Market Focus Developed Markets: The Fed appears set to raise rates again before 2016 comes to a close. The USD is strengthening broadly; expect this to continue in the run-up to year-end. The USD is likely to peak when rates are finally lifted again in December. With a Fed hike likely to come before year-end and questions regarding Eurozone bank stability looming, the outlook for the common currency is becoming slightly bleaker. Over the remainder of the year, the EUR is likely to fall out of favor with investors. For GBP, the likelihood of a so-called hard Brexit has increased. Such a scenario increases the chances for another rate cut by the BoE during the remainder of this year. Expect downside pressure to prevail for the next couple of months. Oil prices boost the CAD, but still the outlook for a weaker CAD near-term hasn t changed. The JPY is not weakening on BoJ measures; only USD strength is pushing USD/JPY higher. External factors are the main drivers for JPY weakness. Stronger-than-expected commodity prices are the major factor keeping the AUD elevated. A weaker AUD looks more likely from here. Emerging Markets: The RUB seems less sensitive to oil price shifts. High carry is providing support in riskon circumstances. TRY has weakened on capital outflows on the back of a ratings downgrade. Geopolitical risks will weigh further on the TRY. Latam: The BRL continues to trade with a positive momentum on the back of fiscal reforms by the interim president Temer and also by a high carry. The MXN has proven vulnerable to portfolio outflows. Rate hikes have given little support. A Trump win might push USD/MXN above 21. Asia: CNY is weakening against the USD as the Fed is expected to raise rates. PBoC will verbally support the CNY but depreciation trend will continue. INR looks stable through the transition to a new RBI Governor. Still supported by a relatively high carry. 1
Developed Markets EUR/USD average spot: 1.1130 (Aug: 1.1180) The consensus forecast sees EUR/USD almost unchanged around 1.10 for 1 year. The Fed is expected to hike after November 8 US elections at its December meeting. The ECB on the other hand is expected to expand its QE program in December. An against the odds win for Trump would hamper global growth and likely weaken the USD. ING is the most bullish forecasting 1.18 at one year. USD/JPY average spot: 102.59 (Aug: 101.63) Consensus forecast for USD/JPY is at 105.67 in one year. BoJ September meeting did not result in new stimulus nor a weaker JPY Inflation expectations are falling and real rates rising thus supporting a stronger JPY Expectations of a Fed hike have driven USD/JPY a bit higher recently to 104 levels although a December hike is almost priced in. Desjardins is now the most bullish at 118.67 in one year. GBP/USD average spot: 1.2640 (Aug: 1.3080) Consensus opinion sees GBP/USD flat around 1.25 for 6 months and up to 1.2930 afterwards. Fears for a hard Brexit (priority of immigration controls over free trade deals) have weakened GBP. Such a scenario increases the chances for another rate cut by the BoE during the remainder of this year. A weaker GBP near term would diminish the likelihood of an outright recession in 2017 RBC is the most bearish at 1.1670 in one year. 2
EUR/JPY average spot: 114.29 (Aug: 113.66) Consensus forecast sees EUR/JPY basically flat around 115 for the next 12 months. BoJ September meeting did not result in new stimulus nor a weaker JPY. Still, both Central Banks pursue very accommodative monetary policies keeping EUR/JPY pretty stable in general. But the likelihood of a stronger JPY looks bigger than that for the EUR, given the impact of external forces. RBC is the most bearish forecasting 101.08 in 12 months. EUR/GBP average spot: 0.8810 (Aug: 0.8520) Consensus forecast sees EUR/GBP basically flat around 0.8750 for one year. Fears for a hard Brexit (priority of immigration controls over free trade deals) have weakened GBP to above 0,91 recently. Fears for a hard Brexit (priority of immigration controls over free trade deals) have weakened GBP. Considerable imbalances in current account balance and net foreign debt are set to weigh on GBP although a weaker GBP helps to alleviate pressure here. St.George is most bearish forecasting 0.8000 in 12 months. EUR/CHF average spot: 1.0890 (Aug: 1.0870) Consensus opinion forecasts EUR/CHF to climb to 1.1050 in 12 months. EUR/CHF remains trapped in tight ranges, with the SNB committed to resisting CHF strength via FX intervention. SNB sees no limit to expanding the balance sheet. Stress in the EZ financial sector pressures the CHF stronger; SNB s first line of defence remains FX intervention. Danske is the most bullish, forecasting 1.1500 in 12 months. 3
EUR/NOK average spot: 9.0150 (Aug: 9.3500) Consensus opinion sees EUR/NOK moving lower to 8.7700 in 12 months. A large upside surprise to CPI and the OPEC deal on output freeze both served to strengthen the NOK recently. Short-term the risk is for some upside bounce in EUR/NOK Further out, in 2017, a better growth outlook, real rate differentials and a higher oil price support the expectation for a lower EUR/NOK Nordea is the most bearish forecasting 8.56 in 12 months. EUR/SEK average spot: 9.6630 (Aug: 9.5110) Consensus opinion sees EUR/SEK trending lower to around 9.083 in 12 months. Swedish growth-related data have continued to lose momentum in the past few weeks. The recent strong EUR/SEK rally surprised and momentum is not likely to reverse near-term. Riksbank is expected to prolong its QE program should ECB extend its own QE in December. ING is the most bearish, looking for 8.90 in 12 months. USD/CAD average spot: 1.3150 (Aug: 1.3050) Consensus opinion sees USD/CAD briefly higher short-term and subsequently lower to 1.2990 in one year. Opec output freeze agreement has supported the CAD, but risk is that implementation in November will fail. A Fed hike in December can also support USD/CAD near-term BoC is expected to keep on hold for the remainder of the year and deep into 2017. Nordea is the most bearish on USD/CAD at 1.2130 in 12 months. 4
AUD/USD average spot: 0.7610 (Aug: 0.7620) Consensus forecast sees AUD/USD moving to and around 0.7500 the next 12 months. GDP growth is robust but further rate cuts are likely, if domestic economic growth remains lackluster and inflation is still low. Stronger-than-expected commodity prices are the major factor keeping the AUD elevated. A broadly stable USD and less demand from China suggest that a sustained rally in commodity prices is unlikely. Nordea is now the most bullish forecasting 0.8200 in 12 months. NZD/USD average spot: 0.7200 (Aug: 0.7190) Consensus forecast for NZD/USD sees the pair stable around 0.7250 for the next 12 months. NZD finds support in carry-trades and a slight up-tick in dairy prices. RBNZ still sees a strong NZD as a risk to growth outlook and keeps a foot on the easing pedal. A Fed hike and increased US rate hike expectations are the biggest risk to a strong NZD. BBH is the most bearish, forecasting 0.69 in 1 year. 5
Emerging Markets EUR/PLN average spot: 4.3010 (Aug: 4.3100) Consensus opinions forecasts EUR/PLN stable around 4.30 for the next 12 months. NBP is expected to keep rates unchanged for the time being. US elections and a possible Fed rate hike in December may weigh on the PLN. Continued strong growth, and unchanged rating and outlook by Moody s are lending support to the PLN. BBH is the most bullish, forecasting 4.50 in 12 months. EUR/HUF average spot: 307.15 (Aug: 311.04) Consensus forecast for EUR/HUF sees the pair hovering around 308 this year. The HUF seems largely immune to easing measures by the NBH Fairly strong economic developments and a strong external position are proving very supportive for the HUF. Biggest risk is deterioration in global risk sentiment on the back of a Trump win. Danske is the most bearish, forecasting 304 in one year s time. EUR/CZK average spot: 27.015 (Aug: 27.024) Consensus opinion sees EUR/CZK above 27 most of this year, but breaking below 27 in Q2 2017. CNB is committed to keep EUR/CZK floor to Q1 17. FX intervention likely to remain in place as the preferred policy tool over negative rates. But risk for an SNB-like exit of the floor is increasing as FX intervention volumes grow. ING is the most bearish at 25.50 in 12 months. 6
USD/RUB average spot: 62.788 (Aug: 65.550) Consensus opinion forecasts USD/RUB around 64.0 for one year. Correlation with oil price is getting less strong CBR is seen keeping rates unchanged for the near-term. Carry-trade in current stable financial markets is providing support to the RUB Risks are mostly external such as intensified sanctions because of Syria and a lower price of oil Danske is the most bearish forecasting 57.10 in 12 months. USD/TRY average spot: 3.0470 (Aug: 2.9780) Consensus forecast sees USD/TRY rising to 3.1360 in 1 year. Downgrade to junk status by Moody s did not come unexpected but has since spurred bond market outflows and weakened the TRY. Slower economic growth, unilateral military actions in Syria and Iraq are weighing on the TRY as well. As is crackdown on Gulenists said to be dominating the CBT. ING is most bullish, forecasting USD/TRY at 3.25 in 12 months. USD/ZAR average spot: 13.900 (Aug: 13.688) Consensus opinion sees USD/ZAR flat around 14.50 for the next 12 months. A high carry and a mild recovery in global commodity prices are providing support for the ZAR. Both weak economic performance and political uncertainty are the main risk factors to a stable ZAR. Downgrade risk increases if fiscal expenditures increase to regain political support for Zuma. Nordea is the most bearish, forecasting 14.10 in 12 months. 7
Latam USD/BRL average spot: 3.2330 (Aug: 3.2060) Consensus forecast for USD/BRL sees the pair rising to 3.42 in 1 year. The economy is bottoming and Banco Central has cut 25bps of the Selic rate last week to bolster recovery. Lower House approval of the fiscal spending ceiling would support BRL. Still, political polarization and ongoing corruption investigations pose serious risks to the recovery process. ING is the most bearish on USD/BRL at 3.00 in 6 months. USD/MXN average spot: 19.331 (Aug: 18.664) Consensus opinion sees USD/MXN slightly lower to 18.74 in one year. Banxico raised rates by 50bp to 4.75% end September on the back of a slide in the Peso. Expect weakening bias to continue up to the US elections. A Trump win would be a major risk to Mexican business s access to the U.S. market and push USD/MXN above 21 Inflation pressures are picking up due to low base effects and weak peso. Nordea is the most bearish, forecasting 17.33 in 12 months. 8
Asia USD/CNY average spot: 6.6920 (Aug: 6.6370) Consensus opinion sees CNY weakening to 6.789 in 12 months. Expect CNY to weaken gradually as growth is under pressure, debt risks are rising, the Fed is resuming rate hikes and net FDI flows are no longer positive for China. Actual inclusion in SDR will start to support CNY and stem capital outflow. Lingering local debt worries pose a risk to CNY stability. Danske is the most bullish looking for 7.10 in 12 months. USD/IDR average spot: 13002 (Aug: 13087) Consensus outlook sees USD/IDR basically unchanged around 13100 for the next 12 months. Rate cuts this year have helped economic growth to rebound and attract portfolio inflows to strengthen the IDR. High carry and structural reforms also attracting FDI are further supporting IDR. CIBC is the most bearish looking for 12400 in 12 months. USD/INR average spot: 66.720 (Aug: 66.891) Consensus opinion sees USD/INR basically flat around 67.00 for the next 12 months. INR is stable as the new Governor Patel takes over at the RBI. With investors not chasing the currency higher expect the INR to remain stable until proof of better economic activity. Risk is that a more hawkish Fed will push USD/INR higher. CIBC is the most bearish at 64.83 in 1 year. 9
USD/KRW average spot: 1101.0 (Aug: 1112.9) Consensus opinion forecasts USD/KRW steady around 1100 for one year. The current account surplus is expected at 8.2% of GDP in 2016, up from 7.7% in 2015. This is supporting strength for the KRW. Economic growth is improving and inflation is slowing which leaves room for the BoK to ease further. Decreasing Chinese growth and CNY depreciation will keep downward pressure on KRW. BBH is most bullish forecasting 1125 in 12 months. USD/MYR average spot: 4.123 (Aug: 4.042) Consensus opinion is that USD/MYR will remain unchanged around 4.1 for 1 year. The 1MDB scandal has never been far from the headlines and the times when it is raised are enough to discourage investors. Possibly PM Najib will call a snap election before yearend aiming to put political risk from 1MDB behind. ING is the most bearish looking for 3.95 in one year. USD/SGD average spot: 1.3630 (Aug: 1.3440) Consensus opinion is that SGD will remain stable around 1.36 for the next 12 months. Expect the current neutral monetary policy stance of the MAS to be maintained for the remainder of the year. The expansionary FY2016 budget should keep economic growth on track with forecasts. Risks to SGD strength are a US rate hike and a weaker yen. St.George is the most bearish on USD/SGD forecasting 1.3130 in 12 months. 10
USD/PHP average spot: -----(Aug: 47.019) Not enough data available this month for USD/PHP USD/THB average spot: ------ (Aug: 34.797) Not enough data available this month for USD/THB. USD/TWD average spot: 31.363 (Aug: 31.726) Consensus opinion sees USD/TWD falling to 30.778 in 12 months. High correlation with USD/JPY has pushed USD/TWD slightly higher again last month. The magnitude of the current surplus is evidence of an undervalued currency. GDP growth is slowing further, suggesting more rate cuts to come. ING is the most bearish at 30.00 in 12 months. 11
Appendix: Ø The comments for each currency pair are a select choice from the underlying research by the editor to paint an appropriate picture that suits the consensus opinion. Ø The high and low values in the charts are the extreme values for a given forecast period. In most cases the lines connecting these point forecasts do not represent a single opinion by a single forecast provider. Ø Not all providers have an opinion on every currency pair. The number of forecasts is not the same for all currency pairs. Ø Updates on specific forecasts in-between monthly reports can be found on www.fxprospect.com. Disclaimer: This report is directed exclusively to professional investors. The information in this report is based on sources believed to be reliable but FX Prospect and the author do not guarantee the completeness and/or the correctness of these sources. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness. This report is provided for informational purposes only. This document does not constitute investment advice and nor is any information provided intended to offer sufficient information such that it should be relied upon for the purposes of making a decision in relation to whether to acquire any financial products. FX Prospect and the author accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this report. 12