April: Vacuum after ECB and Fed maintain near-term EUR/USD upside

Main forecast changes part I.

• We have lowered our 3M target for EUR/USD a bit but we still expect the cross to trade slightly higher EUR/USD on a 3M horizon and hit 1.40 (previously 1.42) as it will take time for the ECB to deliver more easing. Hence, the euro positive current account and capital flows will be able to dominate EUR/USD on a 3M horizon. The latest FOMC minutes also revealed that the FOMC is in no hurry to hike rates when tapering is done. All in all, a new trend lower in the cross should probably not be expected before the ECB starts a new easing round. Thus, relative monetary policy will not in our view be able to push EUR/USD lower before 3-6M. However, comments such as the one from the Bundesbank's Jens Weidmann yesterday that the ECB should discuss what assets a QE programme should buy underlines that eventually the current support for EUR/USD will reverse. We target EUR/USD at 1.36 in 6M (previously 1.37) and 1.30 in 12M (previously 1.32).

• The combination of the Bank of England (BoE) moving towards the first rate hike and the prospect of euro weakness on the back of the ECB being on an easing bias, means we expect EUR/GBP to move lower over the coming year. On a 12M horizon, we expect sterling to appreciate against the euro as the BoE is way ahead of the ECB in the monetary policy cycle. We assume the correlation between the GBP and USD will stay positive in 2014 indicating that our ‘strong dollar’ view will also benefit sterling. Compared with our previous forecast for the GBP we have pencilled in even more sterling strength, reflecting our view that the strong performance for the UK economy will continue. We now forecast EUR/GBP at 0.81 (0.84), 0.80 (0.80) and 0.77 (0.79) on 3M, 6M and 12M horizons respectively.

• We have become much more negative on the Swedish krona, as we now forecast a rate cut at the July Riksbank meeting. Therefore, we have revised our three-, six- and 12-month forecasts for EUR/SEK higher to 9.10, 8.95 and 8.75, respectively, from 8.80, 8.80 and 8.60, respectively, previously. On the other hand, we have rolled out a revised forecast profile for EUR/NOK marginally lower to 8.15, 8.10 and 7.95, respectively, from 8.20, 8,10 and 8.00, respectively, previously. The primary change is that yet another month has passed and that investors’ interest seems to have improved faster than expected in Q1.

• We have kept our USD/JPY forecast unchanged and still target USD/JPY at 106 in 3M, 110 in 6M and 114 in 12M. However, we highlight that weak economic growth has increased the probability of the Bank of Japan easing earlier. Hence, the next spike in USD/JPY could be just around the corner and, in general, we consider risks to be skewed on the upside relative to our one- and three- month forecasts.

Main forecast changes part II.

• We continue to be bearish on the RUB as the geopolitical situation surrounding Ukraine remains open, accelerating net capital outflows and weighing on business sentiment in the Russian economy and Russian assets. Russia’s central bank, Bank Rossii is providing good liquidity, which is often converted to FX by local banks on RUB high volatility. However, we emphasise that the current path towards a freely floating RUB in 2015 has been consistent and helpful for the Russian economy to mitigate external shocks and support local production.

• It seems that political risk has to some extent decreased in Turkey since the local election, so less event risk in Turkey means that we are no longer as negative on the TRY. We have revised our USD/TRY forecast in a more positive direction in the short- to medium-term horizon. That said, we remain bearish on the long-term horizon as the large current account deficit and high inflation continue to be a problem from a fundamental perspective. As risk sentiment towards emerging markets has improved considerably given some signs of stabilisation in the Chinese economy, we have become more positive on the South African rand on a short- to medium-term horizon. We believe the ZAR could benefit from an improving domestic economy, higher carry and rising commodity prices. On a long-term horizon of 12 months, we remain bearish on the ZAR given South Africa’s large current account deficit.

• We have revised our USD/CNY forecast higher, reflecting the recent depreciation of the CNY but we still expect the CNY to resume a moderate appreciation path in H2 14.