March: EUR support the next three months

Following the March ECB meeting, we have opted to more fundamentally revise the level and profile of our EUR/USD forecast. In the near term, we now look for the cross to head a little higher into the low 1.40s on the market pricing in limited ECB action, and to stay around that level on a 3M horizon. Current account and portfolio flows are also likely to continue to work against EUR/USD downside as is the long-standing overweight of speculative USD longs. The potential for medium-to long-term downside will likely depend on the Fed tapering process as ECB rates are set to stay low for some time. Notably, we still see the Fed moving towards higher rates way ahead of the ECB and EUR strength should also be limited as rates are arguably anchored by Draghi’s forward guidance and the deflationary pressure it would in itself create in the euro area. Additionally, some of the factors supporting the euro over the past year – such as notable flows into peripheral countries in the euro zone – should become less EUR supportive going forward. In our baseline scenario, we see EUR/USD drifting down to the mid 1.30s by year end. As a result, we now project the cross at 1.42 in 3M (previously: 1.34), 1.37 in 6M (1.30), and 1.32 in 12M (1.26).

We have made very small changes to our scandi FX forecasts. We still forecast that both EUR/NOK and EUR/SEK will edge lower over the next 12 months to 8.00 (8.00) and 8.60 (8.50), respectively.

The emerging markets news flow is getting increasingly worse. Increased Chinese growth worries are hitting the commodity currencies. The sharp rise in geopolitical risk on the back of the de facto Russian invasion of the peninsula of Crimea has clearly unnerved investors. This is now not only hitting the Russian and Ukrainian markets, but we also see a significant risk of a major spill-over to other Central and Eastern European markets. As a consequence, we have revised our Polish zloty, Hungarian forint and the Romanian leu forecasts in a significantly more negative direction. Needless to say, the Russian rouble, in our view, is likely to continue to weaken (significantly) over the coming 12 months. Also, in Turkey political events are weighing on the lira. As political risks have increased sharply, we have changed our lira forecast in an even more negative direction.

We do not believe the People’s Bank of China (PBOC) is targeting a major depreciation of CNY, but is mainly preparing the market for more two-way volatility in the exchange rate. However, as long as the PBOC has an easing bias, we are unlikely to see any substantial appreciation of CNY. Hence, we now expect USD/CNY to move largely sideways on a three-six month horizon but we still expect the PBOC to appreciate moderately on a 12-month horizon. We now target USD/CNY at 6.15 in 3M (6.02), 6.10 in 6M (6.00) and 6.00 in 12M (5.95).