Both the speed and the size of the move in the USD have surprised us over the past month. We nonetheless still see plenty of factors in favour of a stronger USD (and a weaker EUR). In the near term, QE speculation will depress the EUR, while real rates will boost the USD over the long-term. We now see EUR/USD at 1.24 in 3M and at 1.20 by the end of next year.
In strong USD we trust. Both the speed and the size of the move in the USD have surprised us over the past month. We nonetheless still see plenty of factors in favour of a stronger USD (and a weaker EUR). In the near term, QE speculation will depress the EUR, while real rates will boost the USD over the long-term. We now see EUR/USD at 1.24 in 3M and at 1.20 by the end of next year.
The GBP will remain supported vs the USD in the near term, as markets will continue to speculate that BoE will be the first central bank to lift interest rates (our official call is that it will wait until Q2), or close to when Fed hikes rates. Consequently, broad USD strength will not spill over to GBP/USD, leaving it around 1.6300. The BoE’s ‘bar’ for wage growth has been lowered markedly, to a 1.25% y/y growth forecast for this year), so risks are now for positive surprises. Yet our EUR/USD call on monetary policy divergences leaves the EUR/GBP weaker in the 3M, just as in further horizons – 0.74 at the end of 2015.
We also adjusted JPY forecasts, seeing it weaker over time, both vs the USD and vs the EUR. USD/JPY at 115 by the end of 2016, and EUR/JPY to 144 by the end of 2016,. So far this summer the JPY has been more of a “strong USD” story than a domestic story, as EUR/JPY and USD/JPY have diverged. But going forward, domestic factors will come into play again. Recent data disappointments are not to be sustained, and the tight labour market should support inflationary pressures going forward, which will be positive for Japanese equities but negative for the JPY.
We reiterate our view that the trend is your friend in the EUR/SEK, as three risk premias are likely to underpin the cross in coming months: 1) the risk of another rate cut from the Riksbank in conjunction with the October or December meetings, 2) the risk of a government crisis due to the current “parliamentary nightmare” as well as 3) the potential for a net-dovish surprise from Financial Stability Council in November. As for 2015-2016, the SEK is likely to reassert itself on the back of a marked rise in inflation. Our forecasts are unchanged: 9.30 in 3 months and 8.70 in 2 years’ time.
There should be downside potential in EUR/NOK on the back of a weak Euro, but Norwegian conditions might also argue in the same direction. Lending rates are likely to be cut after a period of high margins. This will tend to boost Norges Bank’s rate path. Another hawkish contribution could come from the central bank’s forecast for a stronger NOK. If NOK stays at today’s level it will be close to 3% weaker than Norges Bank’s forecast for the beginning of next year. All else equal we might then be heading for another hawkish meeting in December. Further out it seems likely that Norwegian growth will be a disappointment which should limit the potential of a EURNOK far below 8.00.
Commodity currencies will remain under “double whammy” pressure. As volatility builds, “high” yielders are likely to suffer. Both tails for the world economy are negative for commodity currencies: if growth disappoints, commodity prices drop; and vice versa, if US growth keeps humming along, USD rates will keep rising, re-pricing the Fed outlook which would be bad for commodity FX. Our baseline is the latter. In particular, the NZD and AUD are vulnerable due to exposure to overleveraged Asian EMs. We see these currencies around 10-15% weaker in 2 years, with most of the weakness being upfront (ahead of the Fed).
We adjusted most EM FX forecasts in a weaker direction earlier this month. However, the pace of – and for some currencies also the extent of – weakening has been a surprise to us. We therefore adjust a number of EM FX forecasts weaker to maintain a profile of general weakening in 3 months and towards mid-15 with higher US bond yields as the main driver. We keep the end-15 and end-16 roughly unchanged and determined by fundamentals.
More specifically, we adjust the USD/RUB forecast to 38.5 in 3M and 37.0 in mid-15 due to a shortage of USD and EUR in Russia and uncertainty related to the Russia/Ukraine war. However, barring a further escalation of the crisis we expect the RUB to be stronger in 3M. We adjust the 3M USD/BRL forecast to 2.45 after a massive weakening during September. Further weakening could be in store in the very near term, but we believe we are close to the top of the cross, as the BCB has stepped up interventions and the presidential elections will be over within a month. We also lifted our 3M forecasts for USD/CNY, USD/INR, USD/ZAR, USD/MXN and EUR/TRY.
Nordea