fx forecast update - danske bank · 2015-08-17 · we expect the bank of england to hike interest...

Investment Research

www.danskebank.com/CI

FX Forecast Update 17 August 2015

The end of CNY appreciation

Thomas Harr Global Head of FICC Research Stefan Mellin Jens Nærvig Pedersen Kristoffer Lomholt

Senior Analyst Senior Analyst Analyst

Morten Helt Christin Tuxen Vladimir Miklashevsky Senior Analyst Senior Analyst Analyst www.danskebank.com/research

Important disclosures and certifications are contained from page 32 of this report.

2 www.danskebank.com/CI

Forecast review part I

• EUR/NOK. In light of the unexpected renewed collapse in the oil price we lift our EUR/NOK forecast across all tenors. We cannot rule out another rate cut from Norges Bank but importantly market pricing has already turned very dovish with 37bp worth of cuts priced in for the coming 12M. Relative fundamentals, positioning and models continue to suggest downside in EUR/NOK and we therefore still expect a stronger NOK eventually. We now target the cross at 9.10 in 1M (from 8.90), 8.90 in 3M (8.70), 8.70 in 6M (8.50) and 8.50 in 12M (8.40).

• EUR/SEK. The Riksbank’s rate cut and expanded QE programme in early July followed by downward pressure on energy prices and growing concerns about the global economic outlook set the uptrend for EUR/SEK this summer. However, last week’s positive CPI surprise ignited a repricing of the Riksbank and sent EUR/SEK lower. The pair is now close to neutral in terms of our short-term financial models and in line with our one- to three-month target at 9.40, and we leave our forecasts unchanged. We see the pair within a 9.30-9.60 range for the next few months.

• EUR/DKK. We expect EUR/DKK to stay elevated in the near term at 7.4610 on a 1M horizon, before dropping to 7.4550 on 3M to 12M, supported by two unilateral rate hikes by DN .

• USD/CNY. The main implications of China’s new exchange-rate policy are that the link to the USD has weakened and the exchange rate has become more dependent on growth and monetary policy in China. In our view, China is not aiming for a major competitive devaluation. However, relative monetary policy between China and the US suggests that the CNY will continue to depreciate and we expect it to depreciate by close to 5% against USD in the next 12M. In the short run however, we expect the PBoC to keep the CNY in a tight grip ahead of the IMF’s decision on SDR this autumn. Hence, we only expect it to depreciate slightly on a 1M and 3M horizon.

• EUR/USD. It is now the final call for USD strength: while we think the Fed will hike in September, we are in for a shallow hiking cycle and a pick-up in euro-zone inflation (despite the recent oil drop) limits EUR/USD downside later in the year. We have revised our 3M and 6M forecasts a little higher to 1.06 (prev. 1.04) and 1.08 (1.06), respectively. Further out, the cross should edge towards the higher levels warranted by fundamentals and we maintain a 12M forecast of 1.10.


Forecast review part II

• EUR/GBP. We expect the Bank of England to hike interest rates in February 2016, and in the short term, we expect EUR/GBP to remain supported by low UK inflation. We forecast EUR/GBP at 0.71 and 0.70 in 1M and 3M respectively, while GBP/USD is expected to drop to 1.51 in 3M. As inflation bottoms out and a BoE rate hike moves closer, we expect EUR/GBP to trade gradually lower over the medium term. Consequently, we expect EUR/GBP to bottom in Q1 16 targeting 0.69 in 6M. On a 6-12M horizon, fiscal consolidation and political risks in the UK (EU referendum) are likely to weigh increasingly on GBP next year. Hence, we forecast EUR/GBP in12M at 0.72.

• USD/JPY. We have brought forward additional USD/JPY appreciation as the first rate hike from the Fed is moving closer. We now target the cross at 125 (previously 123) in 1M and 128 (125) in 3M. Following a possible rally around the first Fed hike, we expect USD/JPY to enter another period of range trading. We have raised our 6M and 12M forecast to 130 from 126 and 127, respectively, as a general depreciation among Asian currencies should leave room for more USD/JPY upside.

• EUR/CHF. The latest move higher in the cross – in our view due to the Greek relief rally – should comfort the SNB which will stay put for the foreseeable future, and the market pricing is now largely fair in our view (rate cuts taken out). We have upped the near-term forecast and rolled the longer term and now see a gradual move higher towards 1.12 (1.10 previously) in 12M.

• USD/RUB. We expect the rouble’s weakening to continue as the oil price remains feeble and Russia's monetary authorities have not intervened significantly in the free float. We raise our forecasts for USD/RUB to 70.00 (3M) from 64.00 and 72.00 (6M) from our previous forecast of 66.00. We keep our long-term forecast unchanged at 70.00 (12M).

• Commodity currencies have been hit hard lately by Chinese growth worries and tumbling commodity prices, and we have in general penciled in more weakness in AUD, NZD and CAD vis-à-vis USD.


Forecast: 9.10 (1M), 8.90 (3M), 8.70 (6M), 8.50 (12M)

EUR/NOK – oil price limits short-term downside potential

• Growth. The Q2 Norges Bank (NB) Regional Survey suggested weaker future economic activity. This was a determining factor for NB revising down its 2015 and 2016 GDP forecasts. In addition, the latest drop in the oil price has increased the tail risk for the Norwegian economy with the downturn in the manufacturing sector in particular seeming more persistent than initially expected. While private consumption seems more resilient, unemployment has risen in recent months primarily driven by the oil-dependent regions. Finally core inflation, credit growth and house prices remain above NB’s projections which together with the significant weakening of the NOK (i.e. I44 index) has limited speculations of further rate cuts despite the lower oil price (see next slide).

• Monetary policy. At the latest monetary policy meeting, NB was significantly more dovish than expected. While the 25bp cut on 18 June was fully priced and expected by the markets, the revised rate path was significantly more dovish than anticipated. The new path includes an implied 68% probability of another 25bp rate cut and a high probability of a cut at the next meeting in September. Markets currently price in 37bp worth of cuts in 12M and 14bps for the meeting in September.

• Flows. Amid the renewed collapse of the oil price, foreign banks (proxy for speculative flows) have become heavy net sellers of the Norwegian currency again. A rise in the NOK liquidity premium and a rise in the NOK beta to the oil price have amplified the negative effect on the NOK (see next slide).

• Valuation. Our PPP models put EUR/NOK at c.8.20, suggesting that the NOK is fundamentally very cheap. According to our FX short-term financial model, EUR/NOK is also significantly overbought although these models fail to capture the recent rise in the NOK liquidity premium

• Risks. Short term the cross remains vulnerable to the upside due to falling oil prices. Medium term, the risk is that the lagged effects of the oil price collapse have a more severe impact on the Norwegian economy than we expect. Hence, the risk to our EUR/NOK is to the upside

4

Conclusion. EUR/NOK has suffered from a perfect storm in the last few months (oil prices collapsing again, dovish NB, poor liquidity) which has sent the Norwegian currency to historically weak levels. Importantly, from most fundamental perspectives the NOK is very cheap which together with stretched speculative positioning should limit the downside potential.

While there is a significant risks of NB rate cut in H2, this has already been more than fully priced. In addition, at the current low oil price the downside potential is limited with global growth picking up. Indeed, according to CFTC IMM data, speculators have recently shifted to positioning for a bottoming in the oil price. We target Brent crude at 53, 57 and 60 USD/bbl in Q3, Q4 and Q1, respectively. If right, this should gradually weigh on EUR/NOK.

In light of our substantial downward forecast revision to oil prices we lift our EUR/NOK forecasts to 9.10 in 1M (8.90), 8.90 in 3M (8.70), 8.70 in 6M (8.50) and 8.50 in 12M (8.40).

Kristoffer Kjær Lomholt, Analyst, [email protected], +45 45 12 85 29

Source: Danske Bank Markets

EUR/NOK 1M 3M 6M 12M

Forecast (pct'ile) 9.10 (43%) 8.90 (29%) 8.70 (23%) 8.50 (21%)

Fwd. / Consensus 9.18 / 8.91 9.19 / 8.70 9.22 / 8.59 9.27 / 8.36

50% confidence int. 8.96 / 9.35 8.85 / 9.47 8.72 / 9.60 8.58 / 9.75

75% confidence int. 8.83 / 9.53 8.64 / 9.75 8.45 / 10.00 8.17 / 10.32

8.0

8.5

9.0

9.5

10.0

10.5

Aug-14 Nov-14 Mar-15 Jun-15 Sep-15 Dec-15 Apr-16 Jul-16

EUR/NOK

75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst


EUR/NOK – important issues to watch

Rise in liquidity risk premium has weighed on the NOK

• According to our microstructure model of FX flows, the NOK is almost 3% weaker than a historical/statistical relationship would suggest given the recent net selling. This highlights the increase in the NOK liquidity premium and the worsening of NOK liquidity as small transactions have a considerable effect on the NOK exchange rate.

• Our short-term financial regression models also detect a significant rise in the EUR/NOK sensitivity to the oil price. Intuitively, this makes sense as a large share of Norwegian oil capex projects have breakeven marginal costs around USD60/bbl.

Markets price in 37 bp worth of NB cuts in 12M; 14 bp for September

• Markets are currently pricing a cut of 14bp for the September meeting, 32bp accumulated for December and roughly 37bp for June 2016 (when the most easing is priced in). In our view, the market pricing for September is fair. Before the 24 September meeting we will have three all-important data releases: i) Norwegian GDP on 20 August, ii) oil investment survey on 25 August, iii) and not least the Regional Network Survey on 11 September.

NOK is significantly weaker than what NB projects

• Currently the NOK is roughly 3% weaker than the NB forecast for Q3 which based on historical evidence should lift the NB rate path by almost 25 bp in the short end. There is however, the risk that the effect will be less as the recent weakening of the NOK has been driven by the oil price collapsing again. Indeed the oil price now trades significantly lower than what NB projected in June.

Increase in NOK liquidity premium is reflected in our

microstructure model

*The I44 is the NOK index that Norges Bank forecasts, and currently the EUR (34%), SEK (14%), CNY (9%), GBP (7%), DKK (6%) and USD (6%) make up the majority of the index.

Source: Norges Bank, Danske Bank Markets

NOK is weaker than NB’s projection

Source: Macrobond Financial, Danske Bank Markets



Forecast: 9.40 (1M), 9.40 (3M), 9.30 (6M), 9.00 (12M)

EUR/SEK – limited downside with a dovish Riksbank

• Growth. Data confirms the Swedish economy is doing relatively well. This has been demonstrated most recently by strong Q2 GDP figures, which will render upward revisions to GDP forecasts in general, including ours. The growth outlook simply indicates that the krona has become significantly undervalued.

• Monetary policy. With last week’s surprise, inflation is suddenly above the Riksbank’s forecast. However, in our view, it will soon undershoot the Riksbank’s forecast again, as the transitory factors that affected the July numbers fade. We expect the Riksbank to stay on hold in September but further stimulus lies ahead, probably in December, when we look for -10bp, possibly accompanied by more QE.

• Flows. The commercial flow picture has clearly improved in 2015, partly as a result of a global rebound, partly because of the weak krona. We expect Swedish asset managers to use rallies in EUR/SEK and USD/SEK to start gradually raising their hedges of foreign exposures.

• Valuation. The fundamental models we use unambiguously suggest that the SEK is substantially undervalued (long term).

• Risks. The risks to our forecast are skewed on the upside. Investors might want to assign a ‘madness premium’ to EUR/SEK (what will the Riksbank do next?). This said, EUR/SEK could undershoot if inflation continues to run above the Riksbank’s forecast.

6

Conclusion. The Riksbank’s rate cut and expanded QE programme in early July followed by downward pressure on energy prices and growing concerns about the global economic (thus inflation) outlook set the uptrend for EUR/SEK this summer. However, last week’s positive CPI surprise ignited a repricing of the Riksbank and sent EUR/SEK lower. The pair is now close to neutral in terms of our short-term financial models and in line with our one- to three-month target at 9.40. We see the pair within a 9.30-9.60 range for the next few months.


Stefan Mellin, Senior Analyst, [email protected], +46 8 568 80592

EUR/SEK 1M 3M 6M 12M

Forecast (pct'ile) 9.40 (44%) 9.40 (47%) 9.30 (39%) 9.00 (25%)

Fwd. / Consensus 9.44 / 9.34 9.45 / 9.29 9.45 / 9.24 9.45 / 9.07

50% confidence int. 9.30 / 9.56 9.21 / 9.64 9.12 / 9.71 8.98 / 9.81

75% confidence int. 9.21 / 9.68 9.06 / 9.83 8.92 / 9.98 8.70 / 10.19

8.5

9.0

9.5

10.0

10.5


EUR/SEK



EUR/SEK – important issues to watch

Dovish stance from the Riksbank but no cut

− We have argued that EUR/SEK would establish a higher range. After the past two weeks, we would define that range as 9.30-9.60. This assessment is based on rates-implied fair value having been stable at around 9.40 (see chart) and the relative QE programmes are consistent with EUR/SEK at around 9.40 (see chart).

− The Riksbank’s actions going forward will be decisive for the krona. A decision to stay on hold (our main scenario) would probably not affect the SEK much, partly because of the pricing in the money market but also because the Riksbank will make sure that the rhetoric stays as soft as possible. In particular, it is likely to stress that no excessive SEK appreciation will be tolerated. An unexpected cut next month would probably send EUR/SEK toward 9.60 again.

Sweden should stay away from direct currency manipulation

− Sweden is one of a few countries (not even China qualifies) with a persistently significant current account surplus. The Swedish economy is doing relatively well and the krona is substantially undervalued. The thought that under these circumstances the Riksbank would yield to currency interventions does not make sense especially as it means that a relatively healthy (wealthy) country would steal growth and inflation from others. In our view, this would be a self-defeating and counter-productive strategy.

EUR/SEK rejected at 2 std deviations above FV – now more neutral



Relative QE consistent with EUR/SEK around 9.40

Stefan Mellin, Senior Analyst, [email protected], +46 8 568 805 92


EUR/DKK outflow continued over summer

• FX. In July, Danmarks Nationalbank (DN) sold DKK40.2bn of FX to cap EUR/DKK upside. Since April, FX intervention has totalled DKK142.6bn. EUR/DKK continued to trade above the central parity fixing at 7.46038. We expect EUR/DKK to stay elevated in the near term at 7.4610 on a 1M horizon, before dropping to 7.4550 on 3M to 12M supported by two unilateral rate hikes by DN

• Rates. FX intervention over the past four months has erased more than half the total increase in FX reserves in January and February of DKK275bn. We believe that DN wishes to get FX reserves back to the level that prevailed in 2014. Hence, given the currency reserve is currently DKK583bn, another DKK100bn in currency intervention should be expected before policy rates are hiked. We expect DN to raise the rate of interest on certificates of deposits (CD rate) by 15bp within 3M and another 10bp in 6M to minus 0.50%.

• Liquidity. We estimate the total effect on DKK liquidity of the suspension of government bond issuance at around DKK70bn. We expect government bond issuance to resume late this year, when DGB Nov 2015 matures, but the Debt Office is in no hurry to issue. Public finances are improving, government deposits at DN are DKK171bn (target DKK100bn) and finally, DN sees the halt in issuance as a response to the ECB’s QE programme.

8

• Flows. The Danish current account (CA) surplus is above 6% of GDP – the highest since 1875 excluding WWI and WWII. This supports a stronger DKK. We expect a large surplus in the next few years.

• Conclusion. EUR/DKK is set to trade close to the central rate on a 12M horizon with downside risks owing to the ECB’s bond purchases and two expected unilateral rate hikes by DN .


Thomas Harr, Global Head of FICC Research, [email protected], +45 4513 6731

Spot 7.4632 7.4610 7.4550 7.4550 7.45503M Forward (ann. carry, bp) 7.4576 (-30) 7.4545 (-35) 7.4475 (-40) 7.4475 (-40) 7.4475 (-40)6M Forward (ann. carry, bp) 7.4535 (-26) 7.4500 (-29) 7.4400 (-40) 7.4400 (-40) 7.4400 (-40)12M Forward (ann. carry, bp) 7.4482 (-20) 7.4425 (-25) 7.4325 (-30) 7.4325 (-30) 7.4325 (-30)

1M 3M 6M 12M17/08/2015

mailto:[email protected]

mailto:[email protected]


Forecast: 1.08 (1M), 1.06 (3M), 1.08(6M), 1.10 (12M)

EUR/USD – final call for dollar strength

• Growth. The data surprise gap between the euro area and the US has narrowed since the spring peak. A stabilisation in the wedge has been seen in recent months as both US and euro-area data have come out broadly in line with expectations. US data have generally confirmed that the economy - including the labour market - is in decent shape, and household real income growth is set to be a source of US strength in H2. Euro-zone growth is notably supported by past EUR weakness at present.

• Monetary policy. We maintain that the Fed-ECB asymmetry has further to run via relative interest rates. The short end of the euro yield curve is kept in check by ECB determination to carry out its QE buying through September 2016. In contrast, the US curve is set for a level shift and steepening as the Fed delivers on policy tightening with a first hike during the autumn (base case is September). Euro-zone inflation is set for a marked rise in H2 (despite the recent sell-off in oil prices) and will be a focal point for the ECB: while Draghi will be keen to focus on ‘inflation trends’, the market may speculate on an early QE exit.

• Flows. Speculators remain net long USD but less so than was the case in late 2014. At the same time, EUR shorts have been covered from early-2015 highs.

• Valuation. PPP is around 1.23, suggesting the cross is undervalued. Our short-term financial models suggest 1.07 as ‘fair’.

• Risks. The Fed hesitating on rate hikes due to missing inflationary pressure.

9

Conclusion. EUR/USD should now start to take its cue from relative rates moving in favour of the dollar ahead of a first Fed hike. This follows as we stress that while the upcoming Fed hiking cycle will be shallow in a historical context, the market is not prepared for an autumn rate rise currently. We now see the cross at 1.08 in 1M. That said, we still think EUR/USD will see a bottom in early autumn. First, the US curve will swiftly adapt to the tightening environment and support from higher US rates to the greenback fade during the course of H2. Second, the euro-zone output gap could close fast and the focus will then turn to the uptick in both headline and core inflation. We have revised our 3M and 6M forecasts a little higher to 1.06 (prev. 1.04) and 1.08 (1.06), respectively. Further out, the cross should edge towards the higher levels warranted by fundamentals and we maintain a 12M forecast of 1.10.


Christin Tuxen, Senior Analyst, [email protected], +45 45 13 78 67

EUR/USD 1M 3M 6M 12M

Forecast (pct'ile) 1.08 (17%) 1.06 (17%) 1.08 (32%) 1.10 (43%)

Fwd. / Consensus 1.11 / 1.09 1.11 / 1.07 1.11 / 1.06 1.11 / 1.06

50% confidence int. 1.09 / 1.13 1.08 / 1.14 1.06 / 1.16 1.04 / 1.18

75% confidence int. 1.07 / 1.15 1.05 / 1.17 1.02 / 1.19 0.98 / 1.22

0.951.001.051.101.151.201.251.301.35


EUR/USD



EUR/USD – important issues to watch

The potential from relative rates remains!

− With the Greek issue largely put aside in the FX market for now, and the scene set for a marked divergence on short-term rates as the ECB sticks to QE and the Fed to its policy-normalisation strategy, see Yield Forecast Update, 14 August 2015, for details, the scene is set for the USD leg to provide renewed downward pressure on EUR/USD.

− Projecting EUR/USD based on a simple cointegration model incorporating our rate projections, oil forecast, etc. leaves us with a conditional model forecast for the cross at 1.06 in 3M; the model broadly suggests that with a 95% probability EUR/USD will fall into the 1.01-1.11 range.

Oil challenging ECB on inflation

− The latest drop and a weaker long-run target for oil prices mean that the autumn inflation pick-up will be moderated somewhat. However, the fall-out of negative base effects and a gradual increase in core inflation due to weak potential growth still imply a return to above 1% inflation in the euro zone around New Year.

− On the whole, we thus maintain that the FX market could make a first attempt to send the euro higher on a 6M horizon as an ECB exit from QE gradually comes into view.



Euro-zone inflation set to rebound despite recent oil drop

Downside potential in EUR/USD from relative rates


http://danskeanalyse.danskebank.dk/abo/YieldForecastUK/$file/YieldForecastUpdate_140815.pdf






Forecast: 0.71(1M), 0.70(3M), 0.69 (6M) and 0.72 (12M)

EUR/GBP – near-term support as low inflation postpones BoE hike

• Growth. Growth rebounded in Q2 to 0.7% q/q (initial estimate) from 0.4% q/q in Q1. The service sector remains the main contributor. We expect the UK economy to expand further in the coming quarters, mainly driven by domestic demand. Private consumption in particular is being stimulated by a combination of low interest rates, very high consumer confidence, increasing house prices, high employment and positive real wage growth for the first time since 2009. Inflation is still very low and the CPI fell to 0.0% y/y in June from 0.1% in May. The recent decline in oil prices and energy bill price cuts announced by energy suppliers imply that the pick-up in inflation around the turn of the year will probably be smaller than previously thought.

• Monetary policy. The Bank of England (BoE) was more dovish than anticipated at the August meeting, mainly due to the lower oil price and strong sterling weighing on the near-term inflation outlook (see Bank of England Review: Dovish BoE due to strong sterling and lower oil price, 6 August). Given the subdued near-term inflation outlook, we now expect the BoE to deliver the first rate hike in Q1 16, most likely in February (previously November 2015). We still expect the BoE to increase interest rates at a relatively modest pace of around 75bps per year in the coming years, taking the Bank Rate to 1.25% by the end of 2016.

• Flows. Positioning is not stretched at present in our view.

• Valuation. PPP around 0.77 for EUR/GBP.

• Risks. As the Conservatives won an absolute majority in parliament, it is very likely that the UK will have an in/out EU referendum before the end of 2017. This is a medium- to long-term risk factor for the UK economy and GBP.

11

Conclusion. In the short term, we expect EUR/GBP to remain supported by low UK inflation. In the coming months we expect trading to be relatively volatile and trendless. We have kept our 1M and 3M forecast unchanged at 0.71 and 0.70 respectively, while GBP/USD is expected to drop to 1.51 in 3M. As inflation bottoms out and a BoE rate hike moves closer, we expect EUR/GBP to trade gradually lower over the medium term. Consequently, we now think that EUR/GBP is more likely to bottom in Q1 16 rather than during autumn 2015. We have kept our 6M target for EUR/GBP unchanged at 0.69. On a 6-12M horizon, we expect the euro to stabilise and eventually reverse some of its losses supported by improved inflation and growth outlook for the euro zone. Furthermore, fiscal consolidation and political risks in the UK (EU referendum) are likely to weigh increasingly on GBP next year. We have thus raised our 12M target to 0.72 from 0.71.

.


Morten Helt, Senior Analyst, [email protected], +45 45 12 85 18

EUR/GBP 1M 3M 6M 12M

Forecast (pct'ile) 0.71 (48%) 0.70 (35%) 0.69 (29%) 0.72 (56%)

Fwd. / Consensus 0.71 / 0.70 0.71 / 0.69 0.71 / 0.69 0.71 / 0.69

50% confidence int. 0.70 / 0.72 0.69 / 0.73 0.68 / 0.74 0.67 / 0.75

75% confidence int. 0.69 / 0.73 0.68 / 0.74 0.66 / 0.76 0.64 / 0.77

0.60

0.65

0.70

0.75

0.80

0.85


EUR/GBP


http://danskeanalyse.danskebank.dk/abo/ResearchBoEReview060815/$file/Research_BoEReview_060815.pdf





























EUR/GBP – important issues to watch

BoE not comfortable with the near-term inflation outlook

− In general, we see five pre-conditions for the BoE to increase interest rates: (1) a return to ‘normal’ unemployment at or below the BoE’s NAIRU estimate; (2) an increase in wages at an annual pace of above 2%; (3) a growth outlook above the trend of 0.5% q/q; (4) a bottoming out of inflation and, finally, (5) no distress in financial markets.

− While the case for a hike is still building, with unemployment back to ‘normal’, wage growth increasing and the growth outlook remaining solid, the BoE still wants to see stabilising/higher CPI inflation before hiking.

− The falls in energy and food prices will begin to drop out of CPI inflation around year end but the recent decline in oil prices and announced energy bill price cuts by energy supplies imply that the pick-up in inflation around the turn of the year will probably be smaller than previously thought.

− Most MPC members are unlikely to feel comfortable with the near-term inflation outlook but the pickup in January should reduce concerns. In other words, the BoE can tick off the last box around the turn of the year.

− Due to the low near-term inflation outlook, we have postponed the first rate hike to Q1 16, most likely in February (from November 2015).

Source: ONS, Danske Bank

Pre-conditions for BoE raising rates

Inflation will increase in Dec/Jan



Condition Status

Unemployment < or = NAIRU √Wages > 2 % √?Solid growth outlook (above trend 0.5% q/q) √CPI inflation stabilised / moving higher xNo financial stress √


Forecast: 125 (1M), 128 (3M), 130 (6M) and 130 (12M)

USD/JPY – higher near-term on US rate hike; trendless medium term

• Macro outlook. Japans GDP in Q2 contracted 0.4% q/q after expanding 1.1% q/q in Q1. The contraction in Q2 is to a large degree payback on a very strong Q1, driven primarily by inventory cuts, weak private consumption and some slowdown in exports. Japan should return to positive GDP growth in Q3 and overall GDP growth remains above trend.

• Monetary policy. As expected, the Bank of Japan kept its monetary policy intact at its August meeting and thus continues to expand its monetary base at an annual pace of JPY80trn. BoJ sees the second quarter weakness in the economy as temporary and still expects the economy to continue to recover moderately. In our main scenario, we expect the BoJ to continue its current QE programme until 2017. However, we acknowledge that the likelihood of additional easing has increased substantially in recent months due to lower oil prices, modest real wage growth and not least JPY outperformance relative to most other Asian currencies.

• Flows. The trade balance is expected to continue to improve in 2015 as exports are on a rising trend.

• Valuation. USD/JPY is nearing stretched levels implied by a 2 sigma deviation from Danske Bank’s PPP estimate of 83 (+ 2 standard deviations is at 127). While this is no barrier for further USD/JPY appreciation, we expect the trend higher to slow going forward.

• Risk. Speculators remain short JPY and USD/JPY could still be hit by short covering on quite a large scale – especially as speculators remain significantly long USD.

13

Conclusion. We have brought forward additional USD/JPY appreciation as the first rate hike from the Fed is moving closer. We now target the cross at 125 (previously 123) in 1M and 128 (125) in 3M. Following a possible rally around the first Fed hike, we expect USD/JPY to enter another period of range trading. We have raised our 6M and 12M forecast to 130 from 126 and 127, respectively, as a general depreciation among Asian currencies should leave room for more USD/JPY upside. While USD/JPY is expected to remain supported by higher US interest rates we expect the cross to be trendless and more volatile in the medium term as stretched valuations in PPP and real effective terms are likely to curb upside potential. Moreover, support to the JPY should increase as the Japanese trade balance looks set to continue to improve.



USD/JPY 1M 3M 6M 12M

Forecast (pct'ile) 125.00 (57%) 128.00 (77%) 130.00 (79%) 130.00 (74%)

Fwd. / Consensus 124.54 / 124.86 124.55 / 125.00 124.55 / 125.79 124.55 / 127.00

50% confidence int. 122.74 / 126.32 121.27 / 127.55 119.71 / 128.75 117.38 / 130.16

75% confidence int. 121.19 / 127.72 118.86 / 130.18 116.26 / 132.83 112.35 / 136.25

100.0105.0110.0115.0120.0125.0130.0135.0140.0


USD/JPY



USD/JPY – important issues to watch

Case for additional BoJ easing has strengthened

− While we expect the BoJ to continue its current QE programme until 2017, several factors have increased the probability of additional BoJ easing.

− First of all, the recent sharp decline in the oil price is weighing on inflation and we think it is likely that the BoJ will revise down its semi-annual outlook report which will be released at its 30 October meeting. A downward revision of its CPI forecast for FY 2016 is in particular a factor that could trigger a policy response from BoJ.

− Secondly, wage growth has been somewhat weaker than expected. The surprise drop in total earnings of -2.4% y/y in June was due to a special factor, namely the timing of bonus payments, and thus should not in isolation cause increasing concerns. However, real wages have been suppressed by rising food prices and could be a drag on private consumption in the coming quarters. Wage growth is an important element for Abenomics to succeed.

− Finally, the yen has appreciated against most Asian currencies over the past couple of months. Notably the Chinese devaluation on 11 August has increased pressure on most emerging Asia currencies. In the interest of maintaining competitiveness Japanese officials might be willing to accept further USD/JPY appreciation in order to curb JPY appreciation against other Asian currencies. At least from a real effective exchange rate perspective there now should be room for more USD/JPY upside.

Source: Bloomberg, Danske Bank Markets

Source: Bloomberg, Danske Bank Markets

Wage growth weaker than expected


Most Asian currencies have depreciated versus JPY

0.53%

-1.53%

-1.89%

-2.28%

-2.38%

-2.68%

-2.70%

-2.79%

-2.80%

-2.94%

-6.15%

-8% -6% -4% -2% 0% 2%

HKD

PHP

INR

CNY

SGD

IDR

KRW

THB

TWD

CNH

MYR

1M FX spot changes versus JPY


Forecast: 1.07 (1M), 1.09 (3M), 1.10 (6M) and 1.12 (12M)

EUR/CHF – SNB forward guidance in disguise

• Growth. Data out of Switzerland have generally surprised on the upside during the course of July but crucially CPI inflation came in markedly weaker than expected in early August, now running at minus 1.3% y/y. While the Swiss PMI has again dropped below the 50 boom/bust mark, the KOF leading indicator has surged recently, suggesting the negative impact on domestic activity has yet to felt on a greater scale.

• Monetary policy. SNB policy in the new (largely) floating CHF regime remains high. With the Greek issue aside for now, recent communication suggests that the central bank currently prefers rates (rather than intervention) as an instrument of policy. The SNB has based its inflation profile on both the Libor target being kept at the current -0.75% and CHF depreciation. With EUR/CHF moving significantly higher over the past month, the pressure on the SNB to act has clearly diminished. We expect the SNB to be on hold for the foreseeable future, awaiting the longer-term effects on capital flows from a prolonged period of negative rates.

• Flows. Speculators have unwound CHF longs following the Greek deal in mid-July and have likely been a key factor behind a relief rally in EUR/CHF.

• Valuation. PPP is around 1.26, whereas our short-term financial models suggest a ‘fair’ level around 1.02.

• Risks. Should Grexit risks re-emerge EUR/CHF is likely to be vulnerable yet again.

15

Conclusion. A Greek relief rally has sent EUR/CHF to post-floor highs. This will be welcomed by an SNB which is (still) on track for a severe miss of its inflation target. Indeed, the SNB needs all the help it can get as the central bank has largely run out of instruments: policy rates (at -0.75%) are already close to a de-facto lower bound, and the SNB does not want its balance sheet to grow much further. In the absence of significant EUR weakness we think the SNB will accept things as they are given its toolbox constraints. Thus we expect the SNB to keep the key policy rates unchanged at -0.75% in September. Pricing is for a gradual normalisation of SNB rates (and no more cuts) as late as 2017; we see this as largely fair. We have upped the near-term forecast and rolled the longer term.



EUR/CHF 1M 3M 6M 12M

Forecast (pct'ile) 1.07 (22%) 1.09 (50%) 1.10 (58%) 1.12 (67%)

Fwd. / Consensus 1.08 / 1.06 1.08 / 1.06 1.08 / 1.07 1.08 / 1.09

50% confidence int. 1.07 / 1.10 1.07 / 1.11 1.06 / 1.12 1.05 / 1.13

75% confidence int. 1.06 / 1.11 1.04 / 1.13 1.03 / 1.14 1.00 / 1.17

0.981.001.021.041.061.081.101.121.141.161.181.201.22


EUR/CHF



EUR/CHF – important issues to watch

SNB forward guidance in disguise

− While the SNB did not introduce explicit forward guidance in June, the governing board did provide more detailed reflection than usual regarding the effects of monetary policy.

1. Jordan said: 'We intend to retain the current interest-rate level for now and will monitor its effects closely'. We say: this is as close as you get to a commitment to keep rates negative for an extended period of time, i.e. forward guidance in disguise.

2. Zurbrügg said: ‘Initial experience has shown that the interest rate instrument is also effective in negative territory’ and was ‘rapidly transmitted to all segments of the money and capital markets’. We say: this is an unprecedented endorsement of negative rates and justifies its extension.

3. Danthine said: that financial stability risks have remained ‘broadly unchanged’ lately. We say: SNB is complacent that negative rates is not a significant risk in this respect.

A Greek relief rally for the Swissie

− The SNB explicitly said that it had intervened to curb CHF strength when the Greek referendum was called, spurring safe-haven flows into CHF, but weekly sight deposits reveal that this was diminutive in size.

− IMM positioning data now suggest that speculators have liquidated CHF longs on a large scale post the Greek bailout deal reached in July, suggesting this as a key reason for the CHF drop recently. However, this relief rally is probably over by now.


Speculators unwinding CHF longs post Greek deal

SNB rates priced unchanged for longer after June meeting



-1.00%

-0.90%

-0.80%

-0.70%

-0.60%

-0.50%

-0.40%

-0.30%

-0.20%

-0.10%

Jun15 Dec15 Jun16 Dec16 Jun17 Dec17 Jun18 Dec18

Pricing CHF-3M 3m swap

Current live 15-Jun-15


Forecast: 1.32(1M), 1.35(3M), 1.33(6M) and 1.30 (12M)

USD/CAD – BoC to defy Fed hikes

• Growth. Canadian data surprises have made a significant turn for the worse of late alongside the latest uptick in the oil price. Activity indicators generally show signs of a downturn and the BoC has been keen to emphasise that the economy will not return to full capacity on a sustained basis until 2017. That said, Canadian activity should benefit from our call for US growth to recover in Q2 via positive spill-overs to the export sector. A healthy labour market also continues to support consumer confidence. Household imbalances remain a risk for financial instability though.

• Monetary policy. Bank of Canada delivered another rate cut in mid July amid the Greek crisis, dollar strength and a continued oil-price drop. The July MPR revised the outlook in a markedly more negative direction and emphasised downside risks to inflation. Another rate cut is in our view likely, possibly at the October meeting, given that oil prices could remain under pressure near term.

• Flows. Speculative CAD positioning is very stretched on shorts.

• Valuation. Our PPP estimate for USD/CAD is around 1.18, while our short-term financial model points to 1.30 as ‘fair’.

• Commodities. Oil constitutes a substantial part of Canadian activity and is generally high-cost; Canada thus stands to lose from a new and lower normal level for the oil price.

• Risks. A sudden uptick in oil prices would comfort the BoC and could swiftly lead Poloz and colleagues to remove the current easing bias.

Conclusion. The January and July cuts show that the BoC has no problem easing monetary policy at a time when the Fed is moving in the opposite direction. The lower level of oil prices is taking its toll on the Canadian economy and if we are right in projecting another BoC cut this autumn at a time when the Fed delivers a first rate hike, CAD should stay under pressure. This suggests that USD/CAD should see another leg higher in coming months. On a 12M horizon we nevertheless project that USD/CAD will stabilise again driven by an eventual but gradual oil recovery and the BoC staying on hold in 2016. We have upped our full USD/CAD profile following a significant downward revision to our oil-price profile through 2016 as the (cost-determined) equilibrium oil price is seen as low as USD65/bbl.



USD/CAD 1M 3M 6M 12M

Forecast (pct'ile) 1.32 (57%) 1.35 (74%) 1.33 (61%) 1.30 (50%)

Fwd. / Consensus 1.32 / 1.31 1.31 / 1.32 1.31 / 1.32 1.31 / 1.29

50% confidence int. 1.29 / 1.34 1.27 / 1.35 1.26 / 1.36 1.23 / 1.38

75% confidence int. 1.27 / 1.36 1.25 / 1.38 1.22 / 1.41 1.18 / 1.45

1.051.101.151.201.251.301.351.401.45


USD/CAD



Forecast: 0.73 (1M), 0.71 (3M), 0.70 (6M) and 0.70

(12M)

AUD/USD – closer to bottom, but not there yet

• Growth. In the past month Australian economic data has generally surprised to the upside. The latest retail sales figures were stronger than expected which is in accordance with the recent rise in consumer confidence. In addition, the labour market has in recent months seemed more resilient than feared with decent increases in employment. Although the unemployment rate rose last month, it was due to a surprising rise in the participation rate. On the other hand, Q2 CPI figures continue to show that inflation is contained, and with no prospects of significant wage increases in the coming years, it will likely remain so. Credit growth rates remain moderate and broadly unchanged in recent months.

• Monetary policy. As widely expected, the Reserve Bank of Australia (RBA) kept the interest rate unchanged at 2.00% at the August monetary policy meeting. The bank maintained its mild easing bias and again stated that future decisions would be data dependent. Notably, Governor Stevens omitted the previous comment that further AUD downside is required to obtain sustainable growth. Instead a new phrase was added that the currency “is adjusting to the significant declines in key commodity prices”.

• Flows. According to the latest CFTC IMM data, speculative AUD positioning is at a historically stretched level. In six of the last seven weeks speculators have increased bearish ‘aussie’ positioning.

• Valuation. Fundamentally, the AUD is overvalued in our view, albeit significantly less so than previously. Our PPP model estimate for AUD/USD is c.0.71.

• Commodities. Iron ore prices have partly recovered from the multi-year record low at the start of April.

• Risks. The AUD remains exposed to global risk sentiment and a further slowdown in China. Recently, the risk of an ‘El Niño’-caused drought has increased.

Conclusion. The aussie has continued to suffer in the last month amid the renewed worries about Chinese growth prospects and tumbling commodity prices. As a result, the AUD/USD has fallen closer to what fundamentally seems justified in the long term. While this suggests less downside potential than previously, we maintain the view that short-term AUD risks remain skewed to the downside in the current environment even with no further RBA rate cuts. Importantly, Australia is still suffering from a significant terms of trade shock. The Chinese decision to devalue the CNY is in our view an argument for further AUD weakness in the short term as it raises further question about the state of the Chinese economy.

We target AUD/USD at 0.73 in 1M (previously 0.74) and expect a Fed re-pricing to drive the cross down to 0.71 (0.72) in 3M. We still expect the cross to stabilise in 6-12M, when a Fed hiking cycle has been priced and the Australian economy recovers. We target the cross at 0.70 in 6M (0.71) and 12M (0.71).



AUD/USD 1M 3M 6M 12M

Forecast (pct'ile) 0.73 (41%) 0.71 (25%) 0.70 (25%) 0.70 (31%)

Fwd. / Consensus 0.73 / 0.73 0.74 / 0.72 0.74 / 0.71 0.74 / 0.71

50% confidence int. 0.72 / 0.75 0.71 / 0.76 0.70 / 0.77 0.68 / 0.79

75% confidence int. 0.70 / 0.76 0.69 / 0.78 0.67 / 0.80 0.64 / 0.82

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95


AUD/USD



Forecast: 0.64(1M), 0.62(3M), 0.65 (6M) and 0.70(12M)

NZD/USD – RBNZ to keep currency war alive

• Growth. Data surprises out of New Zealand have surprised negatively of late and notably CPI inflation has dropped to 0.3% y/y. Crucially, dairy prices are softening yet again, putting New Zealand’s producers under pressure still. However, the sustained weakness in NZD this year should help exporters further out.

• Monetary policy. The RBNZ has now cut rates at two consecutive meetings: the central bank introduced an easing bias at the April meeting and kept this in July stating ‘at this point, some further easing seems likely’. We expect the RBNZ to deliver at least one more cut – probably at the September meeting - but reckon that general USD strength will alleviate some of the current pressure on RBNZ in sending USD/NZD higher.

• Flows. NZD positioning is stretched on shorts albeit less so than a few weeks back.

• Valuation. Fundamentally, the NZD remains somewhat overvalued, with our PPP model suggesting fair value at around 0.63. Our FX short-term financial model suggests 0.66 as fair.

• Commodities. Dairy prices continue to edge lower again, which is a key worry for the agricultural sector.

• Risks. The NZD remains exposed to global risk sentiment and commodity prices: should the former make a turn for the better, if a strong El Nino fuels upward pressure on food prices, RBNZ may adopt a neutral stance.

Conclusion. The significant terms-of-trade shock which New Zealand has suffered during the course of the past year is feeding through to the growth and inflation outlook. RBNZ is in easing mode but with some 40bp cuts already priced on RBNZ we see limited downside pressure on NZD from this side. However, as we see USD strength returning in the near future ahead of a first Fed hike in September, NZD/USD could still move lower on a sustained divergence in monetary policy. We have lowered our near-term forecasts again as the downward pressure from falling commodity prices has surprised us. On a 6-12M horizon we do, however, expect negative factors for NZD/USD to fade, and with upside risks to agricultural prices from a structural point of view, we expect NZD/USD to stabilise around the 0.70 mark, our long-held 12M forecast.



NZD/USD 1M 3M 6M 12M

Forecast (pct'ile) 0.64 (28%) 0.62 (18%) 0.65 (44%) 0.70 (73%)

Fwd. / Consensus 0.65 / 0.65 0.66 / 0.64 0.66 / 0.64 0.66 / 0.64

50% confidence int. 0.64 / 0.67 0.63 / 0.68 0.62 / 0.69 0.61 / 0.70

75% confidence int. 0.62 / 0.68 0.61 / 0.70 0.59 / 0.71 0.56 / 0.74

0.55

0.60

0.65

0.70

0.75

0.80

0.85


NZD/USD



Forecast: 6.40 (1M) 6.45 (3M), 6.65 (6M) and 6.70 (12M)

USD/CNY – end of CNY appreciation, get used to more volatility

• Monetary policy: China remains in a cyclical and structural slowdown with GDP growth poised to drop below the government’s target of 7% both in Q3 and FY 2015. Its new more flexible exchange-rate regime has created more room for manoeuvre for monetary policy. We expect the PBoC to cut its leading interest rate once more by 25bps. However, the reserve requirement ratio is now likely to be cut more aggressively by at least 200ps to offset the negative impact on liquidity from the recent FX intervention. The housing market appears to be stabilising, suggesting a recovery in growth later in H2.

• FX policy. In August the PBoC announced major changes to the exchange-rate system. This was an important step towards China’s longer term goal of a floating exchange rate and increasing the CNY’s role in the global financial system (see Strategy: CNY follow-

up - clarifications and confusion). In the short run, it remains a managed exchange rate with the PBoC continuing to intervene substantially. However, the link to the USD has been loosened and volatility will increase. China is aiming at having the CNY included in the IMF’s Special Drawing Rights (SDR) unit in connection with the review of the SDR weights this autumn.

• Valuation. Despite the CNY’s appreciation in recent years, we do not regard it as overvalued as 1) China’s share of global export markets continues to improve; and 2) markedly lower crude oil and commodity prices represent a substantial terms of trade gain for China and have increased its trade surplus markedly.

• Risks. The CNY could depreciate faster if growth in China slows more than expected or the USD continues to strengthen substantially. On the other hand, if monetary tightening in the US is postponed, the CNY will probably depreciate less.

20

Conclusion: The main implications of China’s new exchange-rate policy are that the link to the USD has weakened and the exchange rate has become more dependent on growth and monetary policy in China. In our view, China is not aiming for a major competitive devaluation. However, relative monetary policy between China and the US suggests that the CNY will continue to depreciate and we expect it to depreciate by close to 5% against USD in the next 12M. In the short run however, we expect the PBoC to keep the CNY in a tight grip ahead of the IMF’s decision on SDR this autumn. Hence, we only expect it to depreciate slightly on a 1M and 3M horizon.


Flemming Jegbjærg Nielsen, Senior Analyst, [email protected], +45 45 12 85 35

http://danskeresearch.danskebank.com/link/StrategyCNYfollowup120815/$file/Strategy_CNY_followup_120815.pdf



















Forecast: 66.00(1M), 70.00(3M), 72.00 (6M) and 70.00 (12M)

USD/RUB – oil drama continues

• Growth. According to preliminary data, Russia’s GDP shrank 4.6% y/y in Q2 15, more than consensus had expected (-4.5%). We keep our 2015 GDP forecast unchanged at a fall of 6.2% y/y despite better-than-expected H1 ‘15 GDP data (-3.4% y/y) as the falling oil price, high central bank rates and inflation continue to weigh on major macro indicators.

• Monetary policy. Russia’s central bank cut its key rate on 31 July to 11.0% from 11.5% p.a. as we, and consensus, had expected. The main reason given by the central bank for the cut were “the considerable cooling of the economy despite a slight increase in inflation risks”.

• Flows. Stabilisation in the oil price in H1 15 and the rouble’s strengthening subdued capital outflows after a large spike in Q4 14. In 2014, capital outflows exceeded USD150bn, slowing down to USD52.5bn in H1 15. Yet, we expect the total 2015 outflow to exceed USD100bn as the weakening rouble creates pressure for renewed outflows.

• Valuation. USD/RUB is trading below the level that we estimate to be the equilibrium (69.00) as long as the Brent oil price remains USD54/bbl on average, excluding geopolitical risk.

• Risks: Sudden CBR rate hikes, increasing intervention or capital controls; escalation of sanctions and growing ‘fear premium’; continuing oil-price decrease.

21

Conclusion. Looking at the average USD/RUB level and the decreasing average oil price within the last 30 days, the overvalued rouble continued to pose fiscal risks to the Russian budget. Thus, Russia’s economic authorities - the Bank of Russia (CBR) and Finance Ministry – continue their stand as onlookers, in our view fearing surging volatility rather than the ongoing weakening.

Looking ahead, we expect the rouble weakness to go on, driven by a weak oil price and EM turmoil on the approaching Fed’s rate hike.

Vladimir Miklashevsky, Economist/Trading Desk Strategist, [email protected], +358 10 546 75 22


USD/RUB 1M 3M 6M 12M

Forecast 66.00 70.00 72.00 70.00

Forward 66.11 67.46 69.44 73.19

30.00

40.00

50.00

60.00

70.00

80.00


USD/RUB

Forward Danske fcst


USD/RUB – important issues to watch

• CBR’s comeback

− As the Fed’s rate hike approaches and commodity prices fall on concerns about the slowing growth of China’s economy, the rouble has lost its position as the best EMEA FX performer for spot returns against the USD YTD. The Russian rouble has continued to weaken over the past 60 days.

− As we had expected, Russia’s central bank stopped building up its FX reserves on 28 July, as the USD/RUB reached 60.00. Previously, the CBR’s daily purchases had been USD150-200m, which we did not consider sufficient on their own to weigh on the rouble. However, used in combination with other tools, the purchases have stopped the rouble appreciation that was seen in spring 2015. As the status quo continues in the geopolitical environment surrounding the Ukraine crisis and newsflow has been muted. The main driver for the RUB remains the sliding oil price.

− In H2 15, we do not exclude a build-up of long-positions in the USD/RUB by private consumers in order to hedge their savings. That Russia’s corporate sector debt exceeds USD400bn (albeit with varying maturities) is still putting pressure on the RUB. We expect outstanding FX corporate debt repayments to rise in Q4 15, which, in our view, will bring back CBR’s FX repo auctions to subdue pressure on the rouble.

Vladimir Miklashevsky, Economist/Trading Desk Strategist, [email protected], +358 10 546 75 22

Source: Bank Rossii, Macrobond Financial, Danske Bank Markets

-100

-80

-60

-40

-20

0

20

40 Russian private sector's capital net

f lows, USD bn

Other sectors

Banks


Forecast: 27.1 (1M) 27.1 (3M), 27.1 (6M) and 27.1 (12M)

EUR/CZK – CNB under increased pressure

• Growth. Last week’s GDP release surprised heavily to the upside revealing a Q2 growth rate of 4.4 % Y/Y (consensus 3.4%). This is the fastest growth rate since 2007 and covered a general robustness across sectors with rising domestic demand and solid exports.

• Inflation. July inflation meanwhile surprised to the downside with the headline figure contracting 0.1% m/m against an expected 0.1% rise. The drop was in particular caused by lower prices on food and clothing. In terms of yearly growth rates the print translated to 0.6% and consequently inflation remains below the lower boundary of the CNB tolerance band.

• Monetary policy. For the first time since 2013 the CNB was forced to intervene last month on the back of the drop in EUR/CZK this year. We believe the CNB will defend the f loor, but there is also a risk that political pressure to give it up could mount if there are substantial inf lows into the CZK. At the August monetary policy meeting the CNB kept rates on hold for the 22nd consecutive month and re-iterated that the f loor will remain “at a level of 27 to the euro or weaker at least until mid-2016”.

• Valuation. The Czech koruna is somewhat undervalued from a long term perspective. To hit the 2% inf lation target, the CNB will, however, in our view have to keep the koruna undervalued.

• Risks. The biggest risk is a prolonged and significant test of the EUR/CZK f loor, which could trigger a kneejerk change in monetary policy.

23

Conclusion. EUR/CZK has moved lower since the latest FX Forecast Update which forced CNB back into the market on 17 July. As the board states, there have not yet been any serious discussions about introducing negative rates - despite low inf lation. This highlights the CNB’s dedication to the currency floor. We expect GDP to be supported in 2015 by stronger external demand, the low oil price and expansionary fiscal policy. This should eventually support inf lation albeit from low levels. We consequently maintain our EUR/CZK forecasts at 27.1 on 1-12M.

The biggest risk to this view is a prolonged test of the EUR/CZK f loor, which could trigger a kneejerk change in monetary policy.


Thomas Harr, Global Head of FICC Research, [email protected], +45 45 13 67 31

EUR/CZK 1M 3M 6M 12M

Forecast (pct'ile) 27.10 (65%) 27.10 (63%) 27.10 (63%) 27.10 (64%)

Fwd. / Consensus 27.02 / 27.11 27.02 / 27.12 27.02 / 27.10 27.01 / 26.97

50% confidence int. 26.80 / 27.19 26.65 / 27.27 26.50 / 27.33 26.28 / 27.38

75% confidence int. 26.62 / 27.40 26.39 / 27.62 26.14 / 27.82 25.85 / 28.05

25.5

26.0

26.5

27.0

27.5

28.0

28.5


EUR/CZK



Forecast: 4.20 (1M), 4.25(3M), 4.15 (6M) and 4.15 (12M)

EUR/PLN – political uncertainty biggest near-term risk

• Growth. The initial estimate showed that Polish GDP grew 0.9% q/q in Q2 and 3.3% y/y. This was the seventh consecutive quarter with an annual growth rate above 3%. The economy continues to be supported by private consumption driven by falling unemployment and a substantial increase in real wages due to deflation as consumer prices fell 0.8% y/y in July. We expect real GDP growth of 2.9% in 2015 and 3.2% in 2016 but stress that the risks to our forecasts are mostly on the upside. Political risks, however, have risen sharply recently in Poland and that on its own could weigh on economic growth.

• Monetary policy. We expect the Polish central bank (NBP) to keep interest rates unchanged at 1.5% for the rest of 2015. Inflation continues to undershoot significantly the central bank’s 2.5% target and we are likely to see continued deflation in the coming months which theoretically should leave room for rate cuts. However, the pick-up in Polish growth is likely to reduce the feeling of urgency in regard to further rate cuts.

• Valuation. The zloty is currently trading close to what we would consider fair value levels.

• Risks. Currently the risk to the zloty is shifting from global factors – such the Russia-Ukraine crisis – to domestic. In particular, the Polish parliamentary elections (due no later than October) are likely to cause more PLN volatility in the next 1-3 months.

24

Conclusion. We believe that the increased political uncertainty in Poland will cause more zloty volatility in the near term and see a risk that EUR/PLN could inch up further in the next 1-3 months. We target the cross at 4.20 in 1M and 4.25 in 3M. On a 6-12M horizon, we expect the zloty to remain supported by both a moderately more positive outlook for growth and the ECB’s QE programme as well as the end of the central bank rate cuts. Hence, we expect EUR/PLN to fall back towards 4.15 in 6-12M.

Thomas Harr, Global Head of FICC Research [email protected], +45 45 13 67 31


EUR/PLN 1M 3M 6M 12M

Forecast (pct'ile) 4.20 (66%) 4.25 (73%) 4.15 (44%) 4.15 (44%)

Fwd. / Consensus 4.17 / 4.17 4.19 / 4.16 4.20 / 4.12 4.24 / 4.08

50% confidence int. 4.12 / 4.22 4.09 / 4.26 4.06 / 4.30 4.03 / 4.36

75% confidence int. 4.08 / 4.27 4.03 / 4.34 3.98 / 4.42 3.91 / 4.54

3.9

4.0

4.1

4.2

4.3

4.4

4.5

4.6


EUR/PLN



Forecast: 310(1M), 310 (3M), 310 (6M) and 305 (12M)

EUR/HUF – strong external position is supportive medium term

• Growth. The Hungarian economy grew less than expected in Q2 with GDP up just 0.5% q/q compared to 0.8% q/q according to the initial estimate. While the weaker than expected Q2 GDP figure challenges our above-consensus growth forecast of 3.3% in 2015, we still think it is likely that the Hungarian economy will grow more than 3% this year. Demand components of GDP due to be released on 4 September will give us more insight into what caused the slowdown in Q2.

• Monetary policy. The Hungarian central bank (MNB) cut its base rate by another 15bp to 1.35% on 21 July. While headline inflation (0.4% y/y in July) remains below the central bank’s target (3% ±1%), we expect inflation to pick up next year mostly due to base effects. This should allow the central bank some time to wait and see how prices and the economy develop and we expect it to stay on hold for the rest of 2015. That said, it is still our view that substantial forint appreciation could trigger further rate cuts.

• Valuation. The HUF has fairly attractive long-term fundamentals and the relatively large current account surplus is particularly helpful.

• Risks. Current risks to the forint seem fairly small and well-balanced to the up and downside.

25

Conclusion. While the low interest rate in Hungary is likely to keep the HUF attractive as a funding currency within the EM carry trade space, we continue to believe that Hungary’s fairly strong external position is likely to be supportive for the HUF in the medium term. We expect EUR/HUF to trade around 310 in the coming one to six months but still look for modest medium-term appreciation against EUR, targeting EUR/HUF at 305 in 12M.


Thomas Harr, Global Head of FICC Research, [email protected], +45 45 13 67 31

EUR/HUF 1M 3M 6M 12M

Forecast (pct'ile) 310.00 (54%) 310.00 (55%) 310.00 (57%) 305.00 (48%)

Fwd. / Consensus 309.96 / 309.99 309.97 / 310.00 309.97 / 309.21 309.99 / 309.26

50% confidence int. 304.83 / 314.16 301.89 / 315.99 298.71 / 317.41 294.18 / 319.19

75% confidence int. 301.45 / 318.53 296.69 / 323.21 292.03 / 327.31 284.47 / 333.06

280

290

300

310

320

330

340


EUR/HUF



Forecast: 2.87 (1M), 2.92 (3M), 2.80 (6M) and 2.70 (12M)

USD/TRY – political uncertainty weighs the most

• Growth. Turkey's economic disappointed during Q2 15 as fixed investment shrank, export orders were weak and production figures didn't inspire. The slowdown continued while private consumption continued to expand. We expect the economy to grow 2.8% y/y in 2015 while seeing considerable downside risks for our growth forecast as political uncertainty may restrain investment activity further.

• Monetary policy. Despite decelerating inflation ( 6.8% y/y in July from 7.2% y/y a month earlier) the Turkish central bank kept its policy rate unchanged at 7.5% in July. The lira's sudden drop on political uncertainty and its weak prospects on the Fed's tightening are adding pressure for an emergency hike.

• Valuation. A ‘fear premium’ persists in our view due to escalating uncertainty post-elections as the country has been running for two months without a government and new elections in 90 days are probable. At the same time, the market is starting to price the Fed’s upcoming rate hike in the medium-term.

• Risks. New elections and Turkey's cross-border military operations could fuel further political uncertainty. The strengthening of the US dollar and a Fed rate hike are clear risks to the TRY versus the dollar, as appetite for emerging market assets is decreasing. A rising oil price would put renewed pressure on the current account. Unexpected central bank rate hikes to curb inflation and support the lira would also be a risk.

26

Conclusion. Since the beginning of 2015 lira sentiment continues to be more politically than fundamentally driven with it worsening the most in early August as the prime minister declared he is not excluding early elections. The current account deficit continues to shrink owing to the low oil price. Even so, we expect the lira to weaken in 3M, but to strengthen in the longer run as Fed hikes are priced in. Consequently, we have raised our 3M forecast to 2.92 (from 2.80), 6M to 2.80 (2.65) and 12M to 2.70 (2.60).


Vladimir Miklashevsky, Economist/Trading Desk Strategist, [email protected], +358 10 546 7522

USD/TRY 1M 3M 6M 12M

Forecast (pct'ile) 2.87 (52%) 2.92 (58%) 2.80 (30%) 2.70 (21%)

Fwd. / Consensus 2.88 / 2.80 2.93 / 2.79 3.01 / 2.80 3.16 / 2.80

50% confidence int. 2.80 / 2.95 2.77 / 3.02 2.76 / 3.11 2.74 / 3.25

75% confidence int. 2.75 / 3.02 2.69 / 3.16 2.63 / 3.31 2.46 / 3.56

2.002.202.402.602.803.003.203.403.60


USD/TRY



Danske Bank Markets FX forecasts vs. EUR and USD


Spot +1m +3m +6m +12m +1m +3m +6m +12m

Exchange rates vs EUR

USD 1.110 1.08 1.06 1.08 1.10 -2.7 -4.6 -3.0 -1.7JPY 138.2 135 136 140 143 -2.3 -1.8 1.7 3.6GBP 0.710 0.71 0.70 0.69 0.72 0.0 -1.5 -3.2 0.5CHF 1.083 1.07 1.09 1.10 1.12 -1.2 0.8 1.9 4.2

DKK 7.4632 7.4610 7.4550 7.4550 7.4550 0.0 0.0 0.0 0.1NOK 9.18 9.10 8.90 8.70 8.50 -0.9 -3.3 -5.7 -8.4SEK 9.43 9.40 9.40 9.30 9.00 -0.3 -0.3 -1.3 -4.4

Exchange rates vs USD

JPY 124.5 125 128 130 130 0.4 2.9 4.8 5.4GBP 1.56 1.52 1.51 1.57 1.53 -2.7 -3.1 0.2 -2.2CHF 0.98 0.99 1.03 1.02 1.02 1.6 5.6 5.1 6.0

DKK 6.73 6.91 7.03 6.90 6.78 2.8 4.8 3.1 1.8NOK 8.27 8.43 8.40 8.06 7.73 1.8 1.3 -2.8 -6.8SEK 8.50 8.70 8.87 8.61 8.18 2.4 4.5 1.8 -2.7

CAD 1.31 1.32 1.35 1.33 1.30 0.5 2.8 1.3 -0.9AUD 0.74 0.73 0.71 0.70 0.70 -0.7 -3.1 -4.1 -3.4NZD 0.65 0.64 0.62 0.65 0.70 -1.9 -4.6 0.7 9.6

RUB 65.36 66.00 70.00 72.00 70.00 -0.1 3.9 3.8 -4.3CNY 6.39 6.40 6.45 6.65 6.70 -0.1 0.2 2.7 2.3Note: GBP, AUD and NZD are denominated in local currency rather than USD

Forecast Forecast vs forward outright, %


Danske Bank Markets FX forecasts vs. DKK


Spot +1m +3m +6m +12m +1m +3m +6m +12m

Exchange rates vs DKK

EUR 7.4632 7.4610 7.4550 7.4550 7.4550 0.0 0.0 0.0 0.1USD 6.73 6.91 7.03 6.90 6.78 2.8 4.8 3.1 1.8JPY 5.40 5.53 5.49 5.31 5.21 2.4 1.8 -1.6 -3.4GBP 10.52 10.51 10.65 10.80 10.35 0.0 1.5 3.3 -0.4CHF 6.89 6.97 6.84 6.78 6.66 1.2 -0.8 -1.9 -3.9

NOK 0.81 0.82 0.84 0.86 0.88 1.0 3.4 6.1 9.2SEK 0.79 0.79 0.79 0.80 0.83 0.4 0.3 1.3 4.7

CAD 5.12 5.23 5.21 5.19 5.21 2.3 1.9 1.8 2.8AUD 4.95 5.04 4.99 4.83 4.74 2.1 1.5 -1.1 -1.6NZD 4.40 4.42 4.36 4.49 4.74 0.8 0.0 3.8 11.6

PLN 1.79 1.78 1.75 1.80 1.80 -0.5 -1.4 1.5 2.4CZK 0.28 0.28 0.28 0.28 0.28 -0.3 -0.4 -0.5 -0.6HUF 0.24 0.24 0.24 0.24 0.24 0.2 0.2 0.5 2.8RUB 0.10 0.10 0.10 0.10 0.10 2.8 0.8 -0.7 6.4

CNY 1.05 1.08 1.09 1.04 1.01 2.9 4.6 0.4 -0.5



Danske Bank Markets FX forecasts vs. SEK


Spot +1m +3m +6m +12m +1m +3m +6m +12m

Exchange rates vs SEK

EUR 9.43 9.40 9.40 9.30 9.00 -0.3 -0.3 -1.3 -4.4USD 8.50 8.70 8.87 8.61 8.18 2.4 4.5 1.8 -2.7JPY 6.83 6.96 6.93 6.62 6.29 2.0 1.5 -2.9 -7.7GBP 13.30 13.24 13.43 13.48 12.50 -0.3 1.3 1.9 -4.8CHF 8.71 8.79 8.62 8.45 8.04 0.8 -1.1 -3.1 -8.2

NOK 1.03 1.03 1.06 1.07 1.06 0.6 3.1 4.7 4.4DKK 1.26 1.26 1.26 1.25 1.21 -0.4 -0.3 -1.3 -4.4

CAD 6.48 6.59 6.57 6.47 6.29 1.9 1.7 0.5 -1.8AUD 6.26 6.35 6.30 6.03 5.73 1.7 1.2 -2.4 -6.0NZD 5.56 5.57 5.50 5.60 5.73 0.5 -0.3 2.4 6.6

PLN 2.26 2.24 2.21 2.24 2.17 -0.8 -1.6 0.2 -2.1CZK 0.35 0.35 0.35 0.34 0.33 -0.6 -0.6 -1.8 -5.0HUF 0.30 0.30 0.30 0.30 0.30 -0.2 0.0 -0.8 -1.7RUB 0.13 0.13 0.13 0.12 0.12 2.5 0.6 -2.0 1.6

CNY 1.33 1.36 1.37 1.29 1.22 2.6 4.3 -0.9 -4.9



Danske Bank Markets FX forecasts vs. NOK


Spot +1m +3m +6m +12m +1m +3m +6m +12m

Exchange rates vs NOK

EUR 9.18 9.10 8.90 8.70 8.50 -0.9 -3.3 -5.7 -8.4USD 8.27 8.43 8.40 8.06 7.73 1.8 1.3 -2.8 -6.8JPY 6.64 6.74 6.56 6.20 5.94 1.4 -1.6 -7.3 -11.5GBP 12.94 12.82 12.71 12.61 11.81 -0.9 -1.8 -2.7 -8.8CHF 8.47 8.50 8.17 7.91 7.59 0.2 -4.1 -7.5 -12.1

SEK 0.97 0.97 0.95 0.94 0.94 -0.6 -3.0 -4.5 -4.2DKK 1.23 1.22 1.19 1.17 1.14 -1.0 -3.3 -5.8 -8.5

CAD 6.30 6.38 6.22 6.06 5.94 1.3 -1.4 -4.1 -5.9AUD 6.09 6.15 5.96 5.64 5.41 1.1 -1.8 -6.8 -9.9NZD 5.41 5.39 5.21 5.24 5.41 -0.1 -3.3 -2.2 2.1

PLN 2.20 2.17 2.09 2.10 2.05 -1.4 -4.6 -4.4 -6.2CZK 0.34 0.34 0.33 0.32 0.31 -1.2 -3.6 -6.2 -9.0HUF 0.30 0.29 0.29 0.28 0.28 -0.8 -3.0 -5.3 -5.9RUB 0.13 0.13 0.12 0.11 0.11 1.9 -2.5 -6.4 -2.6

CNY 1.29 1.32 1.30 1.21 1.15 1.9 1.1 -5.4 -8.9



Danske Bank EMEA FX forecasts


Danske Forward Danske Forward Danske Forward Danske Forward Danske Forward

PLN 17-Aug-15 4.18 3.76 179 226 220

+1M 4.20 4.18 3.89 3.77 178 179 224 226 217 220

+3M 4.25 4.19 4.01 3.77 175 178 221 225 209 220

+6M 4.15 4.21 3.84 3.78 180 177 224 224 210 219

+12M 4.15 4.25 3.77 3.80 180 175 217 222 205 218

HUF 17-Aug-15 310 280 24.1 3.04 2.96

+1M 310 311 287 280 24.1 24.0 3.03 3.04 2.94 2.96

+3M 310 311 292 280 24.0 24.0 3.03 3.03 2.87 2.96

+6M 310 311 287 280 24.0 23.9 3.00 3.02 2.81 2.96

+12M 305 313 277 280 24.4 23.8 2.95 3.00 2.79 2.96

CZK 17-Aug-15 27.0 24.4 27.6 34.9 34.0

+1M 27.1 27.0 25.1 24.3 27.5 27.6 34.7 34.9 33.6 34.0

+3M 27.1 27.0 25.6 24.3 27.5 27.6 34.7 34.9 32.8 34.1

+6M 27.1 27.0 25.1 24.2 27.5 27.6 34.3 34.9 32.1 34.2

+12M 27.1 26.9 24.6 24.0 27.5 27.7 33.2 35.0 31.4 34.5

RUB 17-Aug-15 72.5 65.4 10.3 13.0 12.7

+1M 71.3 73.3 66.0 66.0 10.5 10.2 13.2 12.9 12.8 12.5

+3M 74.2 74.8 70.0 67.4 10.0 10.0 12.7 12.6 12.0 12.3

+6M 77.8 77.2 72.0 69.4 9.6 9.7 12.0 12.2 11.2 12.0

+12M 77.0 81.8 70.0 73.1 9.7 9.1 11.7 11.5 11.0 11.3

TRY 17-Aug-15 3.16 2.85 236 298 290

+1M 3.10 3.20 2.87 2.88 241 233 303 295 294 287

+3M 3.10 3.25 2.92 2.93 241 229 304 290 288 283

+6M 3.02 3.34 2.80 3.00 247 223 308 282 288 276

+12M 2.97 3.52 2.70 3.15 251 212 303 267 286 263

CNY 17-Aug-15 7.09 6.39 105 133 129

+1M 6.91 7.11 6.40 6.41 108 105 136 133 132 129

+3M 6.84 7.15 6.45 6.44 109 104 137 132 130 129

+6M 7.18 7.21 6.65 6.48 104 103 129 131 121 128

+12M 7.37 7.33 6.70 6.55 101 102 122 128 115 127

EUR USD DKK SEK NOK


Disclosures

This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are Thomas Harr (Chief Analyst), Stefan Mellin (Senior Analyst), Christin Tuxen (Senior Analyst), Morten Helt (Senior Analyst), Jens Naervig Pedersen (Analyst), Kristoffer Lomholt (Analyst), and Vladimir Miklashevsky (Analyst).

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