FX Forecast Update€¦ · forecast in a more positive direction to 4.05, 4.10 and 4.15 in three, six and 12 months. Furthermore, we have made some revisions to the South African

Investment Research

www.danskebank.com/CI

FX Forecast Update 13 June 2014

Negative rates and liquidity tools to weaken the euro

Arne Lohmann Rasmussen Chief Analyst, Head of Rates, FX and Commodities Strategy Stefan Mellin Stanislava Pravdová-Nielsen Jens Nærvig Pedersen Kristoffer Lomholt

Senior Analyst Analyst Analyst Assistant Analyst

Morten Helt Lars Christensen Christin Tuxen Vladimir Miklashevsky Senior Analyst Chief Analyst Senior Analyst Analyst www.danskebank.com/research Bloomberg: DRFX <GO>

Important disclosures and certifications are contained from page 31 of this report.

2 www.danskebank.com/CI

Main forecast changes Part I

• The ECB delivered more easing than expected at its rate meeting in June by cutting both the refi and deposit rates by 10bp, the latter into negative territory, and introduced a four-year targeted LTRO (TLTRO). While it remains uncertain how much excess liquidity will be boosted by the new LTRO, we expect the combination of a negative deposit rate in addition to the various liquidity measures to be overall euro negative and in general we have penciled in a bit more euro weakness in our forecast.

• Fed tapering remains on course and while the timing of the first Fed hike very much depends on how much slack is prevalent in the US labour market, we believe the risk is skewed towards earlier tightening than the market is currently pricing in. Hence, we now see a higher probability of EUR/USD breaking below 1.30 this year and we have lowered our six-and 12-months targets for EUR/USD to 1.30 and 1.26, respectively (1.32 and 1.28).

• The Bank of England (BoE) has argued for some time that there is a lot of slack in the economy. However, recent comments from BoE governor Mark Carney suggest that the BoE might consider raising rates this year. This is not yet fully priced into the market and, as a consequence, we have moved forward some of the expected GBP strength as a repricing of the UK money market is likely to provide near-term support to GBP. We now target EUR/GBP at 0.78 in 3M (0.80), 0.77 in 6M (0.79) and 0.76 in 12M (0.77).

• In respect of the Scandies, we have revised up our 1M target for EUR/NOK to 8.20, as the NOK might temporarily suffer if Norges Bank, as we expect, revises the rate path lower at the 19 June meeting. Over the medium to long term, however, we still expect EUR/NOK to edge slightly lower and have kept our 12M target unchanged at 7.85. The Riksbank is already priced for dovish action and we believe there is a good chance that EUR/SEK is close to a turning point. For that reason, we have lowered our 1M target to 9.00 (9.20). We stay medium-term bullish on the SEK and have marginally lowered our EUR/SEK forecast profile. We now target EUR/SEK at 8.80 in 6M (8.90) and 8.70 in 12M (8.75).


Main forecast changes Part II

• We have lowered the profile for EUR/CHF a bit and expect the cross to continue to hover around 1.22 in the coming months. On a six- to 12-month horizon we still expect EUR/CHF to gradually increase towards 1.24 mainly driven by a reversal of safe-haven flows and an increase in Swiss portfolio investments abroad.

• We also expect USD/JPY to trade mostly sideways in coming months as the probability of further BoJ easing has been reduced markedly with the recent pick-up in inflation, improved consumer confidence and stronger-than-expected business investments. With our expectation of a sidelined BoJ in the coming months, we have lowered our 3M forecast to 105 (106). However, relative monetary policy – in particular higher US rates – is still expected to push USD/JPY higher towards 110/114 in 6/12M.

• While there has not been any major impact from the ECB action to broader emerging markets, we have seen some positive effect on some of the CEE currencies, particularly the Polish zloty. We would certainly not rule out the possibility that the ECB’s easing measures are having a positive effect on the zloty. Also, our EMEA Scorecard for the zloty is sending bullish signals at this moment. Therefore, we have revised our EUR/PLN forecast in a more positive direction to 4.05, 4.10 and 4.15 in three, six and 12 months. Furthermore, we have made some revisions to the South African rand in a negative direction. Structural problems, consequently deteriorating the economic prospects and large external imbalances are behind our negative USD/ZAR forecast of 11.20, 11.30 and 11.60 in three, six and 12 months.

• Regarding the RUB, we expect seasonal weakening of the RUB from current ‘optimistic’ levels as the current account is seeing a squeeze on dividend payments, mainly in July 2014. We believe markets underestimate geopolitical risks as the Ukraine crisis is far from being resolved.


Forecast: 1.35 (1M), 1.33 (3M), 1.30 (6M) ,1.26 (12M)

EUR/USD – negative rates and liquidity boost to weaken the euro

• Growth. Economic data indicates that the US recovery is likely to gain pace again following a weak Q1. Eurozone data has also remained decent, although there have been less positive surprises recently. We expect US GDP to grow close to 3% this year, well above the 1.3% expected for the euro area. However, there is room for surprises in the euro area.

• Monetary policy. The ECB delivered more easing than expected at its rate meeting in June by cutting both refi and deposit rates by 10bp, the latter into negative, and in addition introduced a 4-year targeted LTRO (TLTRO). While it remains uncertain how much excess liquidity will be boosted by the new LTRO, the combination of negative EONIA rates and more excess liquidity is expected to weigh on the euro. At the same time, Fed tapering is on course and as the timing of the first Fed hike very much depends on how much slack is prevalent in the US labour market, we believe the risk is skewed towards earlier tightening than what the market is currently pricing in.

• Flows. The eurozone has a current account surplus, while the US is stuck with a chronic deficit. The rating cycle has turned for the peripheral countries and the strong bond performance should continue to attract foreign investors in 2014.

• Valuation. EUR/USD is not far from its PPP level. Our short-term models suggests that current fair value is around 1.38.

• Risks. The combination of ECB easing and relatively low levels of US rates has, in our view, reduced the upside risks for EUR/USD.

4

Conclusion. The current growth and inflation outlook in both regions indicates significant potential for a trend in relative rates supporting the case for a cyclical downtrend in EUR/USD.

We expect the combination of a negative deposit rate in addition to the various liquidity measures to be overall euro negative, and given that the ECB actually managed to deliver more easing than expected, we have lowered our medium and long-term forecasts for EUR/USD a bit.

We now see a higher probability of EUR/USD breaking below 1.30 this year and we now target EUR/USD at 1.30 and 1.26 in six and twelve months time, respectively (1.32 and 1.28).

Source: Danske Bank Markets

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

EUR/USD 1M 3M 6M 12M

Forecast (pct'ile) 1.35 (35%) 1.33 (21%) 1.30 (14%) 1.26 (13%)

Fwd. / Consensus 1.36 / 1.36 1.36 / 1.34 1.36 / 1.32 1.36 / 1.29

50% confidence int. 1.34 / 1.37 1.33 / 1.38 1.32 / 1.39 1.31 / 1.41

75% confidence int. 1.33 / 1.38 1.31 / 1.40 1.29 / 1.42 1.25 / 1.45

1.20

1.30

1.40

1.50

Jun-13 Sep-13 Dec-13 Apr-14 Jul-14 Oct-14 Feb-15 May-15

EUR/USD

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


EUR/USD – important issues to watch

ECB’s liquidity boost to reverse trend in relative central

banks’ balance sheets

− With the introduction of a series of targeted longer-term refinancing operations (TLTROs) the ECB is accommodating the liquidity situation in the Eurosystem.

− While it remains uncertain how much the 4-year targeted LTRO will boost excess liquidity, we expect the measure to reverse the trend in the two central banks’ balance sheets, supporting the case for a lower EUR/USD.

Positioning a near-term barrier for strong EUR/USD

trend

− While the combination of more ECB easing and relatively low levels of US interest rates has in our view limited the upside risks for EUR/USD, IMM data suggest that speculative investors already seem to be quite short EUR, when evaluated by the historical distribution of net positioning as a percentage of open interest.

− While not yet at significantly stretched levels, positioning could, at least in the near term, be a barrier for a stronger pace lower in EUR/USD.

ECB liquidity to reverse trend in relative CB’s balance sheets

Source: CFTC, Danske Bank Markets

Source: Macrobond Financial, Danske Bank Markets


Market already speculative short EUR


Forecast: 0.78(3M), 0.77 (6M) and 0.76 (12M)

EUR/GBP – divergent policy outlook to push cross lower

• Growth. UK economic recovery remains on track and the unemployment rate dropped to 6.6% in April – the lowest rate in more than five years. PMI surveys still point to strong activity in the coming quarter and we see upside risk to our growth forecasts of 2.8% y/y for 2014 and 2.3% y/y for 2015. CPI inflation is currently at 1.9% y/y and we expect it to remain below 2% for some time and move upwards only slowly in coming years.

• Monetary policy. The Bank of England (BoE) has argued for some time that there is a lot of slack in the economy. However, recent comments from BoE governor Mark Carney suggest that the BoE might consider raising rates this year. Hence, the BoE is on a very different path for monetary policy versus the ECB. The UK money market currently prices in the first rate hike in Q1 15 and a repricing of the UK money market curve could add near-term support to GBP against both EUR and USD.

• Flows. Investors have recently reduced long GBP positions according to the IMM data.

• Valuation. From a long-term perspective, GBP is still clearly undervalued (PPP around 0.77 for EUR/GBP).

• Risks. High expectations of BoE rate hikes have already been priced in the UK money market and there is a risk that expectations could be lowered if key indicators start to disappoint. This could weigh strongly on GBP. 6

Conclusion. The combination of the BoE moving towards the first rate hike and the prospect of euro weakness on the back of the ECB easing means we expect EUR/GBP to move lower over the coming year. Recent comments from Mark Carney suggest that the BoE might consider raising rates this year. This is not yet fully priced into the market and, as a consequence, we have moved forward some of the expected GBP strength as a repricing of the UK money market is likely to provide near-term support to GBP. We now target EUR/GBP at 0.78 in 3M (0.80), 0.77 in 6M (0.79) and 0.76 in 12M (0.77).



EUR/GBP 1M 3M 6M 12M

Forecast (pct'ile) 0.79 (20%) 0.78 (17%) 0.77 (16%) 0.76 (18%)

Fwd. / Consensus 0.80 / 0.81 0.80 / 0.80 0.80 / 0.80 0.81 / 0.79

50% confidence int. 0.79 / 0.81 0.79 / 0.82 0.78 / 0.82 0.77 / 0.84

75% confidence int. 0.78 / 0.81 0.77 / 0.83 0.76 / 0.84 0.74 / 0.86

0.70

0.75

0.80

0.85

0.90


EUR/GBP



Forecast: 105 (3M), 110 (6M) and 114 (12M)

USD/JPY – diminished likelihood of further BoJ easing • Macro outlook. Revised Q1 GDP growth came out 6.7% q/q annualised.

The stronger-than-expected figure, however, was primarily driven by a front loading of private consumption ahead of the consumption tax hike on 1 April.

• Monetary policy. In line with expectations, the Bank of Japan (BoJ) left its monetary policy unchanged at today’s meeting, keeping its 2014 monetary base target of JPY270trn. The bank expressed no imminent plans for further easing and still expects inflation to accelerate towards 2% in H2 15. With inflation picking up, improved consumer confidence and stronger-than-expected business investments, the probability of further BoJ easing has been reduced markedly (see next page). However, we still believe that the bank will be forced to ease monetary policy further in order to achieve its inflation target. In our main scenario, BoJ increases its monetary base target in October.

• Flows. Despite the significant weakening of the yen, Japanese exporters have lost market share to the closest competitors (e.g. South Korea) Additionally, foreign direct investments have risen in recent years, creating an increased funding need. Consequently, fundamental flows have become much more yen negative in recent years.

• Valuation. USD/JPY’s fair value is around 83, according to our general PPP model.

• Risk. If inflation surprises to the upside there is a risk that BoJ will comment on a possible exit strategy from its asset purchase program which would be JPY positive. According to CFTC IMM data, speculative JPY positioning has become markedly more stretched in recent weeks indicating an increased sensitivity of USD/JPY to the downside.

7

Conclusion:

With the plan of another sales tax hike in October 2015 we still believe that BoJ eventually will be forced to ease monetary policy further to obtain its 2 percent inflation target. In our main scenario, we believe BoJ will expand its monetary base target in October this year by another JPY10-15trn. With our expectation of a sidelined BoJ in the coming months we have lowered our 3M forecast to 105 (106). Relative monetary policy – in particular US rates – is still expected to push USD/JPY higher towards 110/114 in 6/12M. Recent developments, however, have markedly diminished the probability of further BoJ easing and the risk to our forecasts is consequently skewed to the downside.


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

USD/JPY 1M 3M 6M 12M

Forecast (pct'ile) 102.96 (74%) 105.26 (86%) 110.00 (94%) 114.29 (93%)

Fwd. / Consensus 101.98 / 102.42 101.98 / 104.45 101.98 / 106.61 101.98 / 109.08

50% confidence int. 100.95 / 102.97 100.08 / 103.90 98.93 / 104.95 97.17 / 106.59

75% confidence int. 100.10 / 103.81 98.41 / 105.40 96.35 / 107.32 92.98 / 110.52

90.0

95.0

100.0

105.0

110.0

115.0


USD/JPY



USD/JPY – important issues to watch

• Probability of further BoJ easing has fallen sharply

− Recent developments have markedly reduced the probability of further BoJ easing. Firstly, inflation has picked up and BoJ estimates that inflation in April – net of the sales tax hike effect – rose from 1.3% to 1.5% y/y. An important factor for the continuation of the upward pressure on inflation is an increasingly tight Japanese labour market.

− Secondly, although the better-than-expected Q1 GDP figures were primarily driven by a frontload in private consumption, business investments came out more robust than anticipated. This suggests a stronger-than-expected Japanese economy prior to the sales tax hike and thereby a less imminent need for further easing measures.

• Main scenario: BoJ ease monetary policy further in October

− Having said that, industrial production and other leading indicators (e.g. OECD’s leading indicator) have disappointed lately, indicating that BoJ may still be too optimistic in its inflation forecast. Consequently, the next release of the Tankan current conditions survey in July will be an important event, as BoJ historically has followed this closely.

− We still think that BoJ is too optimistic and that the bank, in light of the scheduled second consumption tax hike, will eventually be forced to ease monetary policy further. In our main scenario, BoJ will increase its monetary base target in October by JPY10-15trn.

− With a sidelined BoJ in coming months, we believe the most important short-run drivers of USD/JPY are a repricing of the Fed funds curve and global risk sentiment.

Tighter Japanese labour market will support inflation

Source: Macrobond Financial, Danske Bank Markets

Morten Helt, Senior Analyst, [email protected], +45 45 12 85 18 Kristoffer Lomholt, Assistant Analyst, [email protected] Source: Macrobond Financial, Danske Bank Markets

July release of Tankan survey is an important event


Forecast: 1.22 (3M), 1.23 (6M) and 1.24 (12M)

EUR/CHF – ECB easing lowers medium-term upside potential

• Growth. Inflation in Switzerland has risen slightly, with May figures revealing increases of 0.22% y/y and 0.30% m/m. At these low levels, however, deflation risk is still very much a concern. In addition, the KOF Economic barometer came out below 100 in May pointing at a future contraction, which would limit the positive effect that economic activity has on inflation.

• Monetary policy. The Swiss National Bank (SNB) still finds itself in a trade-off between low inflation and economic growth on the one hand, and the danger of an overheating housing market on the other. We do not think that the ECB easing measures have changed the reaction function of the SNB and we still believe that the 1.20 EUR/CHF floor will remain the SNB’s key monetary instrument. Hence, in the event of a weakening of the euro, we expect the SNB first to intervene in the FX market if EUR/CHF drops to 1.20 before it might consider alternative measures (i.e. negative deposit rates).

• Flows. A reversal in safe haven flows together with continued investor appetite for euro zone peripheries will weigh on the Swiss franc going forward.

• Valuation. The Swiss franc is c.8% overvalued against the euro, according to our G10 PPP model.

• Risks. Falling global risk sentiment could spark a flight to safe havens, which would strengthen CHF – illustrated by this year’s drop in the correlation between VIX and EUR/CHF. The large and increasing Swiss current account surplus still provides a fundamental headwind to our projections.

9

Conclusion.

Although the improved liquidity situation in the euro zone in isolation weighs on EUR/CHF, ECB easing is also positive for risk sentiment, which is a supportive factor for the cross. Consequently, we do not think ECB easing will lead to an imminent test of the 1.20 EUR/CHF floor and we still believe that a flexible balance sheet will remain SNB’s all-important monetary policy tool.

In light of the ECB easing measures, we have lowered our 3M forecast to 1.22 (1.23) and our 6M forecast to 1.23 (1.24). In six-12 months, however, we still expect EUR/CHF to gradually edge higher towards 1.24 mainly driven by a reversal of safe-haven flows and an increase in Swiss portfolio investments abroad.

Morten Helt, Senior Analyst, [email protected] +45 45 18 85 18 Kristoffer Lomholt, Assistant Analyst, [email protected]


EUR/CHF 1M 3M 6M 12M

Forecast (pct'ile) 1.22 (66%) 1.22 (62%) 1.23 (78%) 1.24 (80%)

Fwd. / Consensus 1.22 / 1.22 1.22 / 1.23 1.22 / 1.24 1.21 / 1.26

50% confidence int. 1.21 / 1.22 1.21 / 1.22 1.20 / 1.23 1.19 / 1.23

75% confidence int. 1.21 / 1.23 1.20 / 1.23 1.19 / 1.24 1.17 / 1.25

1.15

1.20

1.25

1.30


EUR/CHF



Forecast: 8.90 (3M), 8.80 (6M) and 8.70 (12M)

EUR/SEK – close to a turning point

• Growth. Sweden should do significantly better than Euroland in terms of GDP growth and labour market performance in 2014. The macro surprise index is hovering at historical lows (chart next page) and could turn bullish for the SEK in coming months.

• Monetary policy. The Riksbank will cut rates in July due to low inflation outcomes. This is almost certain according to us and market pricing. We would not rule out that (speculations about) a rate cut could add further pressure on the SEK near term. But a cut accompanied with an easing bias is already priced in. Over time, relative monetary policy is negative for EUR/SEK.

• Fundamentals. The current account, public finances, solid triple A, real interest rates and relative inflation among other things are factors that are important for the long-term SEK outlook – in favour of a stronger krona.

• Flows. Commercial interests are expected to cap the upside in EUR/SEK as export recovers.

• Valuation. Our medium-term valuation models suggest that EUR/SEK is overvalued.

• Risks. Softer-than-expected Riksbank action on 3 July could send EUR/SEK higher than forecast short term. QE policies from the ECB seem distant but any hints in that direction are likely to weigh on the EUR.

10

Conclusion. We think EUR/SEK is close to a turning point. The Riksbank is already priced for dovish action, the krona is ‘cheap’ and Swedish macro data might be entering a more positive phase. Unless the Riksbank cuts twice, the upward momentum in EUR/SEK should be fading. It is a misconception that the krona always weakens during summer. EUR/SEK has not risen in July since 2004. Thus, seasonality says we should be prepared for SEK appreciation in July. We stay medium-term bullish on the krona and have marginally lowered our EUR/SEK forecast profile.

Stefan Mellin, Senior Analyst , [email protected] +46 (0)8 568 805 92


EUR/SEK 1M 3M 6M 12M

Forecast (pct'ile) 9.00 (39%) 8.90 (27%) 8.80 (23%) 8.70 (24%)

Fwd. / Consensus 9.04 / 9.00 9.05 / 9.00 9.06 / 8.84 9.09 / 8.69

50% confidence int. 8.95 / 9.13 8.88 / 9.19 8.82 / 9.27 8.71 / 9.38

75% confidence int. 8.87 / 9.21 8.77 / 9.33 8.64 / 9.46 8.46 / 9.69

8.25

8.50

8.75

9.00

9.25

9.50

9.75


EUR/SEK



EUR/SEK – important issues to watch

The Riksbank will cut the repo rate in July

• Last week the ECB delivered on top of market expectations in an attempt obviously directed at a weakening of the currency. We think it will succeed eventually. The decision from the Riksbank on 3 July is likely to result in a rate cut and, possibly, an easing bias expressed in the rate path. The cut in itself will come as no surprise as it is almost (90%) fully priced in. The market even assigns a 20% probability that it will come more, so an easing bias is also priced in. Hence, the upside in EUR/SEK may be limited. Relative monetary policy is in our view basically negative for EUR/SEK.

Let’s break the myth about how the SEK trades during summers

• Let’s break the myth that the krona always weakens during July. This time of the year you often hear ’professionals’ brush up the argument that investors should be prepared for SEK weakness, as it is summer and history tells us EUR/SEK always goes up in July. But this is wrong, it is a misconseption.

• We actually have to go back to 2004 to find a year when EUR/SEK rose in July (see chart). It fell July 2005 and was flat 2006. After that it has fallen every year. On average by 2.1%. Hence, seasonality says we should rather be prepared for SEK appreciation in July. The Riksbank will be a key trigger this year.

Let’s break the myth

Source: Macrobond, Danske Bank Markets, Bloomberg

Swedish surprise index looks stretched

Source: Macrobond, Danske Bank Markets, Bloomberg

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


Forecast: 8.00 (3M), 7.95 (6M) and 7.85 (12M)

EUR/NOK – relative rates NOK supportive

• Growth. Retail sales are growing and manufacturing production was up 1.8% y/y in April. However, the recent oil investment survey was a disappointment, indicating that oil investments will be a drag on growth in 2015. The risk of a severe downturn in the housing market seems to be fading as prices have picked up and as turnover is increasing. Core inflation has risen thanks to the weaker NOK and close to the inflation target at 2.5%.

• Monetary policy. Norges Bank (NB) reiterated in May the message from March that rates will be on hold until ‘next summer’. However, the rhetoric might be more soft at the 19 June meeting. After the significant drop in rates among Norway’s trading partners, we see a high probability that Norges Bank will revise its rate path lower and thereby postponing the first rate hike further.

• Flows. Demand for Norwegian government bonds has improved this year. It is likely that that Norges Bank in the autumn will start on a daily basis to purchase Norwegian kroner instead of the normal purchase of foreign currency to fill the (before oil) government deficit.

• Valuation. NOK is weak relative to our PPP estimates.

• Risks. Norges Bank once again turns dovish especially if the currency appreciates too fast.

12

Conclusion. We expect EUR/NOK to edge slightly lower as the ECB easing pushed EONIA rates into negative territory and as relative rates/carry will continue to be in favour of the Norwegian kroner not least on a “carry-to-risk” basis after the drop in NOK FX volatility. However, we strongly doubt that we will see the 2012 lows in EUR/NOK again. The risk of a new NOK sell-off should not be neglected; in particular, the NOK might temporarily suffer if Norges Bank, as we expect, revises the rate path lower at the 19 June meeting. Note that our1M forecast is 8.20 due to this view. Arne Lohmann Rasmussen, Chief Analyst, [email protected], +45 45 12 85 32


EUR/NOK 1M 3M 6M 12M

Forecast (pct'ile) 8.20 (66%) 8.00 (22%) 7.95 (22%) 7.85 (20%)

Fwd. / Consensus 8.15 / 8.18 8.17 / 8.08 8.20 / 8.01 8.27 / 7.87

50% confidence int. 8.06 / 8.23 8.02 / 8.30 7.98 / 8.39 7.92 / 8.52

75% confidence int. 8.00 / 8.30 7.92 / 8.42 7.82 / 8.57 7.68 / 8.81

7.50

7.75

8.00

8.25

8.50

8.75

9.00


EUR/NOK



EUR/NOK – important issues to watch

• Inflation pushed higher by weaker NOK and higher service

prices

Norwegian core inflation rose 2.5% in May. Inflation is still pushed higher by import prices due to the weaker NOK in 2013. However, services where wages are a dominant factor also rose markedly. Norway is still one of the few countries not struggling with deflationary risks.

• Norges Bank to revise the rate path lower

Norges Bank is expected to revise the rate path lower at the 19 June Monetary Policy Meeting. It might weigh temporarily on the NOK. However, relative rates are still expected to be a clear NOK positive factor versus the euro over the next 12 months, as we expect EONIA rates to drop further and as the NOK carry from a “carry-to-risk” perspective has become more attractive due to the significant drop in NOK FX volatility.

• Housing market is now stabilising

The Norwegian housing market weakened in the latter part of 2013. However, the 2014 numbers show that the market has now recovered. A collapse in the housing market was a major concern for the NOK in 2013 and this risk should now be significantly lower.

The Norwegian housing market has recovered

Source: Macrobond

Relative rates point to a lower EUR/NOK

Source: Macrobond, Danske Bank Markets

Arne Lohmann Rasmussen, Chief Analyst, [email protected], +45 45 12 85 32


Forecast: 7.46 (3M), 7.46 (6M) and 7.46 (12M)

EUR/DKK – pressure relieved from DKK

• Rates. Danmarks Nationalbank (DN) has delivered an accumulated 25bp of unilateral rate hikes since 24 April – 15bp following the intervention in April and another 10bp by not following the ECB on 5 June. The effect has been even more pronounced when looking at the DKK-EUR interest rate spread in the money market, which has now turned positive. The spread may widen further over the coming months as the expected increase in euro liquidity following the end of SMP-sterilisation and the introduction of the TLTRO may push down euro money market rates even further. Consequently, EUR/DKK has declined and is currently trading close to the central rate of 7.46038. This further means that we do not expect there to be any need for additional independent rate hikes from DN over the coming year.

• FX. The negative carry on short EUR/DKK positions in the FX forward market has now been greatly reduced and has dropped below 10bp on an annualised basis on a 1M horizon. The negative carry now owes entirely to the negative basis spread on short EUR/DKK positions. Going forward, we may see EUR/DKK drop below the central rate and a further decline in the negative carry in the FX forward market as the DKK-EUR interest rate spread could widen further as mentioned above.

14

• Flows. The large current account surplus, currently around 7% of GDP, counts in favour of DKK and further adds to the downside potential for EUR/DKK.

• Conclusion. The monetary tightening from DN over the past two months has relieved the pressure on DKK. Hence, we do not expect any further independent rate hikes over the coming year as we may see EUR/DKK drop below the central rate.


Jens Nærvig Pedersen, Analyst, [email protected], +45 4512 8061

mailto:[email protected]


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

USD/CAD – BoC in neutral

• Growth. Even though key figures from Canada have been a bit on the soft side in recent months, the economy looks to be rebounding following the temporary winter setback. The economy will further embrace the recent string of positive news from the US economy which indicates that the recovery is back on track. Economic growth in Canada is set to gradually gain strength over the coming years.

• Monetary policy. The Bank of Canada (BoC) has maintained its overnight lending rate at 1.00% for the past two years. At June’s meeting it kept its neutral stance and emphasised the downside risk to the inflation outlook. Even though Canadian inflation and growth have picked up, we still believe that the BoC will lag the Fed in scaling back on stimuli.

• Flows. Speculators are still short the CAD.

• Valuation. The CAD remains expensive by PPP measures also after the latest sell-off.

• Commodities. We expect oil prices to head lower in years to come and this could weigh on the CAD. However, oil production is rising and thus oil-related revenues will remain decent.

• Risks. If household sector imbalances fail to evolve constructively, the BoC may have to scale back stimuli earlier.

Conclusion. Canada stands to benefit from a US recovery, which we see materialising next year. However, so far, positive spill overs to the Canadian economy have been limited and with Fed tapering on autopilot for now and with BoC on neutral, support for USD/CAD should remain in place. However, the very negative CAD sentiment that prevailed in Q4 13 has now improved. We also note that the market is already speculatively short CAD. This makes room for some further short covering over the summer if the current CAD sentiment improves further.


Jens Nærvig Pedersen, Analyst, [email protected], +45 45 12 80 61

USD/CAD 1M 3M 6M 12M

Forecast (pct'ile) 1.08 (35%) 1.09 (58%) 1.09 (56%) 1.12 (71%)

Fwd. / Consensus 1.09 / 1.10 1.09 / 1.11 1.09 / 1.12 1.09 / 1.13

50% confidence int. 1.08 / 1.09 1.07 / 1.10 1.06 / 1.11 1.05 / 1.13

75% confidence int. 1.07 / 1.10 1.06 / 1.12 1.04 / 1.14 1.02 / 1.17

1.00

1.05

1.10

1.15

1.20


USD/CAD



Forecast: 0.92 (3M), 0.91 (6M) and 0.90 (12M)

AUD/USD – RBA on hold as growth strengthens

• Growth. GDP growth exceeded expectations in Q1 and overall the outlook for the Australian economy has improved further following the recent stabilisation of the Chinese economy along with indications that China’s demand for commodities is rebounding. The current slack in the economy is keeping inflation in check. El Niño weather later this year could spell trouble for the economy.

• Monetary policy. The Reserve Bank of Australia (RBA) has kept its cash target rate unchanged at 2.50% since last summer but has shifted away from an easing bias to neutral. It made no major changes to its policy stance at the meeting in June, while noting that the recent economic improvement was the result of the accommodative monetary policy.

• Flows. Speculators have recently slashed short AUD positions, but are still generally short the AUD. Hence, there is a risk of further short covering.

• Valuation. The AUD remains overvalued but, notably, overvaluation is now less than half its post-crisis peak.

• Commodities. Supply worries on the nickel and aluminium market should support the AUD.

• Risks. Risk appetite is high and signs of China stabilising could further support the AUD.

16

Conclusion. Despite the recent AUD performance, we doubt that we are in for further strong performance in 2014 and we see the latest performance as overdone, especially as RBA remains on hold, while US tapering and the first Fed rate hike moving closer will strengthen the USD.



AUD/USD 1M 3M 6M 12M

Forecast (pct'ile) 0.93 (31%) 0.92 (29%) 0.91 (30%) 0.90 (35%)

Fwd. / Consensus 0.94 / 0.92 0.93 / 0.90 0.93 / 0.90 0.91 / 0.88

50% confidence int. 0.93 / 0.95 0.92 / 0.95 0.90 / 0.96 0.88 / 0.96

75% confidence int. 0.92 / 0.95 0.90 / 0.96 0.87 / 0.97 0.83 / 0.99

0.80

0.85

0.90

0.95

1.00


AUD/USD



Forecast: 0.87 (3M), 0.87 (6M) and 0.87 (12M)

NZD/USD – RNBZ tightening continues

• Growth. New Zealand’s economy is in good shape, supported by the construction boom (to repair the earthquake damages). Employment growth remains strong, which is gradually lowering unemployment. El Niño weather later this year could spell trouble for the economy.

• Monetary policy. The Reserve Bank of New Zealand (RNBZ) hiked its official cash rate by another 25bp to 3.25% at the June meeting. The RBNZ seems determined to hike in order to fight inflationary pressures and will deliver additional hikes later this year. However, inflationary pressure eased a bit in Q1 to 1.5% y/y and is thus below the mid-point of RBNZ’s inflation target range of 1-3%, which reduces the pressure on RBNZ to aggressively hike rates.

• Valuation. The NZD is still heavily overvalued in PPP terms.

• Commodities. While energy prices could trend lower in 2014, the prices of New Zealand’s many agricultural products may stay at decent levels.

• Risks. The market currently prices in another three 25bp rate hikes on a 12M horizon, which, in our view, seems somewhat aggressive. Combined with speculators being long the NZD, this indeed poses a risk of a significant re-pricing.

Conclusion. Despite the prospect of further rate hikes this year, we see the upside potential of NZD/USD as fairly limited as a lot of tightening is already priced in on RBNZ and as the first Fed hikes slowly moves closer. In addition, RBNZ is likely to maintain the view that the current high level of NZD is not sustainable longer term if the economy is to stay competitive and foster growth once the construction boom wanes. Hence, further Kiwi strength could eventually limit the central bank’s desire to hike rates.



NZD/USD 1M 3M 6M 12M

Forecast (pct'ile) 0.87 (67%) 0.87 (65%) 0.87 (66%) 0.87 (70%)

Fwd. / Consensus 0.86 / 0.85 0.86 / 0.84 0.85 / 0.83 0.83 / 0.81

50% confidence int. 0.85 / 0.87 0.84 / 0.88 0.82 / 0.88 0.80 / 0.88

75% confidence int. 0.84 / 0.88 0.82 / 0.89 0.80 / 0.90 0.75 / 0.91

0.75

0.80

0.85

0.90

0.95


NZD/USD



Forecast: 48.95(3M), 49.80 6M) and 51.00 (12M)

EUR/RUB – fundamentals are not in favour of RUB

• Growth. Economic growth in Russia is slowing further, expanding 0.9% y/y in Q1 14 versus 2.0% y/y in Q4 13. Our 2014 GDP forecast stays at -0.3% y/y due to a surge in geopolitical risks, which have introduced both supply and demand side shocks.

• Monetary policy. The Russian central bank surprisingly hiked its main rates by 50bp on 25 April 2014 to curb accelerating inflation and support RUB. Bank Rossii ‘does not intend to lower the key rate in the coming months’. The next rate decision is due to be published on 16 June 2014. We expect rates to stay unchanged. We believe that a total 50bp rate cut is possible in H2 14 if CPI falls below 6% y/y.

• Flows. Net capital outflows accelerated to USD64bn in Q1 14 if the banks’ FX operations are taken into account. This is the highest outcome since late 2008. We believe that local banks have being actively buying RUB assets and leaving both USD and EUR to avoid risks arising from sanctions by Western powers.

• Valuation. EUR/RUB is trading below its 1M average of 47.13.

• Risks. Bank Rossii’s sudden rate hikes to support RUB and curb accelerating inflation. The ECB’s more dovish stance will push EUR/RUB down.

18

• Conclusion. We expect seasonal weakening of the RUB from current ‘optimistic’ levels as current account sees a squeeze on dividend payments mainly in July 2014. We believe markets underestimate geopolitical risks as the Ukraine crisis is far from being solved.

• As we expect the Russian economy to dive into recession already this year and country ratings remain poor, we do not see any support from fundamentals in the long run.

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


EUR/RUB 1M 3M 6M 12M

Forecast (pct'ile) 49.10 (94%) 48.94 (78%) 49.80 (74%) 51.00 (69%)

Fwd. / Consensus 47.07 / 49.22 47.72 / 48.35 48.68 / 48.02 50.59 / 47.30

50% confidence int. 46.29 / 47.71 46.19 / 48.71 46.17 / 49.90 46.07 / 51.99

75% confidence int. 45.73 / 48.36 45.26 / 49.96 44.69 / 51.92 42.97 / 55.29

42

44

46

48

50

52

54

56


EUR/RUB



EUR/RUB – important issues to watch

• Weakness set to continue in 2014

− Over the past month, RUB was again the best gainer against EUR in the EMEA FX universe surging 3.9%. Russia’s monetary policy is tightening, locals have been returning into RUB to hedge against new sanctions, the ECB has turned more dovish delivering rate cuts and expectations of Russia’s military intervention in Ukraine have globally eased further on the outcome of the presidential elections in Ukraine. Yet, we believe that the geopolitical situation remains open as heavy military operations are ongoing in Eastern Ukraine.

− Bank Rossii has reiterated its commitment to a freely floating RUB in 2015 and is rigidly sticking to inflation targeting. FX interventions have moderated and the central bank was an FX buyer in May 2014. We see upside risks for RUB rates as surprising key rate hikes are possible during 2014 to curb CPI and calm sudden RUB’s drops.

− FX risks are very small among ordinary citizens and RUB’s real effective exchange rate remains high. Our base case scenario remains 1% of RUB’s monthly depreciation against the basket.

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

Source: Bank Rossii, Bloomberg, Danske Bank Markets

30

32

34

36

38

40

42

44

30

32

34

36

38

40

42

44RUB's trading band vs. RUBBASK

lower borderupper border*RUBBASK (45%EUR+55%USD)

0

5

10

15

20

25

30

35

40

45

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Bank Rossii's FX interventions and RUBBASK rate

mln EUR, net sales

mln USD, net sales

RUBBASK (rhs)

Source: Bank Rossii, Bloomberg, Danske Bank Markets


Forecast: 4.05 (3M), 4.10 (6M) and 4.15 (12M)

EUR/PLN – a mixed bag: low inflation, higher growth

• Growth. The latest GDP data shows that growth seems to be picking up faster than we previously expected. We now expect real GDP growth of 3.6% y/y in 2014 and 3.6% in 2015. On the other hand, the ongoing Ukrainian-Russian conflict could potentially harm Polish growth going forward even though we think the effect has so far been very limited.

• Monetary policy. While Polish growth seems to be picking up, inflation remains very subdued and there is a risk of outright deflation in the coming months in Poland. The continued very low inflation could push the Polish central bank (NBP) in a slightly more dovish direction and rate cuts cannot be ruled out. The ECB’s recent easing measures combined with a stronger zloty could also add to market speculation about a possible rate cut. However, for now, the NBP keeps signalling that rates will be on hold throughout 2014.

• Valuation. The PLN is trading close to its fair value level, so valuation is unlikely to have any major near-term impact.

• Risks. The biggest risk to the PLN in the near term is the possibility of an escalation in the Ukrainian-Russian conflict.

20

Conclusion. The zloty has been doing surprisingly well recently. The recent strengthening of the zloty has among other things been driven by the ECB’s more dovish stance and the drop in eurozone money market rates has helped make the zloty more attractive from a carry perspective. Looking forward we believe that the strengthening could continue on a 3-6M horizon – primarily driven by attractive carry on the zloty.

.

Lars Christensen, Chief Analyst, [email protected], +45 45 12 85 30


EUR/PLN 1M 3M 6M 12M

Forecast (pct'ile) 4.08 (17%) 4.05 (15%) 4.10 (36%) 4.15 (49%)

Fwd. / Consensus 4.14 / 4.15 4.15 / 4.13 4.17 / 4.11 4.22 / 4.06

50% confidence int. 4.09 / 4.17 4.08 / 4.20 4.06 / 4.24 4.03 / 4.30

75% confidence int. 4.07 / 4.20 4.04 / 4.26 4.00 / 4.34 3.92 / 4.46

3.80

4.00

4.20

4.40

4.60


EUR/PLN



Forecast: 27.4 (3M), 27.4 (6M) and 27.3 (12M)

EUR/CZK – lower inflation keeps EUR/CZK floor for longer

• Growth. Q1 GDP was revised up to 2.5% y/y GDP growth. That was slightly higher than we had expected but below the Czech central bank’s (CNB) forecast (0.2% y/y lower). The growth was driven by investments but also domestic demand contributed more than expected. We expect the Czech economy to continue its recovery with average 2014 GDP growth of 2.4% y/y and 3.1% y/y in 2015 and 3.2% y/y in 2016. The CNB’s current forecast is for 2014 GDP growth of 2.6% and 3.3% in 2015.

• Monetary policy. The CNB remains committed to using the exchange rate as a non-standard monetary policy and to keeping the EUR/CZK floor at 27. Despite the continued economic recovery, inflation continues to hover close to zero and is increasing less than expected by the CNB. This means that the probability of a later exit from the exchange rate is increasing. We expect the CNB to keep the koruna cap for longer – beyond Q1 15 as assumed by the CNB. Some CNB board members have already acknowledged the possibility of a later exit.

• Debt risks are low. The Czech government sees the 2014 public finance gap at 1.8% of GDP and government debt at 44% of GDP.

• Valuation. From a long-term perspective, the CZK is undervalued (fair value is around 25 against the EUR).

• Risks. A further fall in inflation and the need for a weaker CZK.

21

Conclusion. The Czech koruna remains stable is hovering around EUR/CZK 27.4 - 27.5. We expect it to stay basically f lat at current levels going forward and expect the CNB to maintain the CZK cap beyond Q1 15. We forecast EUR/CZK at 27.40, 27.40 and 27.30 on three-, six- and 12-month horizons.


Stanislava Pravdová-Nielsen, Analyst, [email protected], +45 45 12 80 71

EUR/CZK 1M 3M 6M 12M

Forecast (pct'ile) 27.40 (51%) 27.40 (60%) 27.40 (63%) 27.30 (54%)

Fwd. / Consensus 27.43 / 27.40 27.43 / 27.40 27.43 / 27.32 27.42 / 27.12

50% confidence int. 27.34 / 27.45 27.25 / 27.47 27.12 / 27.50 26.93 / 27.57

75% confidence int. 27.29 / 27.52 27.14 / 27.61 26.95 / 27.74 26.64 / 27.95

25.5

26.0

26.5

27.0

27.5

28.0


EUR/CZK



Forecast: 305 (3M), 305 (6M) and 300 (12M)

EUR/HUF – strong external balances support the HUF

• Growth. Growth is clearly picking up in Hungary and after years of stagnation, it is becoming one of the fastest growth economies in central and eastern Europe. However, both structural problems and weak domestic demand are continuing to weigh on economic activity. We now expect a higher pick-up in growth to 3.5% y/y in 2014 – up from 1.2% y/y in 2013. We expect the growth to remain at 3.5% y/y in 2015.

• Monetary policy. The Hungarian central bank (MNB) has initiated a policy of baby-step rate cuts. Further monetary easing is justified as there is actually now deflation in Hungary (despite higher growth) and there is certainly a risk of further deflation in coming months. However, rates have now come down to the point where the MNB might start to worry that the stability of the HUF is jeopardised. Furthermore, higher GDP growth might also turn the MNB slightly less dovish.

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

• Risks. The biggest risks to the HUF remain the political uncertainty and the Hungarian government once again taking a ‘misstep’ in economic policy. The Ukrainian-Russian conflict is also a key risk.

22

Conclusion. We continue to believe that Hungary’s fairly strong external position is likely to be supportive for the HUF in the medium term as will the increasingly stronger recovery in growth. As a consequence, the HUF could even strengthen moderately against the EUR on a 12-month horizon, while the short-term outlook is likely to be dependent on the general Emerging Markets outlook as well as developments in the Russian-Ukrainian conflict. The biggest risks to the HUF remain the political uncertainty and the Hungarian government once again taking a ‘misstep’ in economic policy.



EUR/HUF 1M 3M 6M 12M

Forecast (pct'ile) 305.00 (36%) 305.00 (46%) 305.00 (52%) 305.00 (57%)

Fwd. / Consensus 307.15 / 306.72 307.16 / 305.37 307.17 / 303.39 307.20 / 301.83

50% confidence int. 303.55 / 309.81 300.85 / 311.06 297.37 / 312.38 291.62 / 314.29

75% confidence int. 301.17 / 312.95 297.02 / 316.54 291.60 / 320.85 282.43 / 327.56

280

290

300

310

320

330


EUR/HUF



Forecast: 2.12 (3M), 2.15(6M) and 2.20(12M)

USD/TRY – attractive valuation and high carry

• Growth. The Turkish economy has been showing quite clear signs of slowing over the past couple of years. That said, we are now beginning to see some stabilisation in Turkish growth. Hence, we expect 2.7% y/y real GDP growth in 2014 and 2.9% y/y in 2015. The continued high inflation (8.4% y/y in 2014) and the large current account deficit continue to be a problem from a fundamental perspective.

• Monetary policy. Turkish inflation expectations have risen sharply on the back of the significant sell-off in the lira and this was undoubtedly, in our view, one of the main drivers behind the central bank of Turkey’s (TCMB) emergency rate hike at the end of January. Recently higher food prices have pushed Turkish inflation up further. That said, inflation has probably peaked and recently the TCMB has changed course and has initiated a rate cutting cycle – cutting its key policy rate by 50bp at the latest monetary policy meeting. The TCMB is likely to remain under political pressure to cut rates even more despite the elevated level of inflation.

• Valuation. The sell-off in the lira over the past year in our view means that the lira is no longer overvalued – despite some rebound recently. However, a continued large current account deficit and high inflation continue to be a problem from a fundamental perspective.

• Risks. Continued large macroeconomic imbalances, political risks and the overall fragile global Emerging Market environment continue to be the key risks to the lira.

23

Conclusion. Continued fairly high inflation and a large current account deficit are likely to continue to weigh on the lira over the longer term. However, these imbalances are to a large extent already reflected in the lira and the lira continues to trade at what we consider to be fairly ‘cheap’ levels from a fundamental perspective. Furthermore, high Turkish interest rates are likely to provide some support for the lira. Overall we see a gradual depreciation of the lira, but we are slightly less negative than markets in general.



USD/TRY 1M 3M 6M 12M

Forecast (pct'ile) 2.12 (36%) 2.12 (36%) 2.15 (45%) 2.20 (47%)

Fwd. / Consensus 2.14 / 2.14 2.17 / 2.14 2.21 / 2.17 2.30 / 2.18

50% confidence int. 2.10 / 2.17 2.09 / 2.21 2.09 / 2.26 2.09 / 2.36

75% confidence int. 2.08 / 2.20 2.05 / 2.28 2.03 / 2.36 1.94 / 2.51

1.50

2.00

2.50

3.00


USD/TRY



Forecast: 11.2 (3M), 11.3 (6M) and 11.6 (12M)

USD/ZAR – intensified structural problems drag the rand

• Growth. The South African economy has been hard hit by the prolonged strikes in the platinum sector. This was reflected in very weak Q1 GDP, which showed growth of 1.6% y/y (down from 2.0% y/y in Q4 13) but a contraction of 0.6% q/q from 3.8% growth in Q4 13. Given such a weak reading and continued strikes we have revised down our GDP forecast to 1.9% y/y for this year and to 2.3% y/y in 2015. The South African central bank (SARB) revised its GDP forecast for this year significantly down to 2.1% in (versus 2.6% previously). In 2015, the SARB expects GDP growth of 3.1%.

• Monetary policy. The rate decision in May was a big shift in a more dovish direction. This was on the back of significant deterioration in the growth outlook. The central bank is facing conflicting policy choices – weakening economic activity but accelerating inflation. Recent comments from the SARB governor Gill Marcus still indicate that the next move will be up. The outlook for monetary policy remains unclear but currently the growth concerns will outweigh inflation concerns. We therefore expect the SARB to stay on hold at the next MPC meeting in July.

• Debt risks. A budget deficit of 4.0% of GDP is projected for 2013/14 (lower than projected in October).

• Valuation. ZAR remains fundamentally overvalued (fair value around 12.50).

• Risks. Loss of investor confidence due to socioeconomic problems, deepening of structural problems, further downgrade by the rating agencies, a widening current account deficit.

Conclusion. Our outlook for the rand has changed quite markedly. While the rand was boosted by positive risk sentiment in May and even though the fairly positive sentiment towards emerging markets still remains more or less intact, the rand recently came under some pressure. This is on the back of persistent structural problems, which hit the economy hard and which are no longer being ignored by investors. Structural problems, consequently deteriorating the economic prospects, and large external imbalances mean that we turned negative on all forecast horizons. A credit rating downgrade is clear risk.


Stanislava Pravdová-Nielsen, Analyst, [email protected], +45 45 12 80 71

USD/ZAR 1M 3M 6M 12M

Forecast (pct'ile) 10.90 (65%) 11.20 (73%) 11.30 (68%) 11.60 (67%)

Fwd. / Consensus 10.82 / 10.61 10.93 / 10.68 11.11 / 10.79 11.48 / 10.68

50% confidence int. 10.56 / 11.01 10.46 / 11.23 10.35 / 11.50 10.22 / 11.97

75% confidence int. 10.41 / 11.23 10.21 / 11.63 9.98 / 12.11 9.48 / 12.96

9.00

9.50

10.00

10.50

11.00

11.50

12.00

12.50

13.00


USD/ZAR



Forecast: 6.19 (3M), 6.14 (6M) and 6.05 (12M)

USD/CNY – CNY remains on a longer-term appreciation trend

• Growth has slowed on the back of de facto monetary tightening, regulatory tightening targeting shadow finance and the government’s attempt to control local government debt. We expect stabilisation in H2 14 as both monetary and fiscal policy are now being eased moderately. However, there is mainly downside risk and the credit crunch could prove more severe.

• Monetary policy. The People’s Bank of China (PBoC) is now on an easing bias and monetary policy has effectively been eased since December, albeit the leading interest rates are so far unchanged. Inflation increased to 2.5% y/y in May but remains substantially below the government’s 3.5% threshold and still leaves room to ease if needed. With focus on containing financial risk, PBoC will only do so reluctantly. A targeted 50bp cut in the reserve requirement has been announced in June and an interest rate cut at a later stage is an option if the economy fails to stabilise.

• FX policy. CNY has weakened substantially since PBoC widened the daily trading band from +/-1% to +/-2% in March. In our view PBoC is not targeting a major depreciation of CNY but is mainly hoping that that more two-way volatility in the exchange rate will deter speculative capital inflows into China.

• Valuation. China’s market share on global export markets continues to improve and the current account surplus appears to be increasing again, suggesting that CNY remains slightly undervalued.

• Risks. CNY could depreciate further if GDP growth slows below 7% and/or money market stress returns. In the longer term, liberalisation of China’s capital account could also weaken CNY.

25

Conclusion. As long as PBoC has an easing bias, we expect USD/CNY to move sideways in the upper end of the daily trading band. However, with the economy expected to stabilise in H2 14, we expect CNY to resume a moderate appreciation path. In general, there will be more two-way volatility in the exchange rate in the future. We recommend hedging CNY expenditures as forwards currently discount a slight depreciation. We recommend using offshore CNH forwards, as they currently discount the largest depreciation.


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


Danske Bank Markets FX forecasts


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

Exchange rates vs EUR

USD 1.354 1.35 1.33 1.30 1.26 -0.3 -1.8 -4.0 -7.1JPY 138.1 139 140 143 144 0.7 1.4 3.6 4.4GBP 0.798 0.79 0.78 0.77 0.76 -1.1 -2.4 -3.8 -5.5CHF 1.218 1.22 1.22 1.23 1.24 0.2 0.2 1.1 2.1

DKK 7.46 7.46 7.46 7.46 7.46 0.0 0.0 0.1 0.1NOK 8.13 8.20 8.00 7.95 7.85 0.8 -2.0 -3.0 -5.0SEK 9.02 9.00 8.90 8.80 8.70 -0.3 -1.5 -2.8 -4.2

Exchange rates vs USD

JPY 102.0 103 105 110 114 0.9 3.2 7.9 12.3GBP 1.70 1.71 1.71 1.69 1.66 0.8 0.6 -0.3 -1.7CHF 0.90 0.90 0.92 0.95 0.98 0.5 2.1 5.4 9.8

DKK 5.51 5.53 5.61 5.74 5.92 0.3 1.8 4.3 7.7NOK 6.01 6.07 6.02 6.12 6.23 1.0 -0.2 1.1 2.4SEK 6.67 6.67 6.69 6.77 6.90 -0.1 0.3 1.3 3.2

CAD 1.09 1.08 1.09 1.09 1.12 -0.6 0.2 0.0 2.3AUD 0.94 0.93 0.92 0.91 0.90 -0.7 -1.4 -1.8 -1.6NZD 0.87 0.87 0.87 0.87 0.87 0.8 1.3 2.2 4.1

CNY 6.21 6.19 6.14 6.05 0.2 -0.8 -2.7Note: 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 7.46 7.46 7.46 7.46 7.46 0.0 0.0 0.1 0.1USD 5.51 5.53 5.61 5.74 5.92 0.3 1.8 4.3 7.7JPY 5.40 5.37 5.33 5.22 5.18 -0.6 -1.3 -3.4 -4.1GBP 9.35 9.44 9.56 9.69 9.82 1.1 2.5 4.0 5.9CHF 6.13 6.11 6.11 6.07 6.02 -0.2 -0.2 -1.0 -1.9

NOK 0.92 0.91 0.93 0.94 0.95 -0.7 2.0 3.1 5.2SEK 0.83 0.83 0.84 0.85 0.86 0.3 1.6 2.9 4.4

CAD 5.08 5.12 5.15 5.26 5.29 0.9 1.7 4.3 5.3AUD 5.17 5.14 5.16 5.22 5.33 -0.4 0.4 2.3 5.8NZD 4.77 4.81 4.88 4.99 5.15 1.0 3.2 6.5 11.9

PLN 1.81 1.80 1.78 1.78 0.0 -0.6 0.5CZK 0.27 0.27 0.27 0.27 0.1 -0.6 -0.3HUF 0.24 0.24 0.24 0.25 1.0 1.3 3.8RUB 0.16 0.15 0.14 0.15 -4.5 -5.8 1.5

CNY 0.89 0.91 0.93 0.98 2.5 6.0 11.6



Danske Bank Markets FX forecasts vs SEK


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

Exchange rates vs SEK

EUR 9.02 9.00 8.90 8.80 8.70 -0.3 -1.5 -2.8 -4.2USD 6.67 6.67 6.69 6.77 6.90 -0.1 0.3 1.3 3.2JPY 6.53 6.47 6.36 6.15 6.04 -1.0 -2.9 -6.1 -8.2GBP 11.31 11.39 11.41 11.43 11.45 0.7 0.9 1.1 1.4CHF 7.41 7.38 7.30 7.15 7.02 -0.5 -1.8 -3.8 -6.1

NOK 1.11 1.10 1.11 1.11 1.11 -1.1 0.5 0.2 0.8DKK 1.21 1.21 1.19 1.18 1.17 -0.3 -1.6 -2.8 -4.2

CAD 6.14 6.17 6.14 6.21 6.16 0.5 0.1 1.4 0.9AUD 6.26 6.20 6.16 6.16 6.21 -0.8 -1.1 -0.5 1.5NZD 5.77 5.80 5.82 5.89 6.01 0.7 1.6 3.6 7.6

PLN 2.19 2.14 2.10 2.07 -1.5 -3.4 -3.7CZK 0.33 0.32 0.32 0.32 -1.4 -3.4 -4.5HUF 0.29 0.29 0.29 0.29 -0.6 -1.5 -0.6RUB 0.19 0.18 0.17 0.17 -6.2 -8.7 -2.7

CNY 1.07 1.08 1.10 1.14 0.9 3.1 7.0



Danske Bank Markets FX forecasts vs NOK


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

Exchange rates vs NOK

EUR 8.13 8.20 8.00 7.95 7.85 0.8 -2.0 -3.0 -5.0USD 6.00 6.07 6.02 6.12 6.23 1.0 -0.2 1.1 2.4JPY 5.89 5.90 5.71 5.56 5.45 0.1GBP 10.18 10.38 10.26 10.32 10.33 1.8 0.4 0.9 0.6CHF 6.68 6.72 6.56 6.46 6.33 0.5 -2.2 -4.0 -6.9

SEK 0.90 0.91 0.90 0.90 0.90 1.1 -0.5 -0.2 -0.8DKK 1.09 1.10 1.07 1.07 1.05 0.7 -2.0 -3.0 -5.0

CAD 5.53 5.62 5.52 5.61 5.56 1.6 -0.4 1.2 0.1AUD 5.64 5.65 5.53 5.57 5.61 0.3 -1.6 -0.7 0.6NZD 5.20 5.28 5.23 5.32 5.42 1.8 1.1 3.4 6.7

PLN 1.97 1.93 1.89 1.87 -2.0 -3.6 -4.5CZK 0.30 0.29 0.29 0.29 -1.9 -3.6 -5.3HUF 0.27 0.26 0.26 0.26 -1.1 -1.7 -1.4RUB 0.17 0.16 0.15 0.16 -6.6 -8.9 -3.5

CNY 0.97 0.97 1.00 1.03 0.5 2.8 6.1



EMEA FX forecasts


Danske Forward Danske Forward Danske Forward Danske Forward Danske Forward

PLN 13-Jun 4.13 3.05 180.7 218.6 197.2

+1M 4.08 4.14 3.02 3.06 182.8 220.6 218.3 201.0

+3M 4.05 4.15 3.05 3.07 184.2 179.6 219.8 217.7 197.5 196.8

+6M 4.10 4.18 3.15 3.08 182.0 178.5 214.6 216.7 193.9 196.5

+12M 4.15 4.22 3.29 3.11 179.8 176.6 209.6 215.0 189.2 195.9

HUF 13-Jun 307 227 2.43 2.94 2.65

+1M 305 307 226 227.1 2.45 2.95 2.94 2.69

+3M 305 308 229 227.5 2.45 2.42 2.92 2.93 2.62 2.65

+6M 305 309 235 228.3 2.45 2.41 2.89 2.93 2.61 2.65

+12M 305 312 242 229.7 2.45 2.39 2.85 2.91 2.57 2.65

CZK 13-Jun 27.4 20.3 27.2 32.9 29.7

+1M 27.4 27.4 20.3 20.3 27.2 32.8 32.9 29.9

+3M 27.4 27.4 20.6 20.2 27.2 27.2 32.5 33.0 29.2 29.8

+6M 27.4 27.4 21.1 20.2 27.2 27.2 32.1 33.0 29.0 29.9

+12M 27.3 27.4 21.7 20.2 27.3 27.2 31.9 33.2 28.8 30.2

RUB 13-Jun 46.69 34.48 15.98 19.33 17.43

+1M 49.10 47.01 36.37 34.7 15.19 18.33 19.21 16.70

+3M 48.94 47.66 36.80 35.2 15.24 15.65 18.18 18.97 16.35 17.15

+6M 49.80 48.61 38.31 35.9 14.98 15.34 17.67 18.62 15.96 16.88

+12M 51.00 50.53 40.48 37.2 14.63 14.75 17.06 17.96 15.39 16.36

TRY 13-Jun 2.88 2.13 259 313 282

+1M 2.86 2.90 2.12 2.14 261 315 311 287

+3M 2.82 2.94 2.12 2.17 265 254 316 307 284 278

+6M 2.80 3.00 2.15 2.21 266 249 314 302 284 274

+12M 2.77 3.12 2.20 2.30 269 239 314 291 283 265

ZAR 13-Jun 14.59 10.77 51.1 61.9 55.8

+1M 14.72 14.66 10.90 10.83 50.7 61.2 61.6 55.7

+3M 14.90 14.81 11.20 10.94 50.1 50.3 59.7 61.0 53.7 55.2

+6M 14.69 15.05 11.30 11.11 50.8 49.5 59.9 60.1 54.1 54.5+12M 14.62 15.58 11.60 11.48 51.0 47.8 59.5 58.3 53.7 53.1

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 Stefan Mellin (Senior Analyst), Stanislava Pravdová-Nielsen (Analyst), Morten Helt (Senior Analyst), Jens Naervig Pedersen (Analyst), Lars Christensen (Chief Analyst), Christin Tuxen (Senior Analyst) and Vladimir Miklashevsky (Analyst).

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Documents

FX Forecast Update€¦ · forecast in a more positive direction to 4.05, 4.10 and 4.15 in three, six and 12 months. Furthermore, we have made some revisions to the South African