EUR/USD downside risks have increased significantly over the past month. Not only on the back of sharply higher funding costs in southern Europe, but perhaps more importantly as a result of a weakening economic outlook. The eurozone economy is likely to have entered recession in the fourth quarter prompting the ECB to cut rates. We expect the ECB to deliver further rate cuts and for the policy rate to fall below 1% for the first time. This is a significant regime shift, as the euro during other episodes of rising debt fears has been supported by relatively tighter monetary conditions. As a result, we have cut our 3-month and 6-month forecasts to 1.30 . In the medium term we still expect underlying dollar weakness to persist, due to the US external deficit and the potential for renewed Fed easing. We forecast EUR/USD at 1.38 in 12 months.
USD/JPY continued to drift lower in the latter part of October and fell close to 75.5 at end-October. A level that triggered a new round of intervention from the BoJ that pushed USD/JPY above 79. However, the intervention did not have a lasting effect and the cross is now back below 77. We continue to see downward pressure on USD/JPY that is now expected to reach a new all-time low of 75 (78) and 74 (79) on 3- and 6-month horizons. We doubt that the BoJ will engage in a more aggressive monetary policy, not least relative to both the Fed and the ECB. We only see short-term relief from new rounds of intervention. We expect to see some upside potential for USD/JPY on a 12M horizon and for the pair to reach 78.
EUR/CHF continues to trade mainly on speculation about a pending hike of the 1.20 SNB floor. Had the SNB not intervened in the market our short-term financial model indicates that EUR/CHF would have traded below 1.15 – i.e. almost 10% stronger. Deflation risks have risen over the past month, which increases the probability of an early hike of the 1.20 floor – potentially as early as at the December SNB meeting. We forecast a hike of the floor to 1.25 and for EUR/CHF to trade at about 1.27 in 12 months.
EUR/GBP Following the deteriorating economic outlook in the eurozone, with lower rates to come, we have revised our EUR/GBP forecast substantially. The pair is 1.8% lower since the last edition of FX Forecast Update but still appears to be lagging the steep decline in relative rates, now favouring sterling for the first time since January. Despite a bleak UK economic outlook and the Bank of England printing money, we believe EUR/GBP could continue lower on a 3M horizon and believe 0.83 will be tested. If the eurozone fails to convince markets that the euro will not break up, sub-0.82 levels, last traded mid-2010, could be seen. On a 6M horizon, we believe EUR/GBP will return to the current spot level around 0.86 and continue higher on a 12M horizon to 0.89. The longer term forecast is, however, surrounded by considerable uncertainty – not because of the rate outlook as we expect both the ECB and the Bank of England to be on hold for most of 2012 – but primarily because the risk sentiment could either improve or worsen significantly. We recommend a high hedge ratio for both sterling income and expenses.
EUR/SEK: The ECB is forecast to cut twice through January and the Riksbank is now expected to deliver its first cut in December followed by 2*25bp through April, taking the repo rate to 1.25%. On one hand, re-pricing of relative monetary policy in favour of our forecasts suggests downside potential in EUR/SEK. On the other hand, the risk is that lower Swedish rates will reverse previous Swedish krona demand stemming from positive carry and thus push EUR/SEK higher. We raise the 3M forecast from 9.10 to 9.30 while the 12M forecast is left unchanged at 9.00. We would like to emphasise that the near-term outlook is surrounded by huge uncertainty and event risks could take the pair either higher or lower than the forecast profile suggests.
EUR/NOK: We have made no changes to our EUR/NOK forecast this time and keep our 3M, 6M and 12M forecasts unchanged at 7.70, 7.65 and 7.50 respectively. We still see international focus on the strong Norwegian fundamentals. Furthermore, Norges Bank is expected to keep rates unchanged, despite the forecast that the ECB will lower rates twice over the next couple of months. Hence, relative rates continue to be a supportive factor for the Norwegian krone. However, also in Norway, the risk is skewed toward rate cuts. It is also important to note that the NOK is not a safe haven in the traditional sense and if we see a strong setback in risk-appetite or rate cuts from Norges Bank we would expect NOK to suffer, not least given stretched positioning. Based on relative monetary policy outlook the NOK is expected to outperform SEK, pushing NOK/SEK higher (6M forecast 1.19). SEK is also, in our view, more vulnerable to increased volatility on the financial market and increased global recession fears than the NOK.
EUR/DKK is expected to trade at about 7.44 below the central parity at 7.46038, throughout the forecast period. We forecast that the currency inflow into the Danish bond market will continue in 2012 keeping DKK supported, despite EUR/DKK trading at a discount on the forward market.
See attached PDF for the full report:
USD/JPY continued to drift lower in the latter part of October and fell close to 75.5 at end-October. A level that triggered a new round of intervention from the BoJ that pushed USD/JPY above 79. However, the intervention did not have a lasting effect and the cross is now back below 77. We continue to see downward pressure on USD/JPY that is now expected to reach a new all-time low of 75 (78) and 74 (79) on 3- and 6-month horizons. We doubt that the BoJ will engage in a more aggressive monetary policy, not least relative to both the Fed and the ECB. We only see short-term relief from new rounds of intervention. We expect to see some upside potential for USD/JPY on a 12M horizon and for the pair to reach 78.
EUR/CHF continues to trade mainly on speculation about a pending hike of the 1.20 SNB floor. Had the SNB not intervened in the market our short-term financial model indicates that EUR/CHF would have traded below 1.15 – i.e. almost 10% stronger. Deflation risks have risen over the past month, which increases the probability of an early hike of the 1.20 floor – potentially as early as at the December SNB meeting. We forecast a hike of the floor to 1.25 and for EUR/CHF to trade at about 1.27 in 12 months.
EUR/GBP Following the deteriorating economic outlook in the eurozone, with lower rates to come, we have revised our EUR/GBP forecast substantially. The pair is 1.8% lower since the last edition of FX Forecast Update but still appears to be lagging the steep decline in relative rates, now favouring sterling for the first time since January. Despite a bleak UK economic outlook and the Bank of England printing money, we believe EUR/GBP could continue lower on a 3M horizon and believe 0.83 will be tested. If the eurozone fails to convince markets that the euro will not break up, sub-0.82 levels, last traded mid-2010, could be seen. On a 6M horizon, we believe EUR/GBP will return to the current spot level around 0.86 and continue higher on a 12M horizon to 0.89. The longer term forecast is, however, surrounded by considerable uncertainty – not because of the rate outlook as we expect both the ECB and the Bank of England to be on hold for most of 2012 – but primarily because the risk sentiment could either improve or worsen significantly. We recommend a high hedge ratio for both sterling income and expenses.
EUR/SEK: The ECB is forecast to cut twice through January and the Riksbank is now expected to deliver its first cut in December followed by 2*25bp through April, taking the repo rate to 1.25%. On one hand, re-pricing of relative monetary policy in favour of our forecasts suggests downside potential in EUR/SEK. On the other hand, the risk is that lower Swedish rates will reverse previous Swedish krona demand stemming from positive carry and thus push EUR/SEK higher. We raise the 3M forecast from 9.10 to 9.30 while the 12M forecast is left unchanged at 9.00. We would like to emphasise that the near-term outlook is surrounded by huge uncertainty and event risks could take the pair either higher or lower than the forecast profile suggests.
EUR/NOK: We have made no changes to our EUR/NOK forecast this time and keep our 3M, 6M and 12M forecasts unchanged at 7.70, 7.65 and 7.50 respectively. We still see international focus on the strong Norwegian fundamentals. Furthermore, Norges Bank is expected to keep rates unchanged, despite the forecast that the ECB will lower rates twice over the next couple of months. Hence, relative rates continue to be a supportive factor for the Norwegian krone. However, also in Norway, the risk is skewed toward rate cuts. It is also important to note that the NOK is not a safe haven in the traditional sense and if we see a strong setback in risk-appetite or rate cuts from Norges Bank we would expect NOK to suffer, not least given stretched positioning. Based on relative monetary policy outlook the NOK is expected to outperform SEK, pushing NOK/SEK higher (6M forecast 1.19). SEK is also, in our view, more vulnerable to increased volatility on the financial market and increased global recession fears than the NOK.
EUR/DKK is expected to trade at about 7.44 below the central parity at 7.46038, throughout the forecast period. We forecast that the currency inflow into the Danish bond market will continue in 2012 keeping DKK supported, despite EUR/DKK trading at a discount on the forward market.
See attached PDF for the full report:
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