The current-account surplus is 15% of GDP

FX forecasts

FX overview

US dollar - USD

Recently, the US dollar has had a difficult time against EUR. In our view, this is primarily due to the following:

1) Emerging-market currencies are under pressure. Central banks are selling their currency reserves to defend their currencies – 60% of the global currency reserves are in USD. Only approx. 20% are in EUR.

2) The solid increases in US interest rates are forcing foreign investors out of USD assets. Fixed-rate papers risk capital losses and equities are expensive relative to for instance Europe.

3) Europe's indicators were better than expected. Indeed it seems that Europe is back on track. Yet, we still anticipate European challenges in the coming year. A turn in the EM currencies combined with more stable US interest rates will in our view support a stronger US dollar.

Fundamental valuation

• Monetary policy: The Fed’s purchase activity is unchanged. The Fed buys government and mortgage bonds in the amount of USD 85bn a month.

• We (as well as the majority of analysts) expect to see a gradual scaling down of the purchases - beginning in September.

• We anticipate that the ECB will at some point in time offer a new long-term LTRO – this time with a fixed interest rate.
  

• Fiscal policy: A plan for fiscal austerity measures will be released in the US in Q3. A subsequent downgrade of the USA's credit rating is not unlikely - particularly if we see a political deadlock during the negotiations.

• Economic growth: The US: (2.3% for 2013). Europe: (-0.6 % for 2013).

• Purchasing-power parity: EURUSD 1.22.

Price triggers

• The US: Better US indicators (especially employment) will force up interest rates and increase the likelihood of an early expiry/scaling down of QE3. The dollar will appreciate due to rising interest rates.

• Europe: The debt crisis and structural problems in the euro zone continue.

• The negative credit spiral deteriorates and hampers growth and credits in Europe. The ECB announces a new relaxed LTRO to the banks.

• The ECB announces a negative deposit rate for banks.

• Global markets: Global growth (especially China, USA or Europe) slows down again. USD is being purchased due to search against safe haven.

Investment case

• The narrow trading range between 128 and 134 in the past 12 months is expected to have come to an end. We expect that EURUSD will breach on the downside in step with the Fed's scaling-down of QE and rising interest rates.

• 0-6M: Monetary-policy divergence: The Fed reduces QE3 and the ECB may have to relax its policy due to falling bank lending.

• Growth divergence: Unemployment in the US declines at a faster pace than in Europe. Economic growth increases.

• 6-12M: The growth divergence between the US and the euro zone will be maintained and even expand.

• When will the US dollar appreciate? Our best bid is to look for a stabilisation of EM currencies and a stabilisation of US interest rates. US indicators grow important up to the Fed’s September meeting.

Risk factors

• The US: A slowdown in the autumn with weak economic indicators will postpone the Fed's tightening plans.

• This autumn's large fiscal-policy compromise may risk to be long in coming and result in a downward revision of US credit rating. This may lead to an overreaction in the currency market.

• Europe: The crisis-hit PIIGS countries gain control of their budgets.

• Global markets: Japan's monetary-policy stimuli spread and result in increased volatility in the financial market.

• China takes the markets by surprise with a new round of growth reforms.

Pound sterling - GBP

We are bullish about pound sterling, but we have made a small adjustment of our 3M price target.

Despite a more ”hawkish” rhetoric than expected in the recent monetary-policy minutes, most analysts maintain their expectations that the Bank of England's new spearhead, Mark Carney, will introduce new relaxations now that Forward Guidance was not effective (the BoE has promised to keep its interest rate unchanged until the unemployment rate reaches 7%). We do not believe in new relaxations. Carney’s power is limited and the other committee members seem to have fairly firm views. In addition, the economic indicators from the UK have been excellent, and it is difficult to justify new intervention. Verbal intervention can, however, not be precluded since the Bank of England is concerned about the steadily increasing interest rates which may potentially strangle the budding upswing.

Fundamental valuation

• Monetary policy: The interest rate of the Bank of England is 0.50%. We do not anticipate any change in the interest rate or an expansion of the Bank of England's purchase programme in the coming 12 months.

• The distribution of votes in the monetary-policy committee has for some time been 3 against 6. 3 wish to expand the purchase programme. In the light of the recent good indicators the next interestrate meeting will be interesting.

• Fiscal policy: There are prospects that the public tightening will continue in 2014 which may put a damper on growth.

• Growth: We anticipate slowly improving economic indicators. Improved exports are supporting the currency.

• Purchasing-power parity: Approx. 0.745 EURGBP.

Price triggers

• The UK: The improvement of economic indicators continues. Unemployment declines faster than expected down towards 7%.

• The distribution of vote in the monetary-policy committee moves towards 9-0. 9 for an unchanged purchase programme.

• Europe: Increasing financial turmoil in the euro zone will strengthen sterling against the euro.

• Global markets: A downgrade of global economic growth will support pound sterling due to the search for safe haven.

• War in Syria should offhand strengthen pound sterling and US dollar. Pound sterling will in all probability follow the movement of US dollar.

Investment case

• Rising GBP rates and indicators have not come into their own (like US dollar). We expect that the last part of 2013 will see an appreciation of pound sterling which will continue into 2014.

• 0-3M: Continued good indicators as well as a more unambiguous monetary-policy committee will support expectations of a strong pound sterling.

• 3-6M: Investors are still concerned about the Carney effect. We do not think that it will materialise. If we are proven right, sterling will appreciate in the long term.

• 6-12M: Europe's slow growth is here to stay. The UK holds a large potential and the currency is underestimated.

Risk factors

• The UK: The Bank of England has promised to keep its interest rates low until unemployment reaches 7% (its own forecasts point to mid- 2016), but the markets do not believe in the BoE. If the BoE is right, pound sterling will depreciate.

• Economic growth remains slow and inflation relatively high. The central bank resumes its quantitative easing.

• A downgrade of the credit rating by Standard & Poor's or general distrust in the government's fiscal recovery plan.

• Europe: The debt crisis escalates and the UK financial sector collapses.

The Swiss franc – CHF

The current-account surplus is 15% of GDP. Swiss competitiveness (terms of trade) is close to being the best for 50 years. The Swiss central bank (SNB) will not depreciate the franc by hiking its minimum rate from 120 EURCHF. But we do not believe either that the SNB will remove its intervention level in the near future. We anticipate that the franc will be flat around 120-125 in the coming 12 months. The reason is that:

• Inflation has increased but is still around 0%. This points to maintenance of the minimum rate by the SNB.

• The current-account surplus is booming. This indicates that the SNB should actually remove its minimum rate.

• Growth and employment are improving - rising housing prices are no problem - wages are already increasing accordingly.
  

Tug-of-war, with the SNB’s primary focus being on inflation and financial destabilisation. From these quarters there is no news.

Fundamental valuation

• Monetary policy: The interest rate in Switzerland is at a historical low. Inflation is marginally increasing and the currency is strong. We do not expect any changes on the part of the SNB as the economy is doing relatively well.

• The SNB has determined a minimum price for EURCHF of 120. The market has confidence in the SNB and so do we.

• The Swiss franc is still a ”safe-haven currency”. If the SNB does not succeed in maintaining its minimum rate, the franc will strengthen considerably in a short period of time. 100-110 for EUR/CHF is not unlikely.

• Growth: The Swiss economy is strong relative to that of the euro zone. Unemployment is very low (approx. 3%), the development of housing prices is positive, and the current-account surplus is very wide.

• Purchasing-power parity: 132.20 EURCHF

Price triggers

• Switzerland: The economic trend in Switzerland is of minor importance for the franc. The current-account surplus supports a strengthening of the franc if the SNB stays away from the market.

• Europe: Renewed debt crisis turmoil will strengthen the franc. After Japan’s new monetary-policy strategy, the franc is one of the world’s most attractive safe havens.

• If growth scare and debt crisis turmoil flare up again, EURCHF will fall to 120.

• Global markets: Risky assets have surged in the wake of massive monetary-policy relaxation from the US and Japan. A setback will strengthen the franc.

Investment case

• We expect that the franc will remain in the range of 120-125 EURCHF. 

• A few deviations are expected to be short-lived. Deviations will be to the downside at CHFDKK – we do not expect to see a stop to the SNB’s intervention level at 120 EURCHF.

• Read our recent CHF research report.

• Only an extremely strong negative wave in the financial markets will be able to make the SNB remove its intervention level.

Risk factors

• Switzerland: Given the SNB’s announced minimum rate, it will be difficult for EURCHF to breach below 120.

• Investors are still heavily invested in the franc. If they want to abandon the franc, the downward movement for the franc may be extreme.

• Europe: Renewed calm about the situation in Europe in combination with a positive development in Japan, for instance due to falling value of the yen may cause speculators to sell the franc both speculatively and to raise new loans in francs, which may send the franc up towards 129-130.

• Global markets: The global economy regains positive momentum to an extent that surprises more than we have seen so far. We see confidence in a broad global upswing.

The Japanese yen - JPY

So far, ”Abenomics” has not functioned fully in line with expectations. The Japanese are no doubt behind schedule in relation to attaining its inflation target of 2%. We anticipate that the Bank of Japan intends to ease its monetary policy even further later in the year - this will depreciate the yen.

For the short term (3M horizon), we see the highest probability of an appreciation of the yen. The solid sale of EM assets results in a close-down of geared transactions in yen, and a potential war in Syria will increase investor risk aversion and strengthen the yen. Investors' positions are very one-sided in relation to an depreciation of the yen. In the long term (12M+), the Bank of Japan will attempt to depreciate the yen since a weaker yen is an important presumption for reaching the determined inflation target.

Fundamental valuation

• Monetary policy: The interest rate of the Bank of Japan is 0%-0.10%. It will stay at this level.

• The BoJ’s purchase programme involves current negative pressure on the yen.

• Fiscal policy: Japan is the world champion in government debt with approx. 220% of GDP. The budget deficit is just below 10% of GDP. Government debt is primarily owned by the Japanese themselves. In the long term, national bankruptcy seems inevitable.

• Growth: Economic indicators are improving, but real growth is not expected to rise higher than to 1.5% in 2014 and just below 1% in 2015. The current account will improve over time.

• Purchasing-power parity: EURJPY 1.025.

Price triggers

• Japan: Speculative investors are strongly positioned for a further weakening of the yen. A sharp increase in risk aversion will strengthen the yen. Investors are caught fully off-guard.

• A too solid depreciation of the yen will hit Japanese growth due to high energy costs. Japan is a large importer of energy.

• Europe: The debt crisis escalates. The yen has for many years been a safer haven than the dollar. We expect this to happen again in the event of a crisis.

• Global markets: China sees a hard landing. Australia slows down drastically. The Asian tiger economies initiate a currency war and try, thus, to re-conquer the market share gained by Japan.

Investment case

• Highly one-sided JPY positioning (the financial markets are generally positioned to risk-on) combined with a number of short-term event risks increase the probability that the yen will appreciate before it depreciates.

• 0-3M: The crisis in Syria and fire sale in emerging markets contribute to an appreciation of the yen. Investors are caught off-guard.

• 3-6M: The Bank of Japan continues to relax its monetary policy - the central bank will show a strong reaction when/if a VAT increase is implemented.

• 6-12M: Further weakening of the yen.

Risk factors

• Japan: The central bank expands its purchasing programme to include foreign bonds.

• The Bank of Japan squeezes Japanese pension funds etc. out of Japanese government bonds and into foreign paper. The initiative has been introduced but still needs to be implemented.

• Europe: Europe gains momentum and economic indicators continue their positive trend.

• Global markets: A solid improvement of US and European indicators will weaken the yen in relation to the euro and the US dollar.

• The Fed scales down its purchasing programme. Higher interest rates in the US and Europe weaken the yen against the US dollar and euro.

The Norwegian krone - NOK

The Norwegian krone has had a difficult 2013. The currency has lost close to 10% against the euro. The significant depreciation is due mainly to the following:

• Extremely one-sided positioning at the beginning of the year - ALL analysts had the krone as a top pick in 2013.
  

• - Expectations of Norway and the economy were high - expectations were not fulfilled to a sufficient degree.

• The krone is relatively illiquid (approx. 1/7 of the liquidity in for instance Swiss franc or 50% of the Swedish krona). The way out may quickly get cramped.

 What next? We clearly expect that NOK will appreciate in the long term , and hence we also added BUY NOKDKK to our top picks. The solid depreciation cannot be justified by the development of fundamentals, and the pending Norwegian election and potential change of government will not cause any problems. The highest risk within a 12M horizon will be if US interest rates continue their dramatic upward trend. War in Syria and higher oil prices may also affect the Norwegian krone.

Fundamental valuation

• Monetary policy: Norges Bank has delayed the time of an interestrate increase. Growth, inflation, the krone rate, and rising house prices are important parameters for the central bank.

• Fiscal policy: Norway has very sound public finances and a very attractive AAA rating.

• Growth: Recent GDP figures disappointed on the surface but below the surface they were actually decent. This bodes well for the future.

• Liquidity: The krone belongs among the more illiquid currencies. The way will soon get cramped when so many want out at the same time.

• Purchasing-power parity: 7.29 EURNOK.

Price triggers

• Norway: Norges Bank becomes concerned about the trend in lending as well as the high level of housing prices and sharpens its rhetoric about impending interest-rate increases.

• Europe: Lower ECB rate or new 3-year LTRO allotments will strengthen the krone.

• Global markets: The recent period of improved global growth indicators will in the long term appreciate the krone. the Norwegian krone is a relatively cyclical currency.

• Libya? Higher oil prices are positive for the krone. On the other hand, investors will abandon illiquid assets. Due to the present investor sentiment the risk is offhand highest on the downside.

Investment case

• We have issued a short-term as well as a long-term BUY recommendation for Norwegian kroner. The krone was this month added to our top picks.

• 0-3M: The depreciation of the krone seems to be boosted by repositioning among investors or central banks. The depreciation cannot be justified by fundamentals. A normalisation will strengthen the krone, BUT the timing is difficult – when will it stop?

• 3-6M: The krone is expected to appreciate. Stronger growth, prospects of higher interest rates and a generally underestimated krone will be supportive.

• 6-12M: Investors were again shaken to their foundations due to a Scandinavian currency (last year it was the krona). Confidence has been reduced - NOKDKK has difficulty seeing the 102 level from last year again.

Risk factors

• Norway: Low liquidity is the greatest threat to the krone.

• Norway's central bank wishes to isolate housing market problems and excessive borrowing so that it can in this way pursue a more independent monetary policy. Currently, this is negative for the krone.

• The housing market collapses – banks as well as economic growth are affected.

• Global markets: Libya? Higher oil prices are positive for the krone. On the other hand, investors will abandon illiquid assets. Due to the present investor sentiment the risk is offhand highest on the downside.

• Rising interest rates in the UK and the US are negative for the krone since a narrower interest-rate spread will reduce the incentive to keep the krone.

The Swedish krona – SEK

If we look at the trend in the interest-rate spread between Europe and Sweden relative to EURSEK, we see a relatively high positive correlation between the two. Nevertheless, we have over the summer seen a widening of the interest-rate spread by 15-20 basis points without any positive effect on the krona. The same applies to the correlation to equities (equities have increased without an appreciation of the krona). On the basis of these indicators the krona should appreciate by approx. 2%-3% from its present level.
Why does the appreciation not become a reality? The reason is, in our opinion, that international investors and reserve banks are making a major repositioning where liquidity is preferred to illiquidity. The krona and in particular the Norwegian krone belong among the relatively illiquid currencies. By nature, a repositioning is temporary and hence we also expect a strengthening of the krona in the long term. For the short term, we have no good indicators as to when the movement stops.

Fundamental valuation

• Monetary policy: The Riksbanken has left its key rate unchanged at 1.00% since 2012. We anticipate an interest-rate increase at the end of 2014.

• ”The scaling down” in the US and global monetary-policy rebalancing will be a slightly negative factor for the krona.

• Finansinspektionen has been given the responsibility for the financial imbalances – the Riksbanken can hence to a higher degree focus on inflation.

• Fiscal policy: Sweden has an AAA rating and sound public finances which reduce the risk involved in SEK investments.

• Growth: 2013 is expected to be a year of slow growth. In return, the Riksbanken and the government are positive about 2013.

• Purchasing-power parity: EURSEK 7.54.

Price triggers

• Sweden: Rising inflationary pressure combined with a strong housing market. The Riksbanken advances the time of an interest-rate hike.

• Europe: The debt crisis is cancelled. The krona will lose its safehaven flow but strengthen via its cyclical dependence.

• The ECB once again reduces its interest rates or makes other easing initiatives (for instance a new LTRO).

• Global markets: Increasing global growth is positive for the krona.

Investment case

• 820-880 EURSEK is our expected 12-month trading range - deviations from the range are expected to be temporary.

• 3M: No news from the Riksbanken. Syria and the interest rates in the US will be crucial. Higher US rates or turmoil in Syria are negative for the krona.

• 3-6M: The krona stabilises at the middle of the expected trading range. We are approaching the time for an interest-rate increase from the Riksbanken.

• 6-12M: Relatively large uncertainty. The krona may be a victim of repositioning (as we have seen it with the Swedish krone), but higher global economic growth will support the cyclical element of the krona.

Risk factors

• Sweden: Weaker economic indicators will open the door for interestrate cuts from the Riksbanken.

• Europe: European money-market rates increase even further (shortterm risk – in the long term it will kill European economic growth).

• Global markets: Dramatic slowdown in global economic growth. Sweden's open economy will be hit hard.

• Scaling down of QE in the US. This will result in rising global interest rates and remove part of the incentive to keep the krona.

• War in Syria will speed up the recent trend of selling illiquid assets – SEK and SEK assets are relatively illiquid.

The Polish zloty – PLN

In the short to medium term (3-6M) we expect to see EURPLN trading in the range of 420-440 (unchanged from last time). In the long term (+12M) we believe that the zloty will appreciate slightly - especially if Europe manages to avoid the debt crisis (which may be difficult).

At present, the risk is highest to the downside of the zloty. Emerging markets have been under massive pressure, but so far the Eastern European currencies have been passed over. For BRL, MXN, ZAR, TRY etc. we have seen a depreciation by more than 10% against the euro and the US dollar.

With respect to economic indicators, there were positive surprises across the board. The current account has stabilised at an unexpected high level, unemployment has fallen, retail sales are increasing, inflation is rising and GDP was a positive surprise. It can be argued that the zloty is at present a shade too cheap. We point to the general EM risk and recommend a conservative approach to the zloty.

Fundamental valuation

• Monetary policy: Central-bank rates are record-low at 2.5%. We do not anticipate any changes over the next twelve months. 

• Fiscal policy: The budget deficit has shrunk considerably.

• Growth: We anticipate that the central bank will continue cutting its interest rates to support economic growth.

• The current account has twice in a row shown a surplus. Markedly better than expected

• REER: The zloty is approx. 3% below the 5-year moving average.

Price triggers

• Poland: Lower budget deficit and higher current-account surplus.

• Retail sales and inflation begin to point upward due to a successful cycle of interest-rate cuts.

• Europe: Stronger growth in Europe is positive for the zloty. Europe is the most important trading partner. A faster upswing will appreciate the zloty.

• Global markets: Scaling down of QE by the Fed will result in rising interest rates on some majors, which will have an adverse effect on EM.

• New relaxed measures from the world's central banks.

Investment case

• The zloty is strong relative to the other EM currencies. The interestrate cycle has bottomed out and fundamentals have surprised rather positively. Due, among other things, to the current-account surplus Poland can avoid external financing.

• 0-3M: High risk. The other EM currencies have taken a beating whereas the zloty has been flat. In terms of fundamentals, things look good for the zloty but this is not what is controlling the EM currency market at present.

• 3-6M: The zloty is expected to be stable to marginally stronger.

• 6-12M: Stabilisation of Europe and improved Polish balances (budget and current account) will strengthen the zloty a shade.

Risk factors

• Poland: If the financial crisis in the euro zone flares up again, the zloty will depreciate since European banks and investors are relatively heavily positioned in Polish bonds.

• Europe: Germany is the largest trading partner. Slower economic growth in Germany will affect the current account and Polish growth.

• Global markets: Rising interest rates in the US have so far resulted in the close-down of EM positions on a large scale. If interest rate s increase even further and if this spills over into European interest rates, it will affect the zloty.