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17 May 2010
FX Forecast Update
More EUR weakness ahead but the worst is likely behind
In several issues of FX Forecast Update we have written about the risk related to the debt Key points
situation in the PIIGS countries. Admittedly however, we did underestimate the impact on
the FX market – not least on EUR/USD. We revised our 3M EUR/USD forecast lower on Following recent weeks extraordinary
28 April to 1.27, see FX Research: The good, the bad and the ugly EUR scenario, but as events in Euroland, we pencil in more
EUR/USD is currently trading below 1.24 – a level not seen since the beginning of 2006 euro weakness. Political risks, lower
– the revision was obviously too modest. See the grey boxes below for a detailed insight rates for longer time and subdued
into EUR/USD going forward. economic growth weigh on the euro.
The EU/IMF/ECB rescue package announced on 9 May resulted in a short relief for the Our EUR/USD, EUR/GBP, EUR/CHF,
euro. European solvency concerns returned and the CDS market continues to price a high EUR/SEK and EUR/NOK profiles have all
probability of a sovereign default in southern Europe. In our view, the package did been revised lower. EUR/USD is however
address a lot problems and ought to remove some of the current risk-premium attached to not projected to fall throughout our
the euro. Perhaps most importantly, no country is allowed to default on liquidity whole forecast horizon.
constraints and ECB has shown its commitment to step in as buyer of last resort in the We remain positive on the Scandies
European sovereign debt markets. The latter should mitigate contagion from Greece to (though global risk sentiment needs to be
other PIIGS countries in respect of the interest rate level and secure the ability to issue monitored) and we continue to see a
debt in the market at a manageable price. The interventions are expected to be sterilised, larger potential for SEK than NOK.
i.e. the monetary base will not be expanded, and are therefore not euro negative by
Forecast table (detailed)
construction. Furthermore, the re-opening of the dollar swap-lines has eased the USD-
shortage in the money market even though the price for dollar liquidity seems 1M 3M 6M 12M
surprisingly high. Finally, the package also showed a strong political commitment, EURUSD 1.22 1.20 1.15 1.27
intended to dampen “euro break-up” risks. USDJPY 94 95 99 102
EURCHF 1.39 1.38 1.37 1.41
We think that EUR remains likely to depreciate further against the dollar on the
EURGBP 0.85 0.84 0.83 0.82
short and medium horizon (3-6 months), although any sell-off in our view will be less
EURSEK 9.60 9.50 9.40 9.20
violent than what we have witnessed in recent months, particularly if the liquidity
EURNOK 7.70 7.65 7.60 7.60
issues are alleviated by the announced measures. There are three main reasons for this:
AUDUSD 0.91 0.92 0.94 0.90
Political risk weighs heavily on the euro. The market remains extremely nervous on NZDUSD 0.72 0.73 0.76 0.72
Euroland debt and focuses on the issues that are not being solved with the rescue USDCAD 1.01 1.00 1.02 1.10
package. There are still significant risks ahead for the European banking sector. EURDKK 7.44 7.44 7.45 7.46
Greece might not default in the near future, but the mark-to-market loss is evident and Links to detailed forecasts:
a deep new recession in Greece is likely to result in new banking losses. EUR/USD - page 4
USD/JPY page 5
Relative rates are expected to favour the dollar relative to the euro throughout
EUR/GBP page 6
the year. While the Fed is gradually escaping from quantitative easing and preparing
EUR/CHF page 7
for a normalisation of monetary policy, the ECB is undertaking substantially more
EUR/SEK page 8
alternative stimulus to an extent we don’t know the scope of yet. Our Interest Rate
EUR/NOK page 9
Strategy team expects the Fed to begin hiking rates in Q1 while the ECB is expected
EUR/DKK page 10
to keep rates on hold until H2 2011. The 2Y swap spread is expected to move around
AUD/USD page 11
40bp in favour of the dollar on the 12-month horizon from the current level, roughly
NZD/USD page 12
corresponding to another 5-7% decline in EUR/USD.
USD/CAD page 13
The substantial fiscal tightening is set to drag heavily on economic growth in
Europe. Investors are accordingly expected to flee to regions with higher expected
returns which can lead to more downward pressure on the single currency.
www.danskeresearch.com
FX Forecast Update
With EUR/USD set to decline on the 3- and 6-month horizon, we find it likely that
EUR/GBP also adjusts lower, albeit to a smaller extent, as sterling often is ‘left in
the middle’. Even though having gained around 4% against the euro this year, the pound
remains significantly undervalued according to for example PPP analysis. The outcome of
the UK election was regarded as positive for the pound by financial markets but the
upcoming fiscal tightening is set to be painful and might curb sterling’s strength as it
crowds out any monetary tightening and decreases economic growth. The latest BoE
Inflation Report was quite dovish and higher UK rates are beyond our forecast horizon.
The UK is in our view likely to be downgraded in Q2, which probably also presents some
downside limit for how low EUR/GBP can go.
The Scandinavian currencies SEK, NOK and DKK have fared well in recent
months, even when the Euroland debt woes spread to other asset classes and
affected risk aversion in a broader sense. Sweden, Norway and Denmark all have
sound fiscal balances and higher rates in H2 are expected to support SEK and NOK
further. We project that both Swedish and Norwegian kroner will perform against the
euro throughout our forecast horizon, albeit at a significantly slower pace than seen in the
past 16 months.
EUR/CHF has moved sharply lower to trade just above 1.40 - the profit target in our
short EUR/CHF recommendation from May 5 and our old 6-month forecast. The
arguments for why the 1.4325 level would prove unsustainable likely also applies to the
current 1.4000 floor – though it probable requires the current negative euro sentiment to
continue. As a result, and since the fundamental strong Swiss franc story remains valid,
we look for EUR/CHF to move even lower in the coming months. We have thus opted to
revise lower our EUR/CHF profile, with an expected 1.37 trough at the 6-month horizon.
We don’t think EUR/USD will continue to decline at the end and beyond our
forecast horizon (12 months) though. As we see it, this is not the beginning of a longer-
lasting dollar appreciation, even though the euro has lost massively in a relatively short
period against the US currency. We focus on three reasons why EUR/USD is likely to
correct towards the current spot level or perhaps even higher in the longer term:
The increased focus on government debt in Europe and the sudden will to
address the problems can turn out to be a very positive thing for the euro.
Despite the diversity among member states, Euroland is ‘only’ running a budget
deficit of 6.6% this year and the debt burden is around 85% of GDP. This is of course
not good – but it is actually lower than in the UK, the US and Japan. UK sovereign
debt to GDP will surpass the Euroland average by 2011, as will the US’s, while
Japan’s is already more than double. The US and UK budget deficits will be in double
digits this year and probably next.
The surprise element can benefit the euro. Currently, investors are almost
universally dooming Euroland and the euro. An ECB hike is not priced into markets
until two years from now while many are strong believers in a robust US upswing. In
FX markets this shows for example in the tremendous amount of short EUR /long
USD positions. But with expectations at extremes, sentiment on EUR/USD can
rapidly change if things do not turn out as planned.
2| 17 May 2010
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FX Forecast Update
DKK 7.44 7.44 7.44 7.45 7.46 0.0 -0.1 0.1 0.1
NOK 7.71 7.70 7.65 7.60 7.60 -0.1 -1.1 -2.2 -3.1
SEK 9.60 9.60 9.50 9.40 9.20 0.1 -1.0 -2.1 -4.4
DKK 6.06 6.10 6.20 6.48 5.87 0.7 2.4 7.1 -2.8
NOK 6.25 6.31 6.38 6.61 5.98 0.6 1.4 4.7 -6.0
SEK 7.81 7.87 7.92 8.17 7.24 0.8 1.5 4.8 -7.1
CAD 1.04 1.01 1.00 1.02 1.10 -2.7 -3.7 -1.8 5.5
AUD 0.88 0.91 0.92 0.94 0.90 4.3 6.1 9.4 6.9
NZD 0.70 0.72 0.73 0.76 0.72 3.0 4.9 9.8 5.8
Source: Danske Markets
3| 17 May 2010
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FX Forecast Update
flow situation and a change in sentiment suggest there is a downside to EUR/USD Forward 1.23 1.23 1.23 1.22
though. We project EUR/USD at 1.20 at 3M, 1.15 at 6M, and 1.27 at 12M. Carry (pips) 3 9 21 48
Key arguments
Source: Danske Markets
On the 3-6 month horizon, we think that:
Political risk will weigh on the euro. Even though the EU/IMF/ECB package is EUR/USD forecast and option implied
substantial, it is not guaranteed that it will work completely as intended. There are probabilities
still significant risks ahead for the European banking sector. Greece might not
default in the near future, but the mark-to-market loss is evident and a deep new 1.6
EUR/USD
1.5
recession in Greece is likely to result in new banking losses. 1.4
1.3
Relative rates are expected to favour the dollar relative to the euro throughout the 1.2
1.1
year. While the Fed is gradually escaping from quantitative easing and preparing 1.0
0.9
for a normalisation of monetary policy, the ECB is undertaking substantially more 0.8
alternative stimulus to an extent we don’t know the scope of yet. Jun Sep
09
Dec Mar Jun
10
Sep Dec Mar
11
90 pct. region Spot (incl. DB forecast)
50 pct. region Forward
The substantial fiscal tightening is set to drag heavily on economic growth in
Europe. Investors are accordingly expected to flee to regions with higher expected Source: Danske Markets
On a 12-month horizon and beyond we think that: EUR/USD and PPP estimate
1.6 1.6
The increased focus on government debt in Europe and the sudden will to address 1.5 1.5
1.4 1.4
the problems can turn out to be a very positive thing for the euro. The US, UK and 1.3
EUR/USD spot
1.3
Japan have fiscal challenges ahead that need to be addressed as well. 1.2 1.2
1.1 1.1
PPP estimate
The US flow situation is negative and the US is running an unsustainably large 1.0 1.0
0.9 0.9
current account deficit, set to widen further in the coming years. In contrast, 0.8 0.8
0.7 0.7
Euroland’s external balances are neutral for the euro. This factor is currently
0.6 0.6
gaining in momentum as competitiveness in Europe is decreasing. 80 85 90 95 00 05 10
The extreme investor positioning, currently hurting the euro, can be reversed. Source: Danske Markets
Key risks
The FX environment is currently very uncertain, which makes any forecasting
extremely difficult. Very little guidance from technical research.
The euro can extend its decline throughout our forecast horizon if Europe is lagging
more behind in economic and monetary terms than thought at present.
4| 17 May 2010
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FX Forecast Update
Indications from the Bank of Japan (BoJ) are that measures will be taken to counteract
any potential excessive strengthening of the yen – either via additional quantitative USD/JPY forecast and option implied
easing or potentially even via intervention on the currency market. The emergency probabilities
BoJ meeting in December indicates that a policy imposed floor exists below
USD/JPY. This reduces downside risks in the pair. 120.0
USD/JPY
110.0
Despite increased concerns about the build-up in government debt in most developed 100.0
economies, the combination of very low interest rates, improving economic activity, 90.0
80.0
and strong company earnings is a very favourable environment for risky assets. We
70.0
remain fairly constructive on the outlook for global equity markets (though significant 60.0
risks remain), which should act to weaken the yen. Jun Sep Dec Mar Jun Sep Dec Mar
09 10 11
90 pct. region Spot (incl. forecast)
A resumption of a Chinese yuan appreciation will most likely weigh on the yen. 50 pct. region Forward
When Singapore recently appreciated its dollar, a broad-based yen selling followed. Source: Danske Markets
The yen is likely to become one of the preferred G10 funding currencies in H2 2010 if
volatility stays low or even declines further. USD/JPY and PPP estimate
Key risks 350 350
300 300
A bigger sell-off in risky assets (triggering a bear-market signal) could imply JPY
250 250
support. The collapse in USD/JPY to 88 on 6 May, when stock markets temporarily
USD/JPY spot
200 200
moved sharply lower, emphasises the still high correlation with risky assets.
PPP estimate
150 150
Despite positive momentum in economic data and an upward trend in risky assets, US 100 100
bond yields have failed to move markedly higher. Continued range-trading in yields 50 50
The yen (more so than the US dollar) is a safe-haven currency and tends to strengthen
Senior Analyst
when risk appetite escalates. Hence, an escalation of the current negative market John Hydeskov
sentiment could trigger a more pronounced drop in USD/JPY. +45 45 12 84 97
johy@danskebank.com
Senior Analyst
Kasper Kirkegaard
+45 45 13 70 18
kaki@danskebank.com
5| 17 May 2010
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FX Forecast Update
We think that market participants will be taken by surprise by the UK’s economic 0.9 0.9
0.8 0.8
performance.
EUR/GBP spot
0.7 0.7
According to PPP analysis, sterling is one of the most undervalued G10 currencies; in PPP estimate
0.6 0.6
contrast, the euro is the most overvalued. This misalignment could persist for some
0.5 0.5
time yet, but a ‘return to valuation’ could come into effect within our forecast horizon.
0.4 0.4
6| 17 May 2010
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FX Forecast Update
Short term: The EUR relief rally following the announcement of the massive EU/ Forward 1.40 1.40 1.40 1.41
IMF/ECB crisis package, announced on 9 May, proved short-lived and EUR/CHF has Carry (pips) -8 -22 -43 -86
since corrected back to trade just above 1.40, where the SNB is allegedly intervening. Source: Danske Markets
As long as EUR is under pressure, CHF is likely to see strong demand. A break below
1.40 cannot be ruled out in the short term, although the SNB will probably seek to
EUR/CHF forecast and option implied
avoid an uncontrolled appreciation of the franc. Should the pressure on the EUR ease,
probabilities
a short-term spike higher in EUR/CHF could be triggered by position unwinding.
1.55 EUR/CHF
1.50
Medium term: The recession in Switzerland has proven milder than first projected – 1.45
also by the SNB – and with the outlook of the economic recovery maturing further in 1.40
1.35
2010, the emergency setting of monetary policy is becoming gradually more 1.30
1.25
inappropriate. We expect the SNB to move further away from using intervention as a 1.20
1.15
monetary policy tool and hike rates before year-end – prior to the first expected ECB
Jun Sep Dec Mar Jun Sep Dec Mar
hike – adding to downside pressure on EUR/CHF. An earlier-than-expected SNB hike 09 10 11
90 pct. region Spot (incl. DB forecast)
in September (or even June) would be likely to take EUR/CHF below our 1.38 forecast. 50 pct. region Forward
Longer term: The ECB is likely to tighten monetary policy more than the SNB (due to Source: Danske Markets
higher underlying price pressures and a more hawkish government council), which
should see underlying flows reverse and take EUR/CHF beyond the 12-month
EUR/CHF and PPP estimate
horizon. Also, current market expectations towards both economic performance and
3.25 3.25
relative monetary policy currently leave more potential for EUR positive ‘surprises’
3.00 3.00
than CHF positive ‘surprises’. We expect the Swiss franc to trade with a smaller 2.75 2.75
2.25 2.25
Key risks 2.00 2.00
1.75 1.75
A sooner-than-expected move away from interventions by the SNB coupled with still 1.50
PPP estimate
1.50
EUR/CHF spot
significant EUR risks could see EUR/CHF break meaningfully below 1.40. 1.25 1.25
1.00 1.00
Escalation of Euroland debt crisis could trigger an uncontrolled drop in EUR/CHF. 80 85 90 95 00 05 10
Uncertainties about the economic recovery remain significant, which coupled with
Source: Danske Markets
absent price pressures (deflation fears) could postpone a move further away from
intervention and secure a floor below EUR/CHF also longer term.
Things to look out for
Speeches by the members of the SNB governing board. SNB Governing Board
member Jean-Pierre Danthine stated on 18 March that “…households and firms
should prepare themselves for a return, sometime in the future, to a world of higher
interest rates, with exchange rates being guided by market forces”. Comments like
this on SNB exit strategies are likely to drive franc demand.
If the current economic momentum is sustained in Switzerland, the SNB could hike
interest rates at the September (or even the June) meeting – well before any signalled Senior Analyst
Kasper Kirkegaard
ECB hikes. This would probably see EUR/CHF move well below our current forecast. +45 4513 7018
kaki@danskebank.dk
7| 17 May 2010
www.danskeresearch.com
FX Forecast Update
general election. Meanwhile, debt consolidation will be the main economic-policy 9.0
8.5
issue in many other economies for years to come, especially in southern Europe, US
Jun Sep Dec Mar Jun Sep Dec Mar
and the UK. This is positive for the SEK. 09 10 11
90 pct. region Spot (incl. DB forecast)
50 pct. region Forward
The global economic rebound is set to continue and a no growth-scenario is expected
to be replaced by a slow growth-ditto. This is basically supportive for the pro-cyclical Source: Danske Markets
Swedish currency.
The export recovery will be weaker than normal but still compatible with increasing
commercial demand for SEK. EUR/SEK and PPP
12 12
The Riksbank has with the slightest possible 3-3 majority (Stefan Ingves’ casting EUR/SEK spot
11 11
vote) signalled its intention to move away from crisis-mode monetary policy and raise
10 10
the repo rate to 0.5% on 1 July. In the period ahead of that decision we look, in 9 9
particular, for a much stronger first quarter GDP reading at 1.5% y/y (with an upside 8 PPP estimate 8
tilt) than the Riksbank’s 0.9% y/y forecast; domestic macro data in general supports a 7 7
July hike and that is our main scenario. The multi-facetted problems in southern 6 6
Europe and contagion effects might postpone the first rate hike and/or reduce the 5 5
amount of monetary tightening going forward though. That said, on a relative basis 4 4
80 85 90 95 00 05 10
the Riksbank will outhike the ECB and close the policy gap by year end. At the end of
the day, the SEK is the winner in the monetary policy game. Source: Danske Markets
Early summer has historically been associated with rising EUR/SEK volatility. Note: The EUR/SEK PPP model deviates from the
other G10 PPP models, as we have added a trend
Key risks: to the SEK REER series
Global risk aversion (might delay SEK rebound); softer Riksbank (delay SEK
rebound); sharp EUR sell-off (prompt faster SEK appreciation than forecast).
8| 17 May 2010
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FX Forecast Update
interest rate should be gradually brought closer to a more normal level. Norges Bank
highlighted the strong housing market as an argument for hiking rates. However, EUR/NOK forecast and option implied
Norges Bank also said that developments in Europe may prove to be weaker than probabilities
expected, underlining that the European debt crisis has also impacted Norway.
9.25
We expect that Norges Bank will continue to hike rates gradually for the next 12 9.00 EUR/NOK
8.75
months. Hence, with the ECB on hold, we forecast that relative rates will continue to 8.50
8.25
favour the NOK. That said, undoubtedly Norges Bank will not tolerate a too-strong 8.00
7.75
currency. 7.50
7.25
7.00
The PMI indicator has finally moved above the 50 level and the enterprises in the 6.75
“Regional Network” expect moderate growth ahead. Real income growth is high, the Jun Sep Dec Mar Jun Sep Dec Mar
09 10 11
90 pct. region Spot (incl. DB forecast)
unemployment rate is low and the housing market is improving. The Norwegian 50 pct. region Forward
savings rate is very high, minimizing the risk of a new spike in savings. The revised Source: Danske Markets
budget for 2010 indicated that amid the marginally lower oil spending initially
planned the budget is still very expansive.
EUR/NOK and PPP
Norwegian fundamentals are second to none with huge trade and public surpluses and
10.0 10.0
an outstanding credit rating. We believe investors will look for currencies with strong 9.5
EUR/NOK spot
9.5
9.0 9.0
fundamentals in 2010, not least because of the debt problems in many countries. But
8.5 8.5
note that EUR/NOK is now trading below fair value implied by a simple PPP model 8.0 8.0
7.5 7.5
underlining that the downside potential is limited despite strong fundamentals. PPP estimate
7.0 7.0
6.5 6.5
The NOK is in general expected to get support from oil that is expected to trade in a 6.0 6.0
USD80-100 range for the rest of 2010. The higher oil price indicates that over the 5.5 5.5
5.0 5.0
coming months Norges Bank will once again start to purchase foreign currency on 80 85 90 95 00 05 10
9| 17 May 2010
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FX Forecast Update
the coming months before drifting back toward central parity on a 12M horizon. We
Forward 7.44 7.44 7.43 7.43
project 7.44 at 3M, 7.45 at 6M, and 7.46 at 12M. Carry (pips) 12 36 65 132
Source: Danske Markets
Our base case scenario is that the repo-rate spread between Denmark and Euroland
will stay at 5bp throughout our forecast horizon. In the event of additional inflow in
the short run, we expect the Danish central bank to cut the deposit rate and current
EUR/DKK spot rate
account rate by 10bp each, but leave both the lending and discount rate unchanged. In
7.480 EUR/DKK EUR/DKK 7.480
the event of a very rapid liquidity withdrawal in Euroland, independent Danish rate Higher 'de facto' fluctuation band (-0.5%)
7.470 7.470
hikes cannot be ruled out. Central parity
7.460 7.460
strong dedication to keeping EUR/DKK very stable and preferably slightly lower than
the central parity. Source: Danske Markets
10 | 17 May 2010
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FX Forecast Update
50bp hikes in 12 months), we see potential for renewed AUD support from relative
rates in the short term. AUD/USD forecast and option implied
The Fed is unlikely to raise the policy rate before early 2011. Hence, relative probabilities
monetary policy is expected to remain AUD-favourable on a 3-6 month horizon. 1.05 AUD/USD
1.00
0.95
Australia has been among the economies most sheltered from the global recession and 0.90
0.85
we expect the cyclical position of the Australian economy to continue to justify an 0.80
0.75
0.70
overvalued level in AUD/USD throughout the forecast horizon. 0.65
0.60
A continued improvement in the global growth outlook should support commodity 0.55
Indications that the Fed will tighten monetary policy are likely to mark a turnaround
in the bullish AUD/USD trend. We expect a narrowing of the AUD/USD interest rate AUD/USD and PPP estimate
differential by late 2010 to put downside pressure on AUD/USD (just as in December 1.4 1.4
1.3 1.3
2009) and take the pair away from, by long-term measures, very overvalued territory. 1.2 1.2
1.1 1.1
Risks are that this could materialise sooner than expected. A key test will be the 1.0 1.0
0.9 PPP estimate 0.9
reaction once the Fed removes the ‘extended period’ phrase from its monetary policy 0.8 0.8
0.7 0.7
statement. 0.6 AUD/USD spot 0.6
0.5 0.5
Key risks 0.4
76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
0.4
Risky assets should remain supported by the easy global monetary policy setting and Source: Danske Markets
improving economic data. However, should the Euroland debt crisis trigger a more
pronounced and longer-lasting sell-off, we would expect AUD/USD to move much
lower.
Our China economists are looking for an imminent revaluation of the Chinese
Renminbi. Should this prove negative for global risk sentiment, we could see
AUD/USD move lower.
More front-loaded hikes by the RBA, potentially coinciding with a more dovish-than-
expected Fed, could see AUD/USD move well above our current forecast and towards
parity.
Things to look out for
Senior Analyst
AUD/USD is trading at highly overvalued levels when benchmarked against long- Kasper Kirkegaard
term valuation measures (PPP estimate stands at 0.75). +45 4513 7018
kaki@danskebank.dk
11 | 17 May 2010
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FX Forecast Update
Senior Analyst
Kasper Kirkegaard
+45 4513 7018
kaki@danskebank.dk
12 | 17 May 2010
www.danskeresearch.com
FX Forecast Update
remains positive, we look for USD/CAD downside to unfold further. Spot change 1.4% 2.7% -0.5%
Our forecasts are unchanged: 1.00 (3M), 1.02 (6M) and 1.10 (12M).
Forecast and option implied
Key arguments confidence regions
Given the strength of recent Canadian economic data (e.g. the April jobs report 1.30 USD/CAD
showing 109k jobs added), the removal of the conditional commitment for unchanged 1.20
rates and the fact that the latest BoC statement called for a lessening of the degree of 1.10
1.00
stimulus, a hike on 1 June seems highly likely. This is likely to be the first in a series
0.90
of rate hikes and even though pricing is already aggressive, we look for the
0.80
confirmation of the beginning of the hiking cycle to give further support to the CAD. Jun Sep Dec Mar Jun Sep Dec Mar
09 10 11
90 pct. region Spot (incl. DB forecast)
There are other factors pointing to the CAD remaining strong in the coming months. 50 pct. region Forward
First, given the prospects of global central banks keeping rates low for some time to Source: Danske Markets
come, risky assets could have further upside potential, boding well for the cyclical
CAD. Second, the Canadian economy is in better shape than the US, with stronger
labour and housing markets and a less severely hit banking sector. Also, Canada has USD/CAD and PPP estimate
much healthier balances, despite the slight government budget deficit. 1.7 1.7
1.6 1.6
A significant move below parity could prove difficult: positioning data (IMM) points 1.5
USD/CAD spot
1.5
1.4 1.4
to short USD/CAD being an increasingly crowded trade. Also, we see limited 1.3 1.3
1.2 1.2
potential for relative interest rates to move further in favour of the CAD, given that 1.1
PPP estimate
1.1
1.0 1.0
roughly 170bp of tightening has already been priced in on a one-year horizon. Finally, 0.9 0.9
the pair is trading at stretched levels relative to long-term valuation (PPP estimate: 0.8 0.8
76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
1.16).
Source: Danske Markets
Key risks
As a pro-cyclical currency, CAD remains exposed to changes in general market
sentiment and usually suffers if equities are sold off.
The pair will also be exposed to hints of an earlier-than-expected tightening of the Fed
monetary policy. However, the BoC will most likely move first.
Things to look out for
BoC meeting on 1 June: The BoC has recently moved away from the previous
commitment to unchanged rates until Q3. While BoC Governor Carney has stressed
that “nothing is pre-ordained”, recent strong Canadian data should give the bank
plenty of reasons to hike on the next occasion.
The outlook for the price of oil, given the close negative correlation with USD/CAD. Senior Analyst
Sverre Holbek
+45 45 14 88 82
holb@danskebank.dk
13 | 17 May 2010
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FX Forecast Update
14 | 17 May 2010
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FX Forecast Update
Disclosure
This research report has been prepared by Danske Research, which is part of Danske Markets, a
division of Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory
Authority.
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of
high quality research based on research objectivity and independence. These procedures are
documented in the Danske Bank Research Policy. Employees within the Danske Bank Research
Departments have been instructed that any request that might impair the objectivity and independence
of research shall be referred to Research Management and to the Compliance Officer. Danske Bank
Research departments are organised independently from and do not report to other Danske Bank
business areas. Research analysts are remunerated in part based on the over-all profitability of Danske
Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration
linked to specific corporate finance or debt capital transactions.
Danske Bank research reports are prepared in accordance with the Danish Society of Investment
Professionals Ethical rules and the Recommendations of the Danish Securities Dealers Associations.
Risk warning
Major risks connected with recommendations or opinions in this research report, including as
sensitivity analysis of relevant assumptions, are stated throughout the text.
Disclaimer
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15 | 17 May 2010
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