FX Forecast Update. April 2011: Global PMI decline will not save the dollar

Transcription

1 FX Forecast Update April 2011: Global PMI decline will not save the dollar Arne Lohmann Rasmussen Chief Analyst, Head of Rates, FX and Commodities Strategy John M. Hydeskov Chief Analyst Stefan Mellin Senior Analyst Kasper Kirkegaard Sverre Holbek Christin Tuxen Senior Analyst Senior Analyst Senior Analyst Bloomberg: DRFX <GO>

2 Main forecast changes Please see FX Forecast Update for details and a complete Forecast Table on page 23 Given the current high oil price and the outlook of a summer ECB rate hike, we have lifted our three-month EUR/USD forecast to 1.50 (from 1.46), while maintaining our six-month forecast of On the 12-month horizon, however, relative rates are likely to rotate from being a euro-supportive factor to being more of a dollar- supportive factor, as a first Fed hike should be pending. We forecast EUR/USD at 1.40 in 12 months. The simple relationship between EUR/GBP and the two-year swap spread suggests that the pound should weaken further against the euro. So far, the pound has held up, supported by market expectations of imminent rate hikes and decent data. But as it becomes clearer that the Bank of England is in no rush to lift rates, the pound could depreciate even more. As a result, we have opted to raise our three-month forecast to As it probably is a temporary weakening, which should not be interpreted as a new equilibrium, we keep our six- and 12-month forecasts at 0.89 and 0.86, respectively. We still look for a lower EUR/SEK based on relative yields and dfundamentals, but risks have grown more balanced as the Swedish krona is no longer cheap versus longer-term measures, and since the ECB will be more proactive than previously anticipated. As a result, we now forecast the six-month trough in EUR/SEK at around 8.70 (from 8.50). Swiss economic data remains very strong and suggests that the output gap is closing with the labor market recovery already having matured. At the same time, inflation has surprised on the upside, leaving greater potential for monetary tightening this year. As a result, we have opted to lower our 12-month EUR/CHF forecast to 1.35, reflecting the increased probability that the Swiss franc will continue to trade in overvalued territory. 2

3 EUR/USD monetary support likely to peak in 3-6 months Growth: The US economy is expected to see accelerating growth in the coming quarters, whereas Euro Zone growth should slow slightly. Monetary policy: Fed is expected to complete its QE2 programme, and not hike rates before Q2 2012, while the ECB initiated a hiking cycle in April. Relative monetary policy is a key support factor for EUR/USD. Debt risks: The eurozone periphery remains vulnerable to debt roll-over risks. Flows: The US current account deficit is expected to widen further and weigh on the dollar. Euroland flows are neutral at present. Valuation: EUR/USD is overvalued by longer-term measures, while short-term models suggests that the pair is fair priced. Risks: The euro remains vulnerable to commodity prices and potential contagion to Spain from the european debt crisis. Forecast: 1.50 (3M), 1.50 (6M) and 1.40 (12M) Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com, Conclusion: The April ECB rate hike and further tightening in 2011, indicates that support for the euro from monetary policy will peak earlier than previously expected. As a result, we now also expect an earlier peak in EUR/USD. Beyond the 6M horizon, however, euro support is expected to gradually fade. Not only will global growth slow and valuation become an issue, but we will also come closer to a first Fed hike. 3

4 EUR/USD important issues to watch Wider interest rate spread to support the euro... Trend reversals in EUR/USD have coincided with trend reversals in relative interest rates. In example, when EUR/USD hit 1.20 during the first debt crisis last spring the 2-year swap spread had narrowed to 0bp. And when EUR/USD reached 1.40 in November ahead of the Feds QE2 announcement the spread had widened to 110bp. We expect the interest rate spread between the Euroland and US to remain at elevated levels over the coming quarters as the ECB is likely to hike rates further. The potential for a narrowing yield spread going into 2012 is a key premise for our forecast of a peak in EUR/USD during But positioning is a short term risk Non-commercial investors are currently very short the dollar according to IMM positioning data. As a result, the dollar could see a short-term rebound (lower EUR/USD) if positions are unwound. A potential trigger could be a global sell-off in risk assets, which should be expected to support the dollar via safe haven flows. Trend reversals in relative rates and EUR/USD Source: Reuters Ecowin, Danske Markets Speculative investors are very short the USD Source: Reuters Ecowin, Danske Markets Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com,

5 USD/JPY Room for further upside Monetary policy: The BoJ has recently offered JPY1 trillion in emergency loans, but still has plenty of room to expand its balance sheet. Intervention is possible if USD/JPY drops below 80. Growth: The economy continues to struggle with the consequences of the 11 March earthquake and the BoJ has recently cut its growth forecasts due to supply chain disruptions. Weakness is likely to be concentrated in Q2 11, however. Flows: JPY is favoured by the positive flows from Japans trade and current account surpluses. However, the trade surplus could suffer on weaker exports and rising imports due to reconstruction. Weekly portfolio flow data suggest that Japanese residents are again buying foreign bonds, suggesting only limited impact from repatriation. Valuation: Our short-term model suggests fair value around the 83-level. PPP estimate around 88. Risks: If the US recovery falters, relative rates should move in favour of the JPY. Senior Analyst, Sverre Holbek, Forecast: 85 (3M), 86 (6M) and 87 (12M) Conclusion: Weaker Japanese growth in the coming months and further BoJ stimuli seem likely. With Japanese rates at zero, US rates should remain the key driver of USD/JPY. US macro data still perform and as the end of Feds QE2 draws nearer, US rates are expected to rise. Still, the Fed is likely to stay on hold until mid- 2012, which should keep USD/JPY capped, while the risk of further BoJ intervention should provide a floor below USD/JPY around 80. 5

6 USD/JPY Important issues to watch Mixed evidence on repatriation flows so far Weekly portfolio flow data published by the Japanese Ministry of Finance show Japanese residents are buying foreign bonds again in W14. While foreign bonds were sold in W13, this coincided with the fiscal year-end, suggesting seasonal effect could be at work. So far, the flow data are thus inconclusive with regard to the effect of repatriation ti flows. Non-commercial USD/JPY positioning Non-commercial investor positioning in JPY has swung between long and short several times over the past months. The frequent shifts in positioning appear to cause quite high volatility in the USD/JPY spot rate at the moment. According to the latest IMM data, current positioning is short JPY, suggesting that directional risk from a position squeeze is to the downside in USD/JPY. Japanese residents still buying foreign bonds Source: Reuters Ecowin, Danske Markets Sharp swings in USD/JPY positioning Source: Reuters Ecowin, Danske Markets Senior Analyst, Sverre Holbek, holb@danskebank.com,

7 EUR/GBP selling England by the pound Growth: 2011 will be a more challenging year in the UK than many think at present. UK growth will stay subdued and the output gap will remain large. Monetary policy: BoE will not hike in May as most thought very likely only weeks ago. We see a good chance that the BoE will be in much less hurry than most still think. Unchanged UK rate s throughout this year remains a possibility. ECB is on track with its exit strategy. Debt risks : GBP benefits every time PIIGS debt woes escalate. The UK is viewed as safe haven (however weird that may sound). UK is tightening fiscal policy rapidly, comforting to financial markets. Valuation: Our short-term financial model suggests that EUR/GBP is in equilibrium around current spot (0.8830). PPP estimates around 0.74 (not valid). Risks: We know only very little about some MPC members 3 are already voting for hikes. Balance can tip if data improves. The European debt crisis is still a joker that can be a negative for the euro again. The pound has a strong link to the US dollar. Forecast: 0.92 (3M), 0.89 (6M) and 0.86 (12M) Conclusion: We think the pound will weaken further during Spring and over summer. We regard the forecast as balanced and see downside risks equalling upside risks. A sharp move lower in EUR/GBP is under the current circumstances somewhat unlikely even though the pound is substantially undervalued from a long-term perspective. Chief Analyst John Hydeskov, johy@uk.danskebank.com +44 (0)

8 EUR/GBP important issues to watch Markets lose faith in May rate hike as inflation ease After having been priced as a done deal for some time, a May hike is now just a distant illusion. Data has worsened and inflationary pressures have eased. We dont expect the BoE to hike before August at the earliest. It is however also possible that the BoE keeps rate on hold for whole ECB delivers BoE dont The ECB has initiated a gradual hiking cycle while the BoE shields households against a double whammy from both fiscal and monetary tightening. i The EUR-GBP rate spread is widening and suggest already much higher levels in EUR/GBP. The ECB July hike will highlight the monetary divergence even further. UK halfway in recession? Inflationary pressures ease Source: Bloomberg UK recovery not on track Q4 GDP dropped 0.5% q/q a shock to markets. The bad weather in December obviously hit construction but it was also a reminder that the economic recovery is rather fragile. The underlying trend is poor and coming quarters will not be impressive. Q1 GDP growth will most likely be around 0.5% - not enough to declare that the upswing is Source: Reuters Ecowin intact. Chief Analyst John M. Hydeskov, johy@uk.danskebank.com +44 (0)

9 EUR/CHF short term risks become more symmetric Growth: No longer a key downside driver of EUR/CHF, as stronger-than-expected Euroland growth combined with the outlook of lower growth in Switzerland has ended previous Swiss outperformance. Monetary policy: The initiation of an ECB hiking cycle has widened the yield spread to Switzerland. The SNB is, however, expected to begin rate hikes in June (possibly September). Debt risks : Switzerland is a fiscal safe-haven. Flows: A high Swiss current account surplus justifies a strong Swiss franc. Short term positioning is likely an upside risk on EUR/CHF. Valuation: EUR/CHF is looking slightly oversold both by short-term and longer-term measures (PPP estimate 1.44). Risks: Following G7 intervention in the JPY the Swiss franc has become even more of a safe haven currency. Forecast: 1.31 (3M), 1.33 (6M) and 1.35 (12M) Conclusion: EUR/CHF is likely to remain at low levels as long uncertainty remains about the European debt crisis. Relative rates suggests that EUR/CHF should correct higher h during Short-term risks are more symmetric as a bigger global sell-off in risky assets could see EUR/CHF test levels in the mid 1.20s. Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com,

10 EUR/CHF important issues to watch Relative rates have moved against the franc The 2-year EUR-CHF swap spread has widened 90bp since April, as the market has been pricing in rate hikes from the ECB Feb Relative rates moving against the franc Bp 2Y EUR-CHF swap spread EUR/CHF at 1.28 low The SNB is expected to begin hiking rates later this year. The SNB has potential to catch-up with the ECB, which could see the rate spread reverse A liquid hedge against PIIGS losses Growing concern about the fiscal situation of the PIIGS leaves downside pressure on EUR/CHF as the Swiss franc is not only a risk safe-haven, but also a fiscal safe-haven....but risks are two-sided Jun Aug Oct Dec 09 Feb Apr Jun Aug Oct Dec 10 Source: Reuters EcoWin, Danske Markets Bp Feb Apr 11 EUR/CHF correlations (1Y window) 0.8 Correlation coefficient 0.7 A stronger global economic outlook and easier monetary policy in the US is supporting risky assets Together with the widening rate spread this has likely Y EUR-CHF swap spread raised the short-term fair-value level in EUR/CHF. If global risk concerns reside, higher levels could materialize fast Jan Apr Jul Oct Jan 08 Source: Reuters Ecowin MSCI world equity index Apr Jul Oct Jan 09 Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com, EUR/USD Apr Jul Oct Jan Apr

11 EUR/SEK Riksbank to outhike ECB Growth: Growth around 3.5% in 2011, above trend. Resource utilisation rising. Labour market improving and becoming more strained. CPI inflation at 2.9% and heading significantly ifi higher, h 2Y expectations ti at 2.5%. 25% Monetary policy: Riksbank set to hike rates at each meeting in 2011, maybe 50bp at some; 2.75% in December with risk tilted to the upside. More frontloaded hikes by ECB have reduced, but not removed, downside potential in EUR/SEK. We expect the Riksbank to outhike the ECB. Flows: Export order outlook is upbeat according to NIER. Anecdotal evidence suggests export companies continue to meet strong demand. High quality fundamentals attract broad-based foreign interest in Swedish assets. Valuation: EUR/SEK is in line with/slightly below its long-term equilibrium estimates like PPP. Our mediumterm macro models suggest a fair range of Risks: Spike in risk aversion, economic slowdown or a softer Riksbank would likely send SEK weaker. Forecast: 8.75 (3M), 8.70 (6M) and 8.80 (12M) Conclusion: We still look for lower EUR/SEK based on relative yields and fundamentals, but risks have grown more balanced as the SEK is no longer cheap versus L/T measures and since the ECB will be more proactive than previously anticipated. The forecast expresses a view where the pair will not be trending lower indefinitely. 11

12 EUR/SEK important issues to watch Riksbank to hike rate and path on 20 April We expect the Riksbank to lift the repo rate 25bp and also expect the 4-2 majority to push through an upward revision of the repo rate path. Relative monetary policy implied fair value has run its course and the next leg is down. Riksbank will outhike the ECB, not the other way around: this is not adequately reflected in the pricing. GDP, employment and CPI inflation are all on the higher side of Riksbank February forecast. Dividend payouts in April and May Dividend payouts might give rise to SEK outflows but benchmark is re-investing and historical data in fact shows that the krona tends to outperform in April. Company report season EUR/SEK and relative yields << 2Y swap spread -1.1 oktober november december januari 10 Source: Reuters Ecowin EUR/SEK and export growth << Export growth yoy EUR/SEK >> februari mars april 11 EURSEK >> Alert to comments about adverse effects from the strong 9.0 krona Source: Reuters Ecowin 12

13 EUR/NOK Norges Bank to catch up with the ECB Growth: Mainland GDP grew just 0.3% in Q4, but Forecast: 7.70 (3M), 7.70 (6M) and 7.65 (12M) the Regional Network Report and PMI points to 9.25 stronger growth this quarter. The housing market EUR/NOK 9.00 is strong, but retail sales are still modest. Monetary policy: We expect Norges Bank to hike rates by 25bp in May and twice more this year. Flows: Further long speculative NOK positions have been added over the past month. Still high spending of oil money in Norges Bank has not purchased any foreign currency since October last year, but we expect it to return to the market soon. Valuation: We believe that EUR/NOK can trade well below its PPP estimate of 8.22 in 2011 due to strong fundamentals and higher rates. Risks: The market is very speculative long NOK. Norges Bank may disappoint at the May meeting. NOK might suffer if core inflation continues to drop. Strong euro risk on the upside for EUR/NOK May Jul Sep Nov Jan pct. region 50 pct. region Mar May Jul Sep Nov Jan 11 Spot (incl. DB forecast) Forward Mar 12 Conclusion: We expect EUR/NOK to decline towards 7.70 in three months time. We look for growth above trend in 2011 and expect a renewed widening of the interest rate spread. However, we are getting closer to a bottom in EUR/NOK. We should expect a somewhat bumpy ride, as NOK is still sensitive to positioning, changes in the global growth picture (risk) and oil prices. Chief Analyst, Arne Lohmann Rasmussen, arr@danskebank.com,

14 EUR/NOK important issues to watch Relative rates favour a higher EUR/NOK The move in relative rates in favour of the euro has not been reflected in a significantly higher EUR/NOK. If relative rates continue to narrow in favour of the euro contrary to our expectations - our EUR/NOK forecast might be at risk. The latter might happen if we do not see a Norges Bank rate hike in Q2. Changes in NOK flows The weekly flow data from Norges Bank shows that foreign banks, which we see as a proxy for speculative money, are very long NOK. Hence, there is a risk of profittaking in NOK. Norges Banks purchase of foreign currency in the market going forward might temporarily weigh on the NOK. We could see further speculative NOK inflows due to the high oil price and outlook for monetary policy. Compared with the other oil currency (the CAD), the NOK looks cheap. Core inflation and oil prices Relative rates risk on the upside for EUR/NOK Source: Norges Bank, Danske Markets Very low Norwegian core inflation Norwegian core inflation, CPIATE, is still very low, rising just 0.8% y/y in March, marginally below Norges Banks expectations. At this level it might postpone the next rate hike. A surprise drop in oil prices could put pressure on NOK. Norges Bank could use low current inflation as an excuse to postpone rate hikes if it sees an unwarranted Source: Reuters Ecowin strengthening of the NOK. Chief Analyst: Arne Lohmann Rasmussen, arr@danskebank.com,

15 EUR/DKK moving closer to the central parity Actual range tighter than official bands: EUR/DKK trades in Forecast: 7.46 (3M), 7.46 (6M) and 7.46 (12M) a +/-2.25% band around a central parity of ( ). In practice, the central bank has kept EURDKK 7468(01% EUR/DKK within a much tighter band of (-0.1% to +0.5%). In recent years, the Danish central bank has shown a strong commitment to keeping EUR/DKK stable and preferably marginally lower than the central parity Recent trading: EUR/DKK has recently moved higher and closer to the central parity. Short DKK rates are now slightly below EUR rates and the EUR/DKK forwards trade with a discount. However, there was only a modest FX intervention in March and FX reserves are at a record high. However, if EUR/DKK continues to move higher we expect to see FX intervention from the Danish central bank mitigating the cross moving above the central parity. Rate hikes usually happen on a Thursday at 16:00 CET, prior to the regular money market operations on Fridays. Previously, currency outflow was observed before rate hikes, but last year a negative money market spread to Euroland was enough to trigger a rate hike. However, as the deposit rate was hiked by only 25bp after the ECB hike in April, we now conclude that any additional rate hikes will not take place before a currency outflow has been observed. Jan Apr Jul Oct Jan 09 EUR/DKK Spot Source: Reuters Ecowin, Danske Markets Apr Jul Oct Jan 10 Apr 11 Conclusion: We believe the Danish central bank will aim to keep the krone marginally stronger than the central parity. The gap between the lending rate and the deposit rate/current account rate will be closed over the next 12 months. The lending rate is expected to be hiked synchronously with ECB rate hikes the first rate is expected on 7 April. The lending rate is expected to rise an extra 5bp on a 12-month horizon. Chief Analyst Arne Lohmann Rasmussen, arr@danskebank.com,

16 EUR/DKK important issues to watch More focus on interest rate spreads As a reaction to the higher European money market rates, the Danish central bank raised the deposit rate and current account rate twice by 10bp in H2 10. While the first hike came after a modest currency outflow, the second came without any outflow. The Central Bank governor commented on 1 November 2010 that, The Danish interest rate was raised because short-term market rates in the euro area have risen. The interest rate spread has an impact on the exchange rate So the rate of interest was changed with the krone rate in mind; the fixed exchange rate policy has not changed. Danish krone has not been under any pressure Even when the financial crisis was at its highest in autumn 2008, EUR/DKK deviated less than 0.2% from the central parity. The krone has been stronger than parity for more than two years. Massive currency reserve EUR/DKK moving towards the central parity Source: Reuters Ecowin, Danske Markets Denmark expected to join new EU pact The currency reserve remains voluminous more than large enough to sustain any thinkable pressure. Chief Analyst, Arne Lohmann Rasmussen, arr@danskebank.com, The Danish prime minster Rasmussen has said that he finds the new EU pact attractive. He has said that he is ready to give concessions to the political opposition to left to get a political deal on the pact. Denmark joining the EU pact should further support the view that the Danish fixed exchange rate policy is steady as a rock. 16

17 USD/CAD signs of improvement in Canadian data Growth: Economic data has surprised slightly on the upside lately but signs of activity slowing are starting to show up. Retail sales have declined, employment has disappointed, i d and the export sector stands to be hit by the strong CAD. Monetary policy: The BoC stroke a soft tone at the April meeting. With the Bank increasingly uncomfortable about the high level of the CAD, we do not think the next rate hike will be seen until July. Commodities: CAD is still positively correlated with oil and should receive support in 2011 as oil is projected to remain at high levels. Flows: The trade deficit in Canada has jumped into positive territory recently although deteriorating somewhat in February. Valuation: USD/CAD is too high according to our short-term model estimate. By long-term measures CAD is trading at strong levels (PPP:1.18). Risks: Speculative investors are already long CAD. Forecast: 0.95 (3M), 0.98 (6M) and 1.03 (12M) Conclusion: BoC is suggesting that the strong oildriven currency provides them with more time to wait and see before removing more monetary stimulus. Going forward, we expect the economic outlook to improve and a resumption of the BoC hiking cycle should be in the cards by mid Thus, CAD should sustain its current strong levels in the near term. In the medium term, prospects for Fed hikes should send the USD/CAD higher towards long-term valuation levels. 17

18 USD/CAD important issues to watch Employment Despite some improvement in employment, the Canadian unemployment rate at 7.7% remains well above its historical average. BoC acknowledged in its April report that the economy continued to operate with a material degree of slack in the first quarter of As a result, wage pressures have been subdued over the past year. Also, inflation expectations remain firmly anchored. Labour-market developments will likely be key to watch for timing of BoC moves. Oil correlation dropping Rising oil prices imply a terms-of-trade improvement which has previously been CAD positive. However, the correlation has faded, as the recent rise is the result of geopolitical tensions, rather than an improved global economic outlook. To the extent that oil prices remain driven by the MENA crisis, the correlation may crack as further tensions could hit risky assets and in turn the CAD. Unemployment still at elevated levels US economic outperformance No picture available for this analysis Canada economic outperformance Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 USD/CAD Relative economic performance Source: Reuters Ecowin, Danske Markets USD/CAD correlations changing USD/CAD Jan Mar May Jul Sep Nov Jan /- 2 std.dev. Spot Model Source: Reuters Ecowin, Danske Markets 18

19 AUD/USD tail risks are to the downside Growth: The relative cyclical outlook remains a supportive factor for AUD/USD. The Q1 flooding in Queensland has hampered activity recently but a rebound should kick in in Q2. Monetary policy: RBA kept the overnight cash rate unchanged in April but RBA Governor Stevens said in a recent speech that its is risky keeping interest rates really low for a long period. We look for further tightening in Q2. Debt risks : The still high US twin deficit is not currently a key market theme, but could add downside pressure on the dollar. Flows: The relative balance of payments situation supports AUD relative to USD. Valuation: AUD/USD is trading a highly overbought levels by most long-term measures (PPP estimate 0.73). Risks: AUD remains sensitive i to a potential sell-off in risky assets and commodity prices. Forecast: 1.05 (3M), 1.05 (6M) and 1.00 (12M) Conclusion: Most factors are bullish for the AUD at the moment. The economic outlook is strong and warrants further interest-rate hikes. Commodity prices are at elevated levels l and AUD remains the best Emerging Asia proxy among the G10 currencies. We expect AUD/USD to remain in overvalued territory over the coming quarters. AUD/USD is overvalued and hence tail-risks are to the downside risk/reward has been better. 19

20 AUD/USD important issues to watch Strong correlation with relative rates The high correlation with relative rates implies that AUD/USD could see support if markets price out the probability of a RBA rate cut. We expect the pricing of Fed hikes to mark a turning point for AUD/USD and this could start to become a theme over the summer. Higher commodity prices support the AUD An important driver of the Australian recovery has been the improved terms of trade. AUD is very vulnerable to gold, metal and coal prices which h our commodity strategists expect to stay at elevated levels in the medium term. AUD/USD trading closely with relative rates Source: Bloomberg, Danske Markets AUD supported by improved terms of trade Index Index << Australian terms of trade Real effective AUD >> Source: Reuters Ecowin 20

21 NZD/USD a bullish financial environment Growth: The New Zealand economy was already slowing when the tragic earthquake hit and the quake has disrupted activity temporarily. Reconstruction should be a positive in Q2 though. Monetary policy: The RBNZ delivered a 50bp emergency cut to the policy rate (now 2.50%) in response to the recent earthquake. We do not expect RBNZ to cut further, but rather return to hiking mode on a12m horizon. Debt risks : Fiscal concerns are less pronounced than in the US. Flows: The balance of payments situation has improved in New Zealand in recent years, reducing the risk on NZD. Valuation: NZD/USD appears overvalued by most measures (PPP: 0.61) though less so when correcting for the terms of trade improvement. Short-term model suggests. Risks: NZD is sensitive to global risk sentiment and commodity prices. Forecast: 0.82 (3M), 0.82 (6M) and 0.76 (12M) Conclusion: The NZD-USD rate spread has widened again recently, supporting a surge in NZD/USD. We expect NZD to strengthen a little over the coming quarters as money markets continue to price RBNZ rate hikes again. Longer term, we expect a gradual correction to less overvalued levels. Tail-risks are notably to the downside. 21

22 NZD/USD important issues to watch Weaker support from the terms of trade Prices of agricultural products have been on the rise since the summer 2010, driving a terms-of-trade trade improvement in NZD. Not least corn prices have rallied lately and if meat/dairy producers face problems in passing on rising feed costs, this could hurt New Zealands competitiveness. NZD vulnerable to a global slowdown Elevated commodity prices are on the other hand a rising risk to the global recovery to which the small open New Zealand economy is highly exposed. Also, a daily correlation with global equities above 60 percent illustrates the high sensitivity of NZD/USD to global risk appetite. Terms-of-trade support remains in place Source: Reuters EcoWin Global oil burden set to rise above 5% in 2011 World oil burden (oil expenditures-to-gdp, %) 5% - critical level? Source: IEA, Danske Markets 22

23 Danske Markets FX forecasts vs. EUR and USD Danske 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 Note: GBP, AUD and NZD are denominated in local currency rather than USD 23

24 Danske Markets FX forecasts vs. DKK Danske Markets FX forecasts 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

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

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