FX Forecast Update - Danske Bank · US outperformance heading into 2014. •Monetary policy. With the Fed set for QE tapering around new year (likely December) and the ECB keen to

Investment Research

www.danskebank.com/CI

FX Forecast Update 15 October 2013

Scandi upside limited in the near term

Arne Lohmann Rasmussen Chief Analyst, Head of Rates, FX and Commodities Strategy Kasper Kirkegaard Stefan Mellin Stanislava Pravdová-Nielsen

Senior Analyst Senior Analyst 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 33 of this report.

2 www.danskebank.com/CI

Main forecast changes

• The FX market continues to trade on US policy: timing of Fed tapering of QE and the outcome of the budget and debt ceiling talks in Congress. Notwithstanding the blurred picture caused by the policy situation, we have kept

our EUR/USD profile unchanged (compared with the interim FX Forecast Update as of 23 September 2013) and continue to see Fed tapering marking the start of a USD uptrend that could continue throughout 2014. This is conditional on a scale-back in QE being announced later this year, but we stress that the likelihood of this being (further) delayed beyond the new year has increased with the uncertain US fiscal situation. In the near term, we still see potential for EUR/USD overshooting driven by markets pushing Fed expectations out in time, ECB inaction and peripherals spread compression continuing. Thus EUR/USD could hit 1.37 on a 1M horizon.

• The combination of the money market scaling back the timing of the first rate hike, euro strength, a peak in UK surprise index and higher EONIA rates means that we now estimate that the low in EUR/GBP was probably

seen in the beginning of October and we forecast a stable EUR/GBP over the next 3-6M. On a 12M horizon, GBP will still be exposed to the most dovish G4 central bank after BoJ though. Hence, we forecast that EUR/GBP will slowly move higher once again in 2014 and that GBP will stay in fundamentally ‘undervalued’ territory in 2014. We have lifted our 12M EUR/GBP forecast to 0.86 (0.84).

• We have revised lower our Scandi FX forecasts as the data flow has weakened the case for rate hikes. While the fundamental backdrop remains constructive for both NOK and SEK, poor liquidity and EUR strength mean that we have lifted our forecast profiles vis-à-vis the single currency somewhat. We still expect EUR/NOK to edge slightly lower as a rate cut is still unlikely and as the market is expected to continue pricing in a rate hike in 2014. But Norges Bank has clearly convinced the market that a significant NOK appreciation will not be tolerated and the latest growth indicators have been weaker than expected. We have therefore raised the

forecast profile for EUR/NOK to 8.00 (7.70) in 3M, 7.90 (7.60) in 6M and 7.80 (7.55) in 12M. Similarly, while the fundamental backdrop remains constructive for the SEK, the case for outperformance in the near term based on relative yields has weakened somewhat. As a result, we have raised our forecast profile for EUR/SEK

marginally, to 8.60 (8.50) in 3M, 8.50 (8.40) in 6M and 8.40 (8.30) in 12M.

http://danskeanalyse.danskebank.dk/abo/FXForecastUpdate230913/$file/FX_Forecast_Update_230913.pdf






Main forecast changes (continued)

• We have kept our JPY and CHF projections largely unchanged this time.

• The postponement of USD strength as a result of delayed tapering of QE implies that carry currencies could see a temporary revival. Consequently, we have lifted our AUD/USD and NZD/USD forecasts somewhat as their

respective central banks have recently invoked a less aggressive stance regarding the strength of their

currencies: RBA is on hold after extensive easing over the past two years whereas RBNZ has said rate hikes are likely in 2014. We now see AUD/USD at 0.93 (0.90) and NZD/USD 0.83 (0.79) in 3M and have become a

little less downbeat on a 12M horizon.

• As some stability has returned to emerging markets (EM) recently, most EM currencies have gained on the

back of improved risk sentiment, and we now see some signs of economic stabilisation in a range of the EM

countries. This is most notable in the CEE countries where the macroeconomic improvements are reflected in the more positive outlook for these currencies. This is however mostly in the short to medium term. On a longer-term horizon, we remain rather bearish as the economic recovery will be very moderate and local central banks will keep the level of interest rates low for long. We have become more positive on the Polish zloty and the

Hungarian forint, mostly on a 3-6M horizon, while we remain bearish on the Czech koruna on all horizons as the

elevated risk of deflation could still push the central bank to start direct FX interventions to ease monetary

conditions further.


Forecast: 1.33 (3M), 1.30 (6M) and 1.27 (12M)

EUR/USD – any upside set to be limited by Fed

• Growth. Economic data continue to surprise on the upside in both the US and the eurozone but momentum has clearly been fading in both regions lately. We expect US outperformance heading into 2014.

• Monetary policy. With the Fed set for QE tapering around new year (likely December) and the ECB keen to stress that rates will be kept low for an ‘extended period’, relative monetary policy is set to become a key source of downside for EUR/USD in the medium term.

• Flows. The euro-zone current account surplus continues to rise, while the US is stuck with a deficit. The combination of the ECB’s OMT programme and the eurozone escaping recession should help attract capital again. Trading accounts are likely still long EUR.

• Valuation. EUR/USD is not far from its PPP level. Also, our short-term models suggest that fair value for the cross is close to 1.35 at present.

• Risks. A prolonged US government shutdown could weigh on H2 activity data and/or provide the Fed with little visibility on the economy and postpone tapering as key releases are cancelled; this could weigh on USD. ECB may fail to react should short-end eurozone rates rise further as excess liquidity falls; this would support EUR.

4

Conclusion. While improving in both regions, the relative growth outlook is eventually set to support the Fed moving away from extremely accommodative policy measures long before the ECB. This should set the scene for a cyclical USD uptrend, as the Fed will be looking to hike rates ahead of its eurozone counterpart. However, in our view, H2 will be dominated by both EUR and USD short-end rates having limited potential to increase further in the near term. Thus, we expect to see EUR/USD range-trading for the remainder of 2013.

Source: Danske Bank Markets

Christin Tuxen, Senior Analyst, [email protected], +45 45 13 78 67

EUR/USD 1M 3M 6M 12M

Forecast (pct'ile) 1.37 (77%) 1.33 (29%) 1.30 (21%) 1.27 (21%)

Fwd. / Consensus 1.35 / 1.34 1.35 / 1.32 1.35 / 1.30 1.35 / 1.28

50% confidence int. 1.33 / 1.37 1.32 / 1.38 1.31 / 1.40 1.29 / 1.42

75% confidence int. 1.32 / 1.38 1.30 / 1.40 1.27 / 1.43 1.22 / 1.47

1.20

1.30

1.40

1.50

Oct-12 Jan-13 May-13 Aug-13 Nov-13 Feb-14 Jun-14 Sep-14

EUR/USD

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


EUR/USD – important issues to watch

• US fiscal situation and USD

− The strained situation surrounding US government finances at present has so far failed to induce a significant move in USD. Indeed, it is not clear what the net effect of the current government shutdown and the upcoming debt ceiling should mean for the greenback:

− While the government shutdown should have only temporarily negative effects on the US economy, it does have the potential to delay Fed tapering beyond December – not least due to the fact that many key releases are postponed.

− The debt ceiling and the (small but not negligible) risk of a US government default could lead investors to seek the safe haven of USD.

• ECB vs Fed messages

− At its October meeting the ECB failed to commit to take

any concrete measures (such as a new LTRO) should EUR rates again start to edge higher following the recent significant drop in euro-zone excess liquidity. The risk of no ECB reaction could support EUR in the near term.

− The September Fed minutes revealed that the FOMC

was split on the decision not to taper and that a mix of both Treasuries and MBS is likely once a scale-back in purchases is announced. Thus tapering is indeed around the corner which could support USD towards year-end.

Fed balance sheet vs eurozone excess liquidity

EUR/USD short-term financial model

Source: Reuters EcoWin, Danske Bank Markets



+/- 2 stdev Model estimate Spot

Oct12

Nov Dec Jan13

Feb Mar Apr May Jun Jul Aug Sep Oct

1.225

1.250

1.275

1.300

1.325

1.350

1.375

1.400

1.225

1.250

1.275

1.300

1.325

1.350

1.375

1.400

EUR/USD EUR/USD

08 09 10 11 12 130.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0

100

200

300

400

500

600

700

800

900

Fed balance sheet >>

<< Euro-zone excess liquidity USD bnEUR bn


Forecast: 0.84(3M), 0.85(6M) and 0.86 (12M)

EUR/GBP – GBP euphoria running out

• Growth. The recovery continues to gain traction in the UK with Q2 GDP printing 0.6% q/q and Q3 on track for a 0.8% q/q reading according to the latest NIER estimate. However, very recently we have seen a tendency for UK numbers to disappoint partly reflecting that expectations are now very high. The UK data surprise index has only trended lower for one and half months now.

• Monetary policy. The ‘forward guidance policy’ has now officially been presented. The BoE does not intend to raise the Bank Rate from its current level of 0.50% at least until the unemployment rate has fallen to a threshold of 7%, which is expected to happen in three years’ time. However, due to the strong numbers, the market is pricing in a rate hike much earlier. Note though that pricing has become less aggressive over the past month. Hence, relative rates are no longer as GBP positive as was the case earlier.

• Flows. The less dovish BoE could fuel inflows into GBP.

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

• Risks. The strong numbers in the UK currently make a breach of one or more of the ‘knockouts’ more likely. If that happens, a more pronounced GBP appreciation than we forecast could occur. However, there is more room for economic surprises in the eurozone now.

6

Conclusion. The combination of the money market scaling back the timing of the first rate hike, euro strength, peak in UK surprise index and higher EONIA rates means that we now estimate that the low in EUR/GBP probably was seen in the beginning of October and we forecast a stable EUR/GBP over the next six months. On a 12M horizon, GBP will still be exposed to the most dovish G4 central bank after BoJ. Hence, we forecast that EUR/GBP will slowly move higher once again in 2014 and that GBP will stay in fundamentally ‘undervalued’ territory in 2014.

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


EUR/GBP 1M 3M 6M 12M

Forecast (pct'ile) 0.85 (55%) 0.84 (36%) 0.85 (51%) 0.86 (57%)

Fwd. / Consensus 0.85 / 0.85 0.85 / 0.84 0.85 / 0.84 0.85 / 0.82

50% confidence int. 0.84 / 0.86 0.83 / 0.86 0.82 / 0.87 0.81 / 0.89

75% confidence int. 0.83 / 0.86 0.82 / 0.88 0.80 / 0.89 0.78 / 0.92

0.75

0.80

0.85

0.90

0.95


EUR/GBP



EUR/GBP – important issues to watch

• Less power for Carney than expected

− The BoE forward guidance implies that the Bank Rate will stay at 0.5% for three years. However, it is constrained not only by the unemployment threshold at 7.0%, but also three ‘knockouts’ based on the outlook for inflation, inflation expectations and financial stability.

• Markets do not believe Carney and BoE

− The recovery in the UK over the summer has surprised most analysts. PMIs in service, manufacturing and construction are booming. House prices are up 4-5% y/y and retail sales are improving. The strong numbers coupled with the knockouts are probably the reason why the rates market is priced for a hike in 2015, despite the forward guidance pointing to the first rate hike being in three years’ time. Carney says that the market pricing reflects divergent views on how quickly the unemployment rate will drop. Note that recently the market has scaled back timing of the first rate hike. ‘Low for longer’ expected to weigh on GBP in 2014.

• UK numbers are strong, but that is also expected

− UK numbers, e.g. housing data, continue to be very strong. But the UK surprise index shows that the market has now ‘adapted’ to this. Hence, GBP support fading.

The UK surprise index has peaked


MPC expects threshold to be reached in Q3 16

Source: Bank of England, Danske Bank Markets

Source: Macrobond, Bank of England, Danske Bank Markets


Forecast: 101(3M), 105 (6M) and 110 (12M)

USD/JPY – near-term range but higher in the long run

• Macro outlook. Economic data out of Japan has disappointed recently, but we continue to expect high growth in coming quarters. In 2014, growth is expected to slow, however, as substantial fiscal tightening is implemented.

• Monetary policy. We expect the Bank of Japan (BoJ) to continue its aggressive QE program into 2015. The current improvement in data and rising inflation rate implies that it is likely to take some setback in economic data for the BoJ to announce new easing measures.

• Valuation. The yen is 13% undervalued against the dollar, according to the Danske Bank G10 PPP model. Misalignments of this size are frequently seen and valuation therefore does not yet appear to be a barrier for yen weakness.

• Risk. The yen has proven one of the most sensitive currencies to US political risks and also expectations about US monetary policy. A postponement of QE tapering into 2014 could see the yen strengthen as trading accounts are very long USD/JPY, according to the latest IMM data (from before the US government shutdown).

8

Conclusion. Japan is expected to have the most currency negative policy mix of the G10 currencies in 2014 (monetary easing and fiscal tightening). This justifies the current undervaluation of the yen and given that the Fed is scaling back on its monetary easing, we expect further upside in USD/JPY.

We target USD/JPY at 101 in 3M and 105 in 6M. Medium to long term, we still expect relative monetary policy to support the case for a higher USD/JPY. We target USD/JPY at 110 in 12M.


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

USD/JPY 1M 3M 6M 12M

Forecast (pct'ile) 99.00 (55%) 101.00 (70%) 105.00 (83%) 110.00 (87%)

Fwd. / Consensus 98.59 / 99.45 98.59 / 101.33 98.59 / 103.16 98.59 / 107.49

50% confidence int. 96.78 / 100.41 95.51 / 101.66 94.06 / 103.04 92.08 / 104.98

75% confidence int. 95.27 / 101.83 92.90 / 104.10 90.36 / 106.47 86.36 / 109.85

78.70

83.70

88.70

93.70

98.70

103.70

108.70

113.70


USD/JPY



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

EUR/CHF – range bound with upside risks

• Growth. The economic recovery in Europe has reduced euro tail risks significantly, which in turn has reduced the downside risks on EUR/CHF. We expect European growth to accelerate further over the coming quarters.

• Monetary policy. Neutral for EUR/CHF.

• Flows. The eurozone current account surplus is improving fast and the combination of the ECB’s OMT programme and an exit from recession should help to attract capital. Some of the recent years’ safe-haven flows into Switzerland might reverse, leaving upside risks on EUR/CHF.

• Valuation. The Swiss franc is about 7% overvalued against the euro, according to Danske Bank’s G10 PPP model and the EUR/CHF fair value level continues to move lower as a result of no inflation in Switzerland.

• Risks. Excess euro liquidity is approaching EUR200m as banks are repaying the three-year LTROs. This leaves upside risks on EUR/CHF via the upside risks on short-term euro money market rates.

9

Conclusion. We continue to expect the 1.20 minimum target to remain in place on the forecast horizon, although high credit growth and positive inflation prints could lead markets in 2014 to begin to speculate about a removal of the floor.

Low European rates and a high current account surplus in Switzerland have kept EUR/CHF range-bound but we see increased upside risks over the coming quarters – although a strong trend higher appears less likely.

Kasper Kirkegaard, Senior Analyst, [email protected] +45 45 13 70 18


EUR/CHF 1M 3M 6M 12M

Forecast (pct'ile) 1.24 (70%) 1.24 (66%) 1.24 (64%) 1.24 (60%)

Fwd. / Consensus 1.24 / 1.24 1.24 / 1.24 1.24 / 1.25 1.23 / 1.27

50% confidence int. 1.23 / 1.24 1.22 / 1.25 1.21 / 1.25 1.19 / 1.26

75% confidence int. 1.22 / 1.25 1.21 / 1.26 1.19 / 1.28 1.17 / 1.30

1.10

1.20

1.30


EUR/CHF



EUR/CHF – important issues to watch

• The SNB 1.20 minimum target

− The 1.20 minimum target has been in place for two years now and as deflation risks still persist in Switzerland, we doubt that it will be removed over the coming quarters.

− However, the 1.20 minimum target is not permanent and eventually inflation will return to Switzerland. M3 growth has reached 10.4% y/y even though the SNB is no longer adding liquidity. This shows that more of the significant amount of Swiss francs that the SNB printed for FX interventions is being lent out and with house prices increasing, consumer prices should too eventually.

− Global inflation remains low, however, which means little imported inflation pressure. Still, we could see markets in 2014 begin to discuss the minimum target’s expiry date.

• CHF and JPY flows appear correlated

− The Swiss franc and Japanese yen have been highly correlated since April, as witnessed by the stable JPY/CHF spot rate. Hence, upside USD/JPY risks imply upside EUR/CHF risks.

High CHF and JPY correlation

Kasper Kirkegaard, Senior Analyst, [email protected], +45 45 13 70 18

Inflation is about to turn positive

Source: Reuters EcoWin


10 11 12 13

-1.25

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

-1.25

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

CPI, Switzerland

% y/y % y/y

Aug12

Oct Dec13

Feb Apr Jun Aug Oct

0.0090

0.0095

0.0100

0.0105

0.0110

0.0115

0.0120

0.0125

0.0130

0.0090

0.0095

0.0100

0.0105

0.0110

0.0115

0.0120

0.0125

0.0130

JPY/CHF spot


Forecast: 8.60 (3M), 8.50 (6M) and 8.40 (12M)

EUR/SEK – less SEK support near term from the RB

• Growth. We have argued for some time that a pick-up in hard data, as suggested by soft data and the rebound in peer economies, would materialise during H2 13 starting in Q3. The response has so far has been muted. It now looks as if GDP Q3 will be softer than previously anticipated albeit with positive sequential growth, admittedly an improvement compared with Q2.

• Monetary policy. Weaker-than-expected hard data and inflation below the Riksbank forecast in combination with increased global (read US) uncertainties, suggest that the first rate hike will not be delivered before late 2014. The Riksbank projects Q4 14 and will come up with a new estimate next week.

• Fundamentals. The fundamental backdrop remains constructive for the medium-term krona outlook.

• Flows. Commercial flows will serve as a backstop against higher EUR/SEK. The structural flows which boosted the SEK in 2011-12 have gone away but not reversed. Currently these flows are sort of neutral.

• Valuation. Both medium term and short term, models suggest EUR/SEK downside potential in EUR/SEK.

• Risks. If the Swedish recovery is not only delayed but cancelled. If the Riksbank majority sides with the doves.

11

Conclusion. Hard activity data and inflation have been softer than anticipated. Markets in general have become more cautious in the wake of the US debt debacle. These factors have led markets to re-price the Riksbank and EUR/SEK. It is fair to expect that the first rate hike will not be delivered before late 2014. The case for SEK outperformance near term based on relative yields appears to have weakened somewhat. We have chosen to raise the forecast profile marginally, to 8.60 (8.50) in 3M months, 8.50 (8.40) in 6M and 8.40 (8.30) in 12M.

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


EUR/SEK 1M 3M 6M 12M

Forecast (pct'ile) 8.85 (70%) 8.60 (29%) 8.50 (25%) 8.40 (24%)

Fwd. / Consensus 8.77 / 8.69 8.78 / 8.58 8.80 / 8.55 8.85 / 8.42

50% confidence int. 8.63 / 8.88 8.56 / 8.96 8.50 / 9.04 8.42 / 9.16

75% confidence int. 8.55 / 9.00 8.42 / 9.14 8.30 / 9.30 8.12 / 9.52

8.00

8.25

8.50

8.75

9.00

9.25

9.50

9.75


EUR/SEK



EUR/SEK – important issues to watch

Riksbank monetary policy decision on 24 October

• We continue to believe that that the scenario with a slowly healing global economy, domestically rising inflation and an improving labour market as well as the fact that house prices and household credit growth are both moving higher will prompt a first hike from the Riksbank in H2 14. The Riksbank majority is still concerned about household debt even though the responsibility for these issues has (in a sense) been delegated to the FSA. Eventually, the Riksbank will hike light years before the ECB. When this is properly priced in, it is an argument for a lower EUR/SEK.

• That said, recent weak activity data and lower-than-projected inflation combined with the increased financial and economic uncertainties related to the US debt ceiling debacle suggest, for now, that if anything the first Riksbank rate hike will come later rather than sooner. The money market and EUR/SEK have been re-priced accordingly. In our base scenario further upside potential stemming from relative yields is limited.

• Rate cut? No. Not likely unless things in the US get really nasty provided that it has a measureable impact on the Swedish growth and inflation outlook. The Riksbank will probably stick to its current rate path on 24 October with a slight probability for a near-term cut and a first hike in Q4 14.

Catch-up in hard data delayed, not cancelled


EUR/SEK and relative yields


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

00 02 04 06 08 10 12

30

35

40

45

50

55

60

65

70

85

90

95

100

105

110

115

120

125

<< Industrial production

Swe PMI >>

okt10 11

feb jun okt12

feb jun okt13

feb jun okt

8,1

8,3

8,5

8,7

8,9

9,1

9,3

9,5

-1,3

-1,1

-0,9

-0,7

-0,5

-0,3<< 2Y swap spread

EUR/SEK >>


Forecast: 8.00 (3M), 7.90 (6M) and 7.80 (12M)

EUR/NOK – markets have become too NOK negative

• Growth. Mainland GDP growth was a disappointment in Q2, growing just 0.2% q/q. Also the latest regional network report was weaker than expected. However, note that the recent PMI and manufacturing production has painted a more upbeat picture. But the housing market is cooling down now.

• Monetary policy. Despite the significantly weaker NOK and higher core inflation, Norges Bank only lifted its rate path by approximately 20bp in 2014 in the September Monetary Policy Report. Norges Bank now longer sees a probability of a rate cut this autumn and has pencilled in the first rate hike in 12 months’ time. We find the Norges Bank path fair. If anything, risks are still tilted towards more dovish rhetoric from Norges Bank.

• Flows. Norges Bank is currently purchasing a very modest amount of foreign currency. We have also seen less foreign interest for NGBs this year. Note that according to the weekly flow data, speculators have strongly scaled down long NOK positions this year.

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

• Risks. The very poor liquidity in the Norwegian krone and soft rhetoric from Norges Bank.

13

Conclusion. We expect EUR/NOK to edge slightly lower as a rate cut is now unlikely and as the market is expected to continue pricing rate hikes in 2014. However, Norges Bank has clearly convinced the market that a significant NOK appreciation will not be tolerated and the latest growth indicators have been weaker than expected. We strongly doubt we will see the 2012 lows in EUR/NOK again and the risk of a further NOK sell-off should not be neglected.



EUR/NOK 1M 3M 6M 12M

Forecast (pct'ile) 8.05 (40%) 8.00 (36%) 7.90 (30%) 7.80 (27%)

Fwd. / Consensus 8.13 / 8.00 8.15 / 7.83 8.18 / 7.69 8.23 / 7.59

50% confidence int. 7.97 / 8.25 7.90 / 8.33 7.84 / 8.42 7.77 / 8.55

75% confidence int. 7.88 / 8.38 7.77 / 8.53 7.65 / 8.70 7.50 / 8.93

7.25

7.50

7.75

8.00

8.25

8.50

8.75

9.00


EUR/NOK



EUR/NOK – important issues to watch

• Core inflation back below Norges Bank forecast

Over the summer we saw a surprise spike in Norwegian core inflation. The CPI-ATE measure jumped to 1.8% y/y in July and 2.5% in August. However, the spike turned out be temporary and the core measure dropped to 1.7% in September. One reason why inflation dropped was lower imported inflation. But given the recent weakening of the NOK we doubt the trend is now for even lower inflation. But the Norges Bank view that the spike in inflation was temporary was confirmed.

• Only a small upward revision of the rate path in September

The September rate path contained only a small upward revision of the rate path despite the weaker NOK and the higher inflation over the summer. Norges Bank assumed that the NOK would appreciate and that inflation would drop back. Core inflation has now dropped to 1.7% y/y, but the import-weighted NOK is now more than 4% weaker than presumed by Norges Bank in September. Norges Bank continues to evaluate numbers in a ‘dovish way’.

• Countercyclical buffer introduced

The Ministry of Finance has introduced the countercyclical buffer for the banks. We doubt it will have an impact on monetary policy and the NOK as the banks have already prepared themselves for the new rules.

The NOK weaker than assumed by Norges Bank

Source: Bloomberg, Macrobond

Core inflation now below the Norges Bank path

Source: Macrobond, Danske Bank Markets



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

EUR/DKK – stable just below central parity

• FX. Since Danmarks Nationalbank (DN) hiked interest rates on 24 January, EUR/DKK has been relatively stable slightly below the central rate and DN has not needed to intervene in the FX markets to support DKK. Hence, we do not expect any immediate rate changes.

• Rates. However, given the continued move higher in EONIA rates and subsequent negative carry on long DKK positions in the FX market, we now expect two 10bp rate increases on a 12-month horizon, which would leave the lending rate at 0.40% and return the rate on certificates of deposit to positive territory at 0.10%. The market is more aggressively priced.

• Flows. In 2012 DKK was well supported by safe-haven flows into Denmark. However, early summer we saw the first indications that these flows have reversed. The foreign ownership of Danish T-bills dropped 66 % in June. However, the past two months’ net purchase of treasury bills by foreign investors has more or less evened out the June sell-off. Of the total stock 86% is now held abroad. Foreign investors net purchased DKK-denominated bonds in August for the second consecutive month. Foreign investors now hold 17.4% of the total stock – up from 16% last year. The Danish current account surplus is currently at a record high. Relative to GDP the surplus is currently above 6% – the largest surplus recorded in more than 60 years. The surplus mitigates to a certain degree the negative carry on DKK.

15

Conclusion. We do not expect a new depreciation trend for DKK despite rising EONIA rates and indications of less demand for Danish bonds over the summer. Any move above the central parity will be firmly offset by DN through intervention and rate hike(s). Hence, we expect a very stable EUR/DKK over the next 12 months.

Given our constructive view on the eurozone, we strongly doubt that EUR/DKK will move below 7.445 over the next 12 months.

EUR/DKK Spot 7.46038

07 08 09 10 11 12 13

7.430

7.435

7.440

7.445

7.450

7.455

7.460

7.465

EURDKK

Central parity




EUR/DKK forwards – reduced discount in the short end

• The 1M forward discount in EUR/DKK has recently widened after the significant tightening seen in August. The widening reflects once again that rising EONIA rates have not been mirrored in higher CITA rates in the very short end of the money market curve and as ‘the basis’ has widened. Longer-dated forwards have been much more stable, as the Danish CITA curve has steepened in line with the EONIA curve.

• We do not expect a full normalisation (short-dated CITA rates trading above EONIA rates) in the next 12 months. We thus recommend hedging EUR assets/income using 6-12M tenors to avoid the more negative carry in the very short end of the forward curve. The recommendation reflects that we believe too many independent Danish rate hikes are priced in the CITA curve, that the risk is tilted to the upside for EONIA rates and that basis will continue to weigh on DKK in the short tenors.

• By using 6-12M tenors, the hedger also avoids being exposed to the risk of (1) an even higher negative carry in the short end that might materialise if EONIA rates continue to move higher and Nationalbanken stays put or (2) if the negative basis for DKK widens further and (3) if e.g. turn effect widens the basis once again. The turn-effect in now visible in e.g. 3M tenors that trade with a higher forward discount than 2M tenors.

Carry in short EUR/DKK positions, bp ann.


Danish CITA curve steeper than EONIA curve

* The chart shows an approximation of 1M CITA and 1M EONIA forward rates



-35

-30

-25

-20

-15

-10

01-04-2013 01-06-2013 01-08-2013 01-10-2013

Implied FX forward spread 1M /bp FX forward spread 3M /bp

FX forward spread 12M /bp


Forecast: 1.05 (3M), 1.06 (6M) and 1.07 (12M)

USD/CAD – BoC set to maintain its hawkish bias as Fed exits

• Growth. Canadian data have become a little less dismal following a marked deterioration late summer. The Canadian economy could see a boost from easing credit conditions and a US recovery heading into 2014.

• Monetary policy. The Bank of Canada (BoC) has maintained its overnight lending rate at 1.00% for the past two years. New BoC governor Stephen Poloz has amended the BoC policy statement somewhat but the essence remains unchanged: to the extent that the economy ‘normalises’ as expected, ‘a gradual normalisation of policy interest rates’ is on the cards. We see rates unchanged on a 12M horizon.

• Flows. Speculators remain short CAD but much less than was the case earlier this year.

• Valuation. CAD remains expensive on PPP measures.

• Commodities. We expect oil prices to remain elevated near term but to head lower on a 12M horizon. However, oil production is rising in Canada and this suggests that oil revenue will remain significant.

• Risks. If household sector imbalances fail to evolve constructively, the BoC may have to follow the Fed in scaling back on stimulus earlier than currently expected.

Conclusion. Canada stands to benefit from a US recovery, which we see materialising as 2014 approaches. Recently positive spill-overs to the Canadian economy have been small though and with Fed tapering coming up, support for USD/CAD should remain in place. However, if we are right in projecting a sustainable recovery for both the US and Canada, BoC rate hikes are also moving closer by the day. On the whole, USD/CAD upside should thus be fairly limited from here.



USD/CAD 1M 3M 6M 12M

Forecast (pct'ile) 1.04 (63%) 1.05 (72%) 1.06 (74%) 1.07 (72%)

Fwd. / Consensus 1.04 / 1.04 1.04 / 1.04 1.04 / 1.05 1.05 / 1.04

50% confidence int. 1.02 / 1.05 1.02 / 1.05 1.01 / 1.06 0.99 / 1.08

75% confidence int. 1.02 / 1.06 1.01 / 1.07 0.99 / 1.09 0.97 / 1.12

0.90

1.00

1.10

1.20


USD/CAD



Forecast: 0.93 (3M), 0.90 (6M) and 0.87 (12M)

AUD/USD – RBA to accommodate AUD downside still

• Growth. Data out of Australia have continued to deteriorate recently despite the notable improvements otherwise seen for key trading partner China. Despite some improvement in the September employment report, job creation remains a weak spot.

• Monetary policy. The Reserve Bank of Australia (RBA) kept its cash target rate unchanged at 2.50% in early October. Following the removal of the RBA’s long-standing easing bias in September, the bank is now seemingly on hold, but we would not rule out the need for further cuts on a 12M horizon. Indeed, the RBA has welcomed AUD’s depreciation and has hinted that more may be needed.

• Flows. Speculators remain short AUD, which could limit further downside in the near term.

• Valuation. The recent fall in AUD/USD has brought the pair down to a level where overvaluation is only half of its post-crisis peak.

• Commodities. We see only limited potential for metal prices to move higher from here, as we look for the end of the commodities super-cycle to be around the corner.

• Risks. The summer sell-off in AUD has come about very fast and a near-term correction cannot be ruled out should China and or commodity prices surprise on the upside.

18

Conclusion. With the RBA now on hold and some carry currencies temporarily back in favour, we could see a pause in the AUD downturn. But looking into next year, AUD will have to fall and/or the RBA will need to cut rates to foster the rebalancing of the Australian economy as the mining boom fades. With a USD trough in sight, the potential for AUD/USD to edge lower thus remains in place. On a 3-6M horizon AUD/USD could remain under pressure as the struggling non-mining sector in Australia contrasts with a decent US outlook and the RBA and the Fed are likely to act accordingly.



AUD/USD 1M 3M 6M 12M

Forecast (pct'ile) 0.96 (63%) 0.93 (30%) 0.90 (21%) 0.87 (20%)

Fwd. / Consensus 0.95 / 0.94 0.95 / 0.92 0.94 / 0.90 0.93 / 0.88

50% confidence int. 0.93 / 0.97 0.92 / 0.98 0.91 / 0.98 0.88 / 0.99

75% confidence int. 0.92 / 0.98 0.90 / 0.99 0.87 / 1.01 0.82 / 1.02

0.80

0.90

1.00

1.10


AUD/USD



Forecast: 0.83 (3M), 0.81 (6M) and 0.779(12M)

NZD/USD – RBNZ keen to hike but constrained by NZD

• Growth. New Zealand’s economy has continued to weaken of late. However, the ongoing boom due to the earthquake reconstruction is not expected to peak until 2017.

• Monetary policy. The Reserve Bank of New Zealand (RNBZ) has kept rates at 2.50% since the earthquake-related cut early in 2011. Following a range of warnings since his inauguration, RBNZ Governor Graeme Wheeler has started to intervene to curb NZD strength. RBNZ is struggling with the risks to financial stability of a booming construction sector, whereas the rest of the economy suffers from an overvalued NZD. In September RBNZ explicitly said it was looking to hike rates in 2014 to curb some of the inflationary pressure arising from the booming construction industry.

• Flows. Speculators have turned long NZD after having shortened the kiwi massively earlier in the year.

• Valuation. 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 elevated levels.

• Risks. If the construction boom feeds into inflation, the RBNZ may be forced to hike rates sooner than we currently project.

Conclusion. With house rather than consumer price inflation the key worry for RBNZ at present and Wheeler having revealed his willingness to resort to intervention to curb NZD peaks, upside for the kiwi should be limited from current levels despite the prospect of rate hikes. As for most USD crosses, we see downside in 2014, as USD stands to receive support from a Fed exit at a time when RBNZ remains focused on curbing NZD strength. Relative to the AUD, we see potential in the NZD, with RBNZ looking at hikes and the RBA set to be on hold (if not cut).



NZD/USD 1M 3M 6M 12M

Forecast (pct'ile) 0.85 (70%) 0.83 (43%) 0.81 (33%) 0.79 (33%)

Fwd. / Consensus 0.84 / 0.83 0.83 / 0.81 0.83 / 0.80 0.81 / 0.79

50% confidence int. 0.82 / 0.85 0.81 / 0.86 0.79 / 0.87 0.77 / 0.87

75% confidence int. 0.81 / 0.87 0.78 / 0.88 0.75 / 0.89 0.71 / 0.91

0.70

0.80

0.90

1.00


NZD/USD



Forecast: 4.10 (3M), 4.15 (6M) and 4.25 (12M)

EUR/PLN – improving economy to support PLN

• Growth. Both the manufacturing PMI index and industrial production have picked up recently and it looks as though the softer stance from the Polish central bank (NBP) is starting to have an effect. Q2 GDP data showed a mild pick-up in growth to 0.8% y/y. Although the economy remains weak, there are some sighs of improvement.

• Monetary policy. Polish growth remains weak and inflation is well below the central bank’s 2.5% target so there is clearly room for further monetary easing. However, it is very clear that the Polish central bank is done with monetary easing as it thinks it has done enough. The NBP made it clear to the markets that further rate cuts should not be expected. While we think monetary easing is warranted in Poland, we also think that the NBP is not about to change its mind on this issue. As a result, we now believe it will keep rates unchanged in the coming 12 months but risks are to the downside.

• Valuation. PLN is trading close to its fair value level, so valuation is unlikely to pose any significant hindrance to its continued near-term appreciation.

• Risks. The biggest risk to PLN is weak growth in the Polish economy and the need for further monetary easing.

20

Conclusion. Some stability has returned to the emerging FX markets recently and we see some signs of stabilisation or even improvement in the economy, which in our view should provide some support for the zloty, particularly on the short- to medium-term horizon (3-6M). That said, the economy will remain relatively weak over the next couple of years, which means that the Polish central bank will keep interest rates low for long. Low level of interest rates will weigh negatively on the zloty, especially on the long-term horizon.

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


EUR/PLN 1M 3M 6M 12M

Forecast (pct'ile) 4.15 (32%) 4.10 (24%) 4.15 (41%) 4.25 (56%)

Fwd. / Consensus 4.19 / 4.19 4.21 / 4.19 4.23 / 4.14 4.28 / 4.09

50% confidence int. 4.13 / 4.24 4.10 / 4.28 4.07 / 4.33 4.02 / 4.41

75% confidence int. 4.10 / 4.29 4.04 / 4.37 3.97 / 4.46 3.87 / 4.62

3.80

4.00

4.20

4.40

4.60

4.80


EUR/PLN



Forecast: 290 (3M), 290 (6M) and 292 (12M)

EUR/HUF – risk-on sentiment helps the HUF

• Growth. Domestic demand remains very weak, which together with subdued export growth weighs on the economic activity. However, there are some signs that the economy has stabilised and it seems to be finally out of recession. We expect the economy to expand 0.4% this year, 1.2% in 2014 and 1.5% in 2016. Hence, the GDP growth will remain under its potential over the next three years.

• Monetary policy. The Hungarian central bank (MNB) has initiated a policy of baby step rate cuts. Hence, at the last Monetary Council meeting in September it was decided to cut the key policy rate by 20bp to 3.60%. We expect the MNB to continue this policy and we expect yet another 20bp rate cut at the Monetary Council meeting in October. That should bring the key policy rate down to 3.40%.

• Valuation. Inflation could become a valuation issue in the medium term but the risk has eased lately.

• Risks. The biggest risk to HUF clearly remains the political uncertainty in Hungary and the risk that the Hungarian government will once again make a ‘misstep’ in economic policy.

21

Conclusion. HUF has rebounded recently on the back of the favourable risk sentiment towards the EM markets. As long as the risk-on sentiment remains intact and the economy keeps recovering, HUF should keep getting support on the short- to medium-term horizon. On the longer-term horizon HUF should be supported by positive external balances as Hungary is expected to run a current account surplus.


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

EUR/HUF 1M 3M 6M 12M

Forecast (pct'ile) 295.00 (50%) 290.00 (31%) 290.00 (41%) 292.00 (52%)

Fwd. / Consensus 295.61 / 297.78 295.62 / 299.50 295.63 / 296.67 295.67 / 292.93

50% confidence int. 291.56 / 298.62 288.19 / 300.39 284.37 / 302.16 277.46 / 304.53

75% confidence int. 288.65 / 302.18 283.58 / 306.91 277.21 / 312.10 265.98 / 319.49

266.00

276.00

286.00

296.00

306.00

316.00


EUR/HUF



Forecast: 26.0 (3M), 26.0 (6M) and 25.6 (12M)

EUR/CZK – deflation risks have increased

• Growth. The Czech economy remains sluggish and the outlook is not very positive. However, there are tentative signs of stabilisation. As the global economy recovers, the Czech economy should start to recover as well, albeit very slowly and not before next year at the earliest. We have revised our GDP forecast in a slightly more positive direction. We now expect GDP to contract by 1.0% y/y this year (previously -1.8% y/y) and to grow by 1.6% y/y in 2014 (previously +0.6% y/y).

• Monetary policy. The key policy rate is at a technical zero of 0.05% and for further easing the CNB would use direct FX interventions. At the latest board meeting some of the CNB board members called for imminent koruna sales but the majority again outvoted the doves, stating that there is no need for further monetary easing and hence no need for koruna sales as the risk of deflation is low. But recent inflation clearly shows that the risk of deflation increases considerably and in our view further easing is quite urgent. That said, we do not expect the CNB to start intervention any time soon but given the relatively sharp fall in inflation, the CNB will most likely step up its verbal intervention.

• Debt risks are low. The Czech government forecasts the public finance deficit will be below 3% this year.

• Valuation. From a long-term perspective, the CZK is undervalued (fair value is around 23.8 against the EUR).

• Risks. Intervention risks in connection with further monetary easing.

22

Conclusion. CZK has strengthened recently on improved global risk sentiment and moved to around EUR/CZK 25.55 – a level way too strong to be welcomed by the central bank. Despite the economy seeming to show some signs of stabilisation, inf lation continues to fall and the risk of deflation is rising. However, this does not mean that the CNB will start FX interventions any time soon given that the majority of the CNB board does not see the need for further easing. At this moment verbal intervention seems very likely in the near future. That said, given the increasing deflationary risks, we cannot rule out that the CNB will be forced to start direct FX interventions. We therefore remain bearish on CZK on all forecast horizons.


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

EUR/CZK 1M 3M 6M 12M

Forecast (pct'ile) 25.70 (68%) 26.00 (79%) 26.00 (75%) 25.60 (60%)

Fwd. / Consensus 25.61 / 25.65 25.61 / 25.78 25.61 / 25.68 25.61 / 25.45

50% confidence int. 25.37 / 25.76 25.18 / 25.88 24.98 / 25.99 24.67 / 26.14

75% confidence int. 25.23 / 25.99 24.94 / 26.28 24.62 / 26.57 24.11 / 26.98

24.10

24.60

25.10

25.60

26.10

26.60


EUR/CZK



Forecast: 42.80(3M), 43.10 (6M) and 44.25 (12M)

EUR/RUB – fragile future under US uncertainties

• Growth. Russian economic growth continues to disappoint, expanding 1.2% y/y in Q2 13 and just 1.6% in H1 13. We expect H2 13 to deliver a better performance due to decelerating inflation and expansion in fixed investments, but cut our 2013 forecast by 40bp to 1.8%.

• Monetary policy. The Russian central bank left its main rates unchanged again in October 2013 claiming its key rate to be the one-week auction rate (5.50) and not the refi rate (8.25). We expect Bank Rossii to cut its main rates by 25bp in November 2013 on CPI’s slowdown.

• Flows. The Russian authorities shifted the outflows forecast from USD50bn to USD67bn in 2013. Bank Rossii wrote in August 2013 that ‘continuing private capital outflows in H2 13 will create additional pressure on the RUB’.

• Valuation. EUR/RUB is trading slightly above its 1M average of 43.48 and we reiterate upside risk is present in the worst-case scenario, bringing the pair to 45.00 in H2 13 on volatile news from the US.

• Risks. Bank Rossii’s rate cuts, its QE steps, the deterioration in the current account surplus and the Fed’s tapering of economic stimulus in upcoming months are weighing on the RUB as the oil price stays high.

23

• Conclusion. As we expected in early 2013, Russia’s central bank Bank Rossii is continuing to act according to its plans on a weaker rouble. The RUB is set to stay weak over the next 12 months as part of the government’s plan to stimulate economic growth.

• We see downside risks for the EUR/RUB in the coming three months, as Q1 is set to post a stronger current account surplus. However, in our view, possible new measures from the Russian authorities to keep the RUB down are highly likely.

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


EUR/RUB 1M 3M 6M 12M

Forecast (pct'ile) 43.65 (46%) 42.80 (22%) 43.10 (28%) 44.25 (40%)

Fwd. / Consensus 43.82 / 43.59 44.25 / 43.25 44.90 / 42.55 46.17 / 42.56

50% confidence int. 43.11 / 44.41 42.93 / 45.18 42.83 / 46.13 42.67 / 47.82

75% confidence int. 42.63 / 44.98 42.17 / 46.22 41.55 / 47.78 40.15 / 50.42

39.50

41.50

43.50

45.50

47.50

49.50


EUR/RUB



EUR/RUB – important issues to watch

• Weakness to continue in 2014

− Over the past month, the RUB has performed poorly against the EUR in the EMEA FX universe, losing 1.4%. However, there are much worse performers among EM currencies. Bank Rossii has intervened to mitigate the RUB’s weakening. It has significantly clarified its FX policy mechanism disclosing ‘informal’ intervention levels.

− Despite the weaker rouble looking attractive for local industries, we believe the government is not in favour of a dramatic devaluation, letting Bank Rossii weaken the RUB by a maximum of 45.00 against the EUR and 39.00 against the basket in H2 13. Yet, we are bearish on the RUB in 12 months as the Russian economy is not getting any notable boost and the global environment remains challenging for EM assets.

− Decreasing inflation in H2 13 and the occasional come back of risk-on is likely to add to the attractiveness of Russian government bonds and OFZs and be RUB positive.


Source: Bank Rossii, Bloomberg, Danske Bank Markets

31.732.232.733.233.734.234.735.235.736.236.737.237.738.238.739.239.7

31.732.232.733.233.734.234.735.235.736.236.737.237.738.238.739.239.7

RUB's trading band vs. RUBBASK

lower border

upper border

RUBBASK (45%EUR+55%USD)

new no intervention zoneold no intervention zone (informal)

Bank Rossii sells USD400m/day

Bank Rossii sells USD200m/day

Bank Rossii buys USD200m/day

Bank Rossii buys USD400m/day


Forecast: 1.97(3M), 1.99(6M) and 2.04(12M)

USD/TRY – eased tapering fears ease pressure on the lira

• Growth. The Turkish economy saw a brisk expansion of 4.4% y/y in Q2 13, exceeding expectations. The support came from private consumption. Fixed investments were weak. We expect GDP growth of 4.0% y/y in 2013 and 4.1% in 2014.

• The current account deficit shrank in August to USD2bn from USD5.8bn in July, almost matching consensus. High FX inflows by tourists in the summer months traditionally keep the deficit narrow. Yet, we expect the gap to widen in future and weigh on TRY.

• Monetary policy. Turkey’s central bank took a break in its ultra hawkish policy, leaving the overnight lending rate unchanged at 7.75% in September as Fed tapering fears and Syria uncertainty eased. We would not rule out further tightening as TRY has a strong downside risk under arising Fed tapering plans in 2014.

• Valuation. USD/TRY stays not far from its monthly average looking to be fairly priced.

• Risks. The announcement of Fed tapering in December 2013 could hit TRY further together with other EM currencies. Escalations in Turkey’s political environment would bring strong upside risks for USD/TRY. Yet, Syria intervention risk has currently vanished, supporting TRY.

25

Conclusion. We continue to see risk from the political situation in Turkey and less from the Syrian situation. We see a stabilisation around current levels in the lira. Carry remains attractive, but in the longer term we expect the rebound to be curbed by the very large current account deficit. That said, we are overall neutral on the lira relative to market pricing on a three-, six- and 12-month horizon.



USD/TRY 1M 3M 6M 12M

Forecast (pct'ile) 1.98 (42%) 1.97 (37%) 1.99 (44%) 2.04 (48%)

Fwd. / Consensus 2.00 / 2.00 2.02 / 2.02 2.05 / 2.01 2.12 / 2.02

50% confidence int. 1.95 / 2.03 1.94 / 2.06 1.93 / 2.10 1.93 / 2.18

75% confidence int. 1.93 / 2.07 1.90 / 2.13 1.87 / 2.20 1.79 / 2.32

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40


USD/TRY



Forecast: 9.70 (3M), 9.80 (6M) and 10.05 (12M)

USD/ZAR – commodity gains support the rand

• Growth. The economic activity remains weak. On the back of weaker-than-expected economic activity recently we have revised our GDP outlook for all three forecast years. We estimate average GDP growth of 2.0% this year (previously 2.2%), 2.8% in 2014 (previously 3.1%) and 3.2% in 2015 (previously 3.3%). The South African central bank (SARB) kept its GDP forecast unchanged and still expects 2013 GDP growth of 2.0%, 2014 estimated GDP at 3.3% and in 2015 the SARB estimates GDP at 3.6%.

• Monetary policy. The SARB MPC stayed on hold in September, maintaining the key policy rate at 5.00%. The SARB continues to face conflicting policy choices – weak economic activity but continued upside risk to inflation. In our view the SARB MPC is well aware that the current relief for Emerging Markets’ currencies could be short-lived, as Fed tapering will come at some point and is the key risk to the rand and consequently to inflation (hence reducing the scope for more monetary easing). Sluggish economic activity argues against monetary tightening at the same time. Therefore, we expect the SARB to stick to its wait-and-see approach for now.

• Debt risks. The South African government raised the projected 2012/13 budget deficit to 5.2% (from 4.8%).

• Valuation. ZAR remains fundamentally overvalued (fair value around 10.95).

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

Conclusion: Delay of Fed tapering provides temporary relief for EM currencies including the rand. Furthermore, as our EMEA FX Scorecard indicates, the rand also gets support from the rebound in commodities at the moment. So, while we stress that the rand remains fundamentally overvalued (given the large current account deficit) and we remain bearish on the rand on a 12-month horizon, we expect that the rand on a 3-6 month horizon could get some support from a rebound in commodity prices amid still favourable global risk sentiment. That said, the rand will remain highly exposed to swings in global risk appetite and will remain volatile.


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

USD/ZAR 1M 3M 6M 12M

Forecast (pct'ile) 9.75 (29%) 9.70 (32%) 9.80 (41%) 10.05 (51%)

Fwd. / Consensus 9.99 / 9.99 10.08 / 10.10 10.22 / 10.10 10.50 / 10.12

50% confidence int. 9.71 / 10.20 9.58 / 10.41 9.43 / 10.63 9.22 / 10.99

75% confidence int. 9.53 / 10.44 9.30 / 10.84 9.00 / 11.29 8.51 / 11.98

8.40

8.90

9.40

9.90

10.40

10.90

11.40

11.90


USD/ZAR



Forecast: 6.11 (3M), 6.09 (6M) and 6.05 (12M)

USD/CNY – less appreciation pressure

• Growth. Latest data suggest that the Chinese economy has again started to recover moderately on the back of a government mini stimulus. Credit growth has also rebounded after temporarily slowing markedly in connection with the money market stress in June. Hence, the risk of a severe credit crunch appears to be waning. GDP growth is expected to be above trend in H2 13 but is expected to ease again next year as the impact from stimulus wanes.

• Monetary policy. PBoC has added some liquidity in the money market in the wake of the stress in June. However, with the economy recovering, more substantial easing such as a cut in the reserve requirement or leading interest rates can now be ruled out and we are now moving closer to possible monetary tightening next year.

• FX policy. China is gradually moving towards full convertibility and a floating exchange rate. The implication is for less intervention and increasing two-way volatility in the exchange rate. PBoC has moved the reference exchange rate for USD/CNY lower in recent months, underscoring that CNY remains on a moderate appreciation trend. We expect the daily trading band to be widened soon from +/-0.5% currently.

• Valuation. CNY is, in our view, no longer undervalued and could possibly be slightly overvalued after the recent depreciation of many emerging market currencies.

• Risks: CNY could depreciate if GDP growth slows below 7% and/or money market stress proves more permanent .

27

Conclusion. We still recommend hedging CNY expenditures on the back of our expectations of moderate CNY appreciation and continued FX depreciation expectations in FX forwards. However, the risk-reward pay-off has become less favourable. We recommend using offshore CNH forwards as they currently discount the largest depreciation. In addition, the alternative offshore non-deliverable forwards are increasingly an imperfect hedge.


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

Apr11

Aug Dec12

Apr Aug Dec13

Apr Aug

6.0

6.1

6.2

6.3

6.4

6.5

6.6

6.0

6.1

6.2

6.3

6.4

6.5

6.6USD/CNY exchange rate

PBoC reference rate

Daily trading band

Spot

Trading band widened


Danske Bank Markets FX forecasts

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

Exchange rates vs EUR

USD 1.351 1.37 1.33 1.30 1.27 1.4 -1.5 -3.8 -6.1JPY 133.3 136 134 137 140 2.1 0.6 2.9 5.3GBP 0.847 0.85 0.84 0.85 0.86 0.3 -1.0 0.1 1.1CHF 1.236 1.24 1.24 1.24 1.24 0.3 0.4 0.5 0.7

DKK 7.46 7.46 7.46 7.46 7.46 0.0 0.1 0.1 0.2NOK 8.10 8.05 8.00 7.90 7.80 -0.8 -1.7 -3.3 -5.2SEK 8.75 8.85 8.60 8.50 8.40 1.0 -2.0 -3.4 -5.0

Exchange rates vs USD

JPY 98.7 99 101 105 110 0.6 2.2 6.9 12.1GBP 1.59 1.61 1.58 1.53 1.48 1.1 -0.6 -3.9 -7.1CHF 0.92 0.91 0.93 0.95 0.98 -1.1 2.0 4.4 7.1

DKK 5.50 5.45 5.61 5.74 5.87 -1.4 1.7 4.1 6.7NOK 6.00 5.88 6.02 6.08 6.14 -2.2 -0.1 0.6 1.0SEK 6.49 6.46 6.47 6.54 6.61 -0.4 -0.4 0.5 1.2

CAD 1.04 1.04 1.05 1.06 1.07 0.4 1.2 1.9 2.4AUD 0.95 0.96 0.93 0.90 0.87 1.0 -1.8 -4.3 -6.3NZD 0.84 0.85 0.83 0.81 0.79 1.6 -0.4 -2.1 -3.0

CNY 6.10 6.11 6.09 6.05 -0.4 -0.7 -1.6Note: 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 0.1 0.1 0.2USD 5.50 5.45 5.61 5.74 5.87 -1.4 1.7 4.1 6.7JPY 5.60 5.49 5.57 5.45 5.33 -2.0 -0.5 -2.7 -4.9GBP 8.80 8.78 8.88 8.78 8.67 -0.2 1.0 0.0 -0.9CHF 6.03 6.02 6.02 6.02 6.02 -0.3 -0.3 -0.3 -0.5

NOK 0.92 0.93 0.93 0.94 0.96 0.8 1.8 3.5 5.5SEK 0.85 0.84 0.87 0.88 0.89 -1.0 2.1 3.6 5.4

CAD 5.33 5.24 5.34 5.41 5.49 -1.7 0.4 2.1 4.1AUD 5.26 5.23 5.22 5.16 5.11 -0.4 -0.2 -0.5 -0.2NZD 4.63 4.63 4.66 4.65 4.64 0.2 1.2 1.8 3.2

PLN 1.78 1.82 1.80 1.76 2.7 2.1 0.9CZK 0.29 0.29 0.29 0.29 -1.5 -1.5 0.0HUF 0.25 0.26 0.26 0.26 2.5 3.2 3.7RUB 0.17 0.17 0.17 0.17 3.5 4.3 4.4




Danske Bank Markets FX forecasts vs SEK

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

Exchange rates vs SEK

EUR 8.75 8.85 8.60 8.50 8.40 1.0 -2.0 -3.4 -5.0USD 6.45 6.46 6.47 6.54 6.61 -0.4 -0.4 0.5 1.2JPY 6.57 6.51 6.42 6.20 6.00 -1.0 -2.6 -6.1 -9.8GBP 10.33 10.41 10.24 10.00 9.77 0.7 -1.0 -3.5 -6.0CHF 7.08 7.14 6.94 6.85 6.77 0.7 -2.3 -3.8 -5.6

NOK 1.08 1.10 1.08 1.08 1.08 1.8 -0.3 -0.1 0.2DKK 1.17 1.19 1.15 1.14 1.13 1.0 -2.0 -3.5 -5.1

CAD 6.26 6.21 6.16 6.17 6.18 -0.8 -1.6 -1.4 -1.2AUD 6.17 6.20 6.01 5.88 5.75 0.6 -2.2 -3.9 -5.3NZD 5.43 5.49 5.37 5.30 5.23 1.2 -0.8 -1.7 -2.0

PLN 2.09 2.10 2.05 1.98 0.6 -1.4 -4.3CZK 0.34 0.33 0.33 0.33 -3.5 -4.9 -5.2HUF 0.30 0.30 0.29 0.29 0.5 -0.4 -1.6RUB 0.20 0.20 0.20 0.19 1.4 0.7 -0.8




Danske Bank Markets FX forecasts vs NOK

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

Exchange rates vs NOK

EUR 8.10 8.05 8.00 7.90 7.80 -0.8 -1.7 -3.3 -5.2USD 5.97 5.88 6.02 6.08 6.14 -2.2 -0.1 0.6 1.0JPY 6.08 5.92 5.97 5.77 5.57 -2.8GBP 9.56 9.47 9.52 9.29 9.07 -1.1 -0.7 -3.4 -6.2CHF 6.56 6.49 6.45 6.37 6.29 -1.1 -2.0 -3.7 -5.7

SEK 0.93 0.91 0.93 0.93 0.93 -1.8 0.3 0.1 -0.2DKK 1.09 1.08 1.07 1.06 1.05 -0.8 -1.7 -3.4 -5.3

CAD 5.80 5.65 5.73 5.73 5.74 -2.6 -1.3 -1.3 -1.4AUD 5.72 5.64 5.59 5.47 5.34 -1.2 -1.9 -3.9 -5.5NZD 5.03 4.99 4.99 4.92 4.85 -0.7 -0.5 -1.6 -2.2

PLN 1.94 1.95 1.90 1.84 0.9 -1.4 -4.4CZK 0.32 0.31 0.30 0.30 -3.2 -4.8 -5.3HUF 0.27 0.28 0.27 0.27 0.8 -0.3 -1.7RUB 0.19 0.19 0.18 0.18 1.7 0.8 -1.0




EMEA FX forecasts


Danske Forward Danske Forward Danske Forward Danske Forward Danske Forward

PLN 14-Oct 4.18 3.08 178.5 209.7 193.8

+1M 4.15 4.19 3.03 3.09 179.8 213.3 209.4 194.0

+3M 4.10 4.21 3.08 3.10 182.0 177.2 209.8 208.9 195.1 193.3

+6M 4.15 4.23 3.19 3.12 179.8 176.2 204.8 208.3 190.4 193.0

+12M 4.25 4.27 3.35 3.15 175.5 174.2 197.6 207.0 183.5 192.2

HUF 14-Oct 296 218 2.52 2.96 2.74

+1M 295 296.3 215 218.4 2.53 3.00 2.96 2.73

+3M 290 297.3 218 219.1 2.57 2.51 2.97 2.96 2.76 2.73

+6M 290 298.8 223 220.2 2.57 2.49 2.93 2.95 2.72 2.73

+12M 292 302.1 230 222.6 2.55 2.46 2.88 2.93 2.67 2.72

CZK 14-Oct 25.5 18.8 29.2 34.3 31.7

+1M 25.7 25.5 18.8 18.8 29.0 34.4 34.4 31.3

+3M 26.0 25.5 19.5 18.8 28.7 29.2 33.1 34.4 30.8 31.8

+6M 26.0 25.5 20.0 18.8 28.7 29.2 32.7 34.5 30.4 32.0

+12M 25.6 25.5 20.2 18.8 29.1 29.2 32.8 34.7 30.5 32.2

RUB 14-Oct 43.79 32.28 17.03 20.01 18.50

+1M 43.65 44.01 31.86 32.44 17.09 20.28 19.94 18.44

+3M 42.80 44.45 32.18 32.77 17.43 16.77 20.09 19.77 18.69 18.29

+6M 43.10 45.09 33.15 33.24 17.31 16.52 19.72 19.53 18.33 18.09

+12M 44.25 46.36 34.84 34.16 16.86 16.05 18.98 19.08 17.63 17.71

TRY 14-Oct 2.69 1.98 278 326 302

+1M 2.71 2.70 1.98 1.99 275 327 325 297

+3M 2.62 2.73 1.97 2.01 285 273 328 322 305 298

+6M 2.59 2.77 1.99 2.04 288 269 328 318 305 294

+12M 2.59 2.87 2.04 2.11 288 260 324 309 301 286

ZAR 14-Oct 13.43 9.87 55.5 65.2 60.3

+1M 13.36 13.44 9.75 9.91 55.8 66.3 65.3 60.3

+3M 12.90 13.56 9.70 10.00 57.8 55.0 66.7 64.8 62.0 60.0

+6M 12.74 13.73 9.80 10.12 58.6 54.2 66.7 64.1 62.0 59.4+12M 12.76 14.12 10.05 10.40 58.4 52.7 65.8 62.7 61.1 58.2

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

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