We revise our FX forecasts for the remainder of 2014, for 2015 and for the first time provide financial forecasts for 2016.
EUR/USD – revised lower on an even softer ECB
The EUR has been under pressure since ECB decided to switch stance towards a substantially more dovish one in May. Economic activity has disappointed while price pressures have eased, in part due to elevated geopolitical risks dampening activity. Reflecting this worsening of the cyclical outlook as well as the latest signals from the ECB, we have revised our ECB forecast. Meanwhile, the US recovery remains on track, both economic activity and inflation seem to be picking up, while the Federal Reserve has on the margin become more hawkish over the course of the last few months. Consistent with our new central bank and macro economic forecasts we have revised our EUR/USD forecast somewhat lower, including some undershooting vs our macro model.
GBP – to gain vs the EUR
UK activity has on the whole surprised positively, this too in sharp contrast with developments in the Euro Area. While there are downside risks to the GBP, like how the economy will cope with the recent currency strength, we have lowered our EUR/GBP forecast, reflecting the sharpened divergence between the respective central banks.
JPY– jury still out on Abenomics
The Japanese economy is still feeling the positive effects from earlier Abenomics-fuelled JPY weakness. Whether the recent bout of stimulus will have been successful or not will be revealed over the course of the next six months given that most of the JPY-led rise in inflation will have abated by then. The longer-term USD/JPY forecasts remain bullish, reflecting our view of the upcoming hawkish repricing of US interest rates feeding through to a relatively stronger USD.
EUR/CHF – gradual normalization suggest a weaker CHF
Turning to Switzerland, EUR/CHF has been declining recently and is approaching the SNB’s floor of 1.20. Further ECB stimulus (quantitative easing and/or further rate cuts) could increase the pressure on the floor and force the SNB to intervene, but this is not our main scenario. In the longer-term, a gradual normalisation of the conditions in the Euro Area should help the EUR/CHF rise. We do however cut our longer-term forecasts somewhat, reflecting the ECB’s commitment to “lower for longer”.
Scandis – SEK to outperform as Swedish inflation rises
Finally, looking at the Scandis, the NOK is seen appreciating somewhat, as, again, the central bank policy divergence will tend to underpin the Norwegian krone vs the EUR, despite the risks of a drop-off in oil investments next year. The SEK should remain fairly weak for a few more months, but the looming uptick in inflation rates seems likely to prompt a reappraisal of the Riksbank, and the currency, over the course of the next year. We have cut our longer-term forecasts accordingly. The graph below shows the relationship between EUR/SEK and relative rate expectations, including a scenario in which SEK FRA rates rise by 50bp while corresponding Euribor contracts remain unchanged.
Nordea