January: Low inflation set to weigh on EUR

Main forecast changes

• We have upped our near-term EUR/USD outlook a little. Strong peripherals performance and the outlook for less imminent easing from the ECB make the case for EUR downside less strong on a 3M horizon. Also, the weather-related uncertainty regarding US data and hence whether Fed tapering will continue unabated limits USD upside a little in the months ahead. We now see EUR/USD at 1.33 in 3M but have kept our 6M and 12M forecasts unchanged at 1.30 and 1.26, respectively. We stress though that if we are wrong in projecting downside inflation surprises, the 3M outlook for EUR/USD is likely to be at least a few big figures higher as eurozone activity is on course for a strong start to 2014. 
• We continue to expect both EUR/NOK and EUR/SEK to edge lower over six to 12 months calling for EUR/SEK and EUR/NOK at 8.50 and 8.00, respectively, on a 12M horizon. Note, however, that on a 1M horizon the SEK might temporarily suffer from a new low inflation print. Our 1M forecast for EUR/SEK is 8.90. 
• We continue to look for a weaker yen against the US dollar over the medium to longer term. We have ‘rolled’ our USD/JPY forecast and we now expect USD/JPY at 110 (previously 108) in 6M and target 113 (previously 110) in 12M as monetary policy divergence is set to continue beyond our forecast horizon. 
• We have lifted the outlook for EUR/CHF a little reflecting our view that the reversal of recent years’ safe-haven flows into Switzerland could accelerate in 2014. This could pave the way for some upside in EUR/CHF and we expect the cross to edge higher towards 1.26 in 2014. 
• We have kept our AUD/USD forecast unchanged but adjusted higher the level of our USD/CAD and NZD/USD profile. We expect to see more soft talking from the BoC, although we are less sure a rate cut will be delivered. We think that the pricing of RBNZ has gone too far in the way of hikes recently and we see only very limited potential for upside from here on a 6-12M horizon, targeting 0.85 in 12M (previously 0.80). 
• On the EMEA currencies, we have made the biggest forecast changes to the Polish zloty and the Turkish lira. We have adjusted the lira in a more negative direction reflecting the sharp increase in political uncertainty. This said, we see some potential for a recovery for the lira in the short term as the lira valuation has become more attractive and carry has risen significantly. Longer term, we are looking for the lira to weaken further – more or less in line with forwards. In terms of the zloty, we have changed our short and long-term forecasts in a more bullish direction, as we have become somewhat more upbeat on Poland’s external balances.