is adding support to the DKK. Furthermore, foreign investors continue to hold a large share of Danish bonds around 17% of all issued DKK-denominated bonds. The draft bill from the Danish Government, which is set to handle the refinancing risk in the Danish mortgage system and proposed to take effect from 1 January 2014, may, however, affect foreign investors appetite for Danish mortgage bonds with variable interest rate. Jens Nærvig Pedersen, Analyst, jenpe@danskebank.dk, Forecast: 7.46 (3M), 7.46 (6M) and 7.46 (12M) C e n t r a l p a r it y E U R D K K E U R / D K K S p o t Source: Reuters EcoWin, Danske Bank Markets Conclusion. We expect EUR/DKK to remain stable below the central rate. Any move above the central rate would be firmly offset by DN through intervention and rate hike(s). As a rule of thumb it takes around DKK10-20bn of intervention before a rate change. Hence, we expect a very stable EUR/DKK over the next 12 months. Given our constructive view on the eurozone, we strongly doubt that EUR/DKK will move below over the next 12 months. 13

14 USD/CAD BoC signals low rates for longer Growth. Canadian data have improved over the past couple of months. Especially the labour market has surprised to upside with a third consecutive month of job growth in October. The Canadian economy should continue to expand into supported by a boost from easing credit conditions and an ongoing US recovery. Monetary policy. The Bank of Canada (BoC) has maintained its overnight lending rate at 1.00% for the past two years. At the October monetary policy meeting, BoC governor Stephen Poloz surprised investors by dropping language about the need for future interest rate increases that had been in place for more than a year, citing greater slack in the economy. Basically, BoC now indicates that it intends to keep rates low for longer and we still see rates unchanged on a 12M horizon. Flows. Speculators remain short CAD but much less than was the case earlier this year. Valuation. CAD remains expensive on PPP measures. Commodities. We expect oil prices to remain elevated near term but to head lower on a 12M horizon. However, oil production is rising in Canada and this suggests that oil revenue will remain significant. Risks. If household sector imbalances fail to evolve constructively, the BoC may have to follow the Fed in scaling back on stimulus earlier than currently expected. Morten Helt, Senior Analyst, mohel@danskebank.dk, Forecast: 1.05 (3M), 1.07 (6M) and 1.08 (12M) Nov-12 Feb-13 Jun-13 Sep-13 Dec-13 Mar-14 Jul-14 Oct-14 USD/CAD 1M 3M 6M 12M Forecast (pct'ile) 1.05 (65%) 1.05 (60%) 1.07 (73%) 1.08 (71%) Fwd. / Consensus 1.05 / / / / % confidence int / / / / % confidence int / / / / 1.13 USD/CAD 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. Canada stands to benefit from a US recovery, which we see materialising as 2014 approaches. Recently positive spill-overs to the Canadian economy have been small though and with Fed tapering coming up, support for USD/CAD should remain in place. Since the BoC dropped its language about the need for future interest rate hikes has USD/CAD risen nearly 2 big figures as one full 25bps rate hike has been priced out, and at least in the near term USD/CAD upside is likely to be fairly limited. However, as a consequence of the dovish signals from BoC we have raised or 6M and 12M target marginally to 1.07 and 1.08 respectively. 14

15 AUD/USD RBA intensifies rhetoric against strong Aussie Growth. Data out of Australia have continued to deteriorate. Especially labour market remains a weak spot. The total number of employed rose by only people in October much less than the expected by economists. Monetary policy. The Reserve Bank of Australia (RBA) kept its cash target rate unchanged at 2.50% in November and maintained an easing bias, underlining that it might cut rates again if necessary. However, some mixed signals were send, as Governor Stevens on the one hand intensified the rhetoric against the elevated local currency, said that the Aussie is uncomfortably high, while on the other hand, expressing increased concerns about risk to financial stability due to low interest rates. While the latter initial was interpreted as signal that the RBA might be done cutting rates, there is no doubt that the RBA, one way or the other, will have to take measures in order to weaken the Aussie. Flows. Speculators remain short AUD, which could limit further downside in the near term. Valuation. AUD remains fundamentally overvalued. However, overvaluation is only half of its post-crisis peak. Risks. Fed s tapering remains a key driver for AUD/USD and following the dovish statement from the coming Fed chairman Yellen, risks are probably skewed towards that Fed tapers earlier than currently expected. Morten Helt, Senior Analyst, mohel@danskebank.dk, Forecast: 0.93 (3M), 0.90 (6M) and 0.87 (12M) Oct-12 Jan-13 May-13 Aug-13 Nov-13 Feb-14 Jun-14 Sep-14 AUD/USD 1M 3M 6M 12M Forecast (pct'ile) 0.94 (64%) 0.93 (47%) 0.90 (30%) 0.87 (26%) Fwd. / Consensus 0.93 / / / / % confidence int / / / / % confidence int / / / / 1.00 AUD/USD 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. With the RBA likely to be on hold for now, we could see a pause in the AUD downturn supported by improved risk appetite, a possible delay in Fed s tapering and the ongoing recovery in China. But looking into next year, AUD will have to fall and/or the RBA will need to take actions to foster the rebalancing of the Australian economy as the mining boom fades. On a 3-6M horizon AUD/USD could remain under pressure as the struggling non-mining sector in Australia contrasts with a decent US outlook and the RBA and the Fed are likely to act accordingly. 15

16 NZD/USD RBNZ keen to hike but constrained by NZD Growth. The downturn seen in New Zealand s economy over the summer seems to have stabilized. Unemployment declined in Q3, and while private consumption remains weak, consumer sentiment has risen to the highest since January 2010, which bodes well for growth in the coming quarters. Monetary policy. The Reserve Bank of New Zealand (RNBZ) has kept rates at 2.50% since the earthquake-related cut early in Following a range of warnings since his inauguration, RBNZ Governor Graeme Wheeler has started to intervene to curb NZD strength. RBNZ is struggling with the risks to financial stability of a booming construction sector, whereas the rest of the economy suffers from an overvalued NZD. In October RBNZ explicitly said that it expects to hike rates in Flows. Speculators have remain long NZD. However, positioning do no appear significantly stretched. Valuation. 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 elevated levels. Risks. If the construction boom feeds into inflation, the RBNZ may be forced to hike rates sooner than we currently project. Morten Helt, Senior Analyst, mohel@danskebank.dk, Forecast: 0.83 (3M), 0.81 (6M) and 0.779(12M) NZD/USD 0.65 Oct-12 Jan-13 May-13 Aug-13 Nov-13 Feb-14 Jun-14 Sep-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst NZD/USD 1M 3M 6M 12M Forecast (pct'ile) 0.83 (51%) 0.83 (51%) 0.81 (39%) 0.79 (37%) Fwd. / Consensus 0.83 / / / / % confidence int / / / / % confidence int / / / / 0.90 Conclusion. With house rather than consumer price inflation the key worry for RBNZ at present and Wheeler having revealed his willingness to resort to intervention to curb NZD peaks, upside for the kiwi should be limited from current levels despite the prospect of rate hikes. As for most USD crosses, we see downside in 2014, as USD stands to receive support from a Fed exit at a time when RBNZ remains focused on curbing NZD strength. Relative to the AUD, we see potential in the NZD, with RBNZ looking at hikes and the RBA set to be on hold (if not cut). 16

17 EUR/RUB early tapering risk weighs on the pair Growth. Russian economic growth continues to disappoint, expanding 1.2% y/y in Q3 13, the same path as a quarter earlier. We cut our 2013 forecast by 30bp to 1.5%. Forecast: (3M), (6M) and (12M) Monetary policy. The Russian central bank left its main rates unchanged again in November 2013, claiming in October its key rate to be the one-week auction rate (5.50) and not the refi rate (8.25). We expect Bank Rossii to cut its main rates by 25bp in Q1 14, if we see CPI clearly in a 5-6% range for at least two months. Flows. Net capital outflows increased to almost USD13bn in Q3 13 versus USD7bn a quarter earlier, posting USD48bn for January-September 2013, while in 2012 capital outflows totalled USD54.6bn. Valuation. EUR/RUB is trading slightly above its 1M average of and we reiterate our view that upside risk is present in the worst-case scenario, bringing the pair to in H2 13 and early 2014 on volatile tapering news from the US. Risks. Bank Rossii s rate cuts, its QE steps, the deterioration in the current account surplus and the Fed s tapering of economic stimulus in upcoming months are weighing on the RUB as the oil price remains high. Vladimir Miklashevsky, Economist/Trading Desk Strategist, vlmi@danskebank.com, Conclusion. As we expected in early 2013, Russia s central bank Bank Rossii is continuing to act according to its plans on a weaker rouble. The RUB is set to stay weak over the next 12 months as part of the government s plan to stimulate economic growth. We see downside risks for the EUR/RUB in the coming three months, as Q1 is set to post a stronger current account surplus. However, in our view, possible Fed steps to start tapering in January 2014 would keep the RUB under pressure. 17

18 EUR/RUB important issues to watch Weakness set to continue in 2014 Over the past month, the RUB has performed slightly poorly against the EUR in the EMEA FX universe, losing 0.5%. However, there are much worse performers among emerging market currencies, such as the BRL (-5.8%), CZK (-5.6%) and IDR (-4.4%). Bank Rossii has intervened in November to mitigate the RUB s weakening. It has significantly clarified its FX policy mechanism disclosing informal intervention levels. Despite the weaker rouble looking attractive for local industries, we believe the government is not in favour of a dramatic devaluation, letting Bank Rossii weaken the RUB by a maximum of against the EUR and against the basket in H2 13 and early Yet, we are bearish on the RUB in 12 months as the Russian economy is not getting any notable boost and the global environment remains challenging for emerging market assets. Decreasing inflation in 2014 and the occasional come back of risk-on is likely to add to the attractiveness of Russian government bonds and OFZs and be RUB positive RUB's trading band vs. RUBBASK old no intervention zone (informal) lower border upper border RUBBASK (45%EUR+55%USD) Source: Bank Rossii, Bloomberg, Danske Bank Markets Bank Rossii sells USD400m/day Bank Rossii sells USD200m/day new no intervention zone Bank Rossii buys USD200m/day Bank Rossii buys USD400m/day Vladimir Miklashevsky, Economist/Trading Desk Strategist, vlmi@danskebank.com,

19 USD/TRY increasing tapering fears to weigh on the lira Growth. The Turkish economy saw a brisk expansion of 4.4% y/y in Q2 13, exceeding expectations. The support came from private consumption. We raise our GDP growth forecasts to 4.8% y/y for 2013 and 6.3% for As we had previously expected the current account deficit widened in September to USD3.3bn, from USD2.4bn (revised) in August, more than consensus expected. The effect of high FX inflows from tourists in the summer months has vanished. We expect the gap to stay wide in future and weigh on TRY. Monetary policy. Turkey s central bank continues the break in its ultra hawkish policy, leaving the overnight lending rate unchanged at 7.75% in October as Fed tapering fears eased. We would not rule out further tightening as the TRY has a strong downside risk under Fed tapering plans for early Valuation. USD/TRY remains above its monthly average of Risks. The announcement of Fed tapering in January 2013 could hit the TRY further together with other emerging market currencies. An escalation in Turkey s political environment would bring strong upside risks for USD/TRY. Forecast: 1.99(3M), 2.02(6M) and 2.08(12M) 2.45 USD/TRY Oct-12 Jan-13 May-13 Aug-13 Nov-13 Feb-14 Jun-14 Sep-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst USD/TRY 1M 3M 6M 12M Forecast (pct'ile) 2.03 (41%) 2.01 (30%) 2.02 (35%) 2.10 (47%) Fwd. / Consensus 2.05 / / / / % confidence int / / / / % confidence int / / / / 2.41 Conclusion. We continue to see risk from the political situation in Turkey. We see a stabilisation in the lira around current levels. Carry remains attractive but, in the longer term, we expect the rebound to be curbed by the very large current account deficit and the Fed s tapering plans. That said, we are slightly bearish on the lira relative to market pricing on a 12-month horizon. Vladimir Miklashevsky, Economist/Trading Desk Strategist, vlmi@danskebank.com,

20 EUR/PLN rate cut expectations will hit the zloty Growth. Recent Polish macroeconomic data have pointed to a slight pickup in Polish growth. This said, Polish growth remains subdued and well below potential growth and unemployment seems set to continue increasing. Monetary policy. Polish growth remains weak and inflation is well below the central bank s 2.5% target. Indeed, there is now a clear risk of outright deflation in the Polish economy. Therefore, we now think the Polish central bank (NBP) will reinitiate its rate cutting cycle in coming months. We expect the NBP to cut rates by in total 75bp over the coming six months. This is not priced in by the markets. Valuation. The PLN is trading close to its fair value level, so valuation is unlikely to have any major near-term impact on the zloty. Risks. The biggest risk to the PLN is weak growth in the Polish economy and the need for further monetary easing. Forecast: 4.25 (3M), 4.30 (6M) and 4.30 (12M) 4.60 EUR/PLN Oct-12 Jan-13 May-13 Aug-13 Nov-13 Feb-14 Jun-14 Sep-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst EUR/PLN 1M 3M 6M 12M Forecast (pct'ile) 4.20 (58%) 4.25 (69%) 4.30 (72%) 4.30 (63%) Fwd. / Consensus 4.19 / / / / % confidence int / / / / % confidence int / / / / 4.59 Conclusion. The outlook for lower Polish interest rates is likely to weigh on the zloty in coming months. However, over the medium term (six to 12 months), we believe a continued fairly benign global financial environment and a more attractive valuation of the zloty are likely to provide a bit of support. Lars Christensen, Chief Analyst, larch@danskebank.com,

21 EUR/HUF strong external balances support forint Growth. Domestic demand remains very weak, which together with subdued export growth weighs on economic activity. However, there are some signs that the economy has stabilised and finally seems to be out of recession. We expect the economy to expand 0.4% this year, 1.2% in 2014 and 1.5% in Hence, we expect GDP growth to remain below its potential over the next three years. Monetary policy. The Hungarian central bank (MNB) has initiated a policy of baby step rate cuts. We expect the MNB to continue this policy and we expect yet another 20bp rate cut at the Monetary Council meeting in November. This would bring the key policy rate down to 3.20%. Valuation. The forint has fairly attractive long-term fundamentals and, in particular, a fairly large current account surplus is helpful. Risks. The biggest risk to the HUF remains the political uncertainty in Hungary and the risk that the Hungarian government will once again take a misstep in economic policy. Forecast: 300 (3M), 300 (6M) and 300 (12M) 319 EUR/HUF Oct-12 Jan-13 May-13 Aug-13 Nov-13 Feb-14 Jun-14 Sep-14 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst EUR/HUF 1M 3M 6M 12M Forecast (pct'ile) (50%) (62%) (61%) (62%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / Conclusion. We could see a bit of softness for the forint in the near term as other emerging market currencies remain under pressure. However, given the attractive valuation of the forint, we expect it to remain fairly stable over the coming six to 12 months. Lars Christensen, Chief Analyst, larch@danskebank.com,

22 EUR/CZK CNB intervenes directly in the FX market Growth. We see some tentative signs of stabilisation. Given that economic activity seems to be improving as the global economy recovers, the Czech economy should start to recover as well, albeit slowly. We now expect GDP to contract by 1.0% y/y this year, to grow by 1.6% y/y in 2014 and grow by 2.2% y/y in The Czech central bank (CNB) has raised its GDP growth forecast for 2013 to -0.9%, up from -1.5% previously but cut its 2014 forecast from 2.1% to 1.5%. Monetary policy. At the latest CNB board meeting, the CNB announced it would target EUR/CZK at around 27. Although the risk of FX intervention was high, the approval and actual direct FX intervention immediately after this announcement was surprising. The CNB will intervene with any amount needed and made it clear that it is in this for the long run. The decision to use FX intervention was due to the increased risk of deflation and the urgent need for looser monetary policy conditions in order to anchor inflation expectations. We expect the CNB to keep the CZK weak to loosen monetary policy in order to bring inflation back to its 2% inflation target. Debt risks are low. The Czech government forecasts the public finance deficit to be below 3% this year. Valuation. From a long-term perspective, the CZK is undervalued (fair value is around 23.8 against the EUR). Risks. Further fall in inflation and the need for weaker CZK Forecast: 27.2 (3M), 27.5 (6M) and 28.5 (12M) Nov-12 Feb-13 Jun-13 Sep-13 Dec-13 Mar-14 Jul-14 Oct-14 75% conf. int. 50% conf.int. Forward Danske fcst EUR/CZK 1M 3M 6M 12M Forecast (pct'ile) (42%) (61%) (79%) (93%) Fwd % confidence int / / / / % confidence int / / / / EUR/CZK Conclusion. Following the direct FX intervention on 7 November, the CZK has lost more than 4% and is now at around EUR/CZK 27 in line with the CNB s target. We expect the CZK to stay in a fairly narrow range around EUR/CZK 27 in the coming month. Nonetheless, a target of EUR/CZK 27 does not mean that the CNB cannot change it. So, given that we expect inflation to stay lower than targeted by the CNB, the risk for further weakness in CZK in fairly high. We look for EUR/CZK higher than 27 going forward. Stanislava Pravdová-Nielsen, Analyst, spra@danskebank.com,

23 USD/ZAR Fed tapering remains the main risk to the rand Growth. On the back of weaker-than-expected economic activity recently, we have revised our GDP outlook for all three forecast years. We estimate average GDP growth of 2.0% this year (2.2% previously), 2.8% (3.1%) in 2014 and 3.2% in 2015 (3.3%). The South African central bank (SARB) kept its GDP forecasts unchanged and still expects GDP growth of 2.0% in 2013, 3.3% in 2014 and 3.6% in Monetary policy. The SARB MPC kept interest rates on hold at the MPC meeting in September, maintaining the key policy rate at 5.0%. Although the statement sounded less hawkish on the back of eased upside pressure on inflation from the exchange rate and oil prices, as the delay in Fed tapering provided temporary relief to the ZAR at the time of the MPC meeting, the central bank committee remained concern about upside risks to inflation and that it would remain uncomfortably close to the upper end of the inflation target. We expect the SARB to stay on hold at its MPC meeting in November and maintain our wait-and-see approach. In our view, the SARB MPC is well aware that the risk for the ZAR from Fed tapering is significant. Debt risks. The South African government raised the projected 2012/13 budget deficit to 5.2% (from 4.8%). Valuation. ZAR remains fundamentally overvalued (fair value around 10.95). Risks. Loss of investor confidence due to socioeconomic problems, further downgrade by the rating agencies, a widening current account deficit. Stanislava Pravdová-Nielsen, Analyst, spra@danskebank.com, Forecast: (3M), (6M) and (12M) Oct-12 Jan-13 May-13 Aug-13 Nov-13 Feb-14 Jun-14 Sep-14 USD/ZAR 1M 3M 6M 12M Forecast (pct'ile) (50%) (48%) (53%) (57%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / USD/ZAR 75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst Conclusion. The delay in Fed tapering provided temporary relief for the ZAR over the past month. However, it was not for long and most of the EM currencies have been under pressure over the past few days, with improved US data bringing the Fed tapering discussion back into the spotlight. Hence, Fed tapering remains the main risk for the ZAR. Despite this, our EM FX Scorecard indicates that the rand could receive short-term support from commodity prices. Hence, we are somewhat positive on the ZAR but only on a short-term horizon of three months. In the long run, on a 12- month horizon we remain bearish due to the fundamental overvaluation of the ZAR (given the large current account deficit). 23

24 USD/CNY renewed appreciation pressure Growth. Latest data suggests that the Chinese economy has again started to recover moderately on the back of a government mini stimulus. GDP growth is expected to be above trend in H2 13 but is expected to ease again next year as the impact from stimulus wanes. Monetary policy. Money market rates have largely normalised after the stress in the money market in June. However, PBoC has de facto tightened monetary policy by draining liquidity through its open market operations and guiding money market rates slightly. With growth expected to slow next year, we do not expect a hike in the official leading interest rates. FX policy. China is gradually moving towards full convertibility and a floating exchange rate. The implication is for less intervention and increasing two-way volatility in the exchange rate. PBoC has moved the reference exchange rate for USD/CNY lower in recent months, underscoring that CNY remains on a moderate appreciation trend. We expect the daily trading band to be widened soon from +/-0.5% currently. Valuation. CNY is, in our view, no longer undervalued and could possibly be slightly overvalued after the recent depreciation of many emerging market currencies. Risks. CNY could depreciate if GDP growth slows below 7% and/or money market stress returns Forecast: 6.07 (3M), 6.04 (6M) and 6.00 (12M) Apr Aug 11 USD/CNY exchange rate PBoC reference rate Dec Source: Reuters EcoWin, Danske Bank Markets Daily trading band Spot Apr Aug Dec 12 Apr Aug 13 Conclusion. We still recommend hedging CNY expenditures on the back of our expectations of moderate CNY appreciation and continued CNY depreciation expectations in FX forwards. However, the risk-reward pay-off has become less favourable. We recommend using offshore CNH forwards as they currently discount the largest depreciation. In addition, the alternative offshore nondeliverable forwards are an increasingly imperfect hedge Flemming Jegbjærg Nielsen, Senior Analyst, flemm@danskebank.com,

25 Danske Bank Markets FX forecasts Forecast Forecast vs forward outright, % Spot +1m +3m +6m +12m +1m +3m +6m +12m Exchange rates vs EUR USD JPY GBP CHF DKK NOK SEK Exchange rates vs USD JPY GBP CHF DKK NOK SEK CAD AUD NZD CNY Note: GBP, AUD and NZD are denominated in local currency rather than USD 25

26 Danske Bank Markets FX forecasts vs DKK Forecast Forecast vs forward outright, % Spot +1m +3m +6m +12m +1m +3m +6m +12m Exchange rates vs DKK EUR USD JPY GBP CHF NOK SEK CAD AUD NZD PLN CZK HUF RUB CNY