Jyske Bank's FX forecasts

Fx Outlook  

FX overview - USD, GBP, CHF, JPY, NOK, SEK, TRY and CZK

US dollar – USD

The US has the world’s largest economy and one of the world’s highest GDP per capita. The largest trading partners are (% of exports): Canada (20.1%), Mexico (11.7%) and China (5.5%). The large industries in the US include oil, steel, auto and air transport. US GDP per sector: Service (79.6%), Manufacturing industry (19.2%), Agriculture (1.2%).

Fundamental valuation

  • Based on the purchasing power parity, USD is undervalued (by about 12%) – equilibrium around 1.22 (EUR/USD) and 6.10 (USD/DKK). 

  • We expect US growth to be much higher than eurozone growth (at least twice as high) in 2010 and 2011. 

  • Interest-rate increase from the Fed at end-2010. The ECB will wait until early 2011.

  • In the very long term (~20 years) USD will gradually lose its status as reserve currency.

Price triggers

  • Relatively better growth data from the US compared with the euro zone.

  • At the short end of the yield curve (up to 2Y), the yield spread between the euro zone and the US will narrow, and this will support USD. 

  • Continued turmoil related to Greece/Portugal will squeeze EUR/strengthen USD until matters will be clarified further. 

  • The Fed has set the scene for a normalisation of the monetary policy (by removing the promise to keep interest rates low and withdrawing quantitative easing).

Investment case

  • We believe that USD will appreciate over the coming six months thanks to the relatively better prospects for the US economy. 

  • The yield spread will narrow in favour of USD over the coming quarters. 

  • The trend has changed, and USD is now in a technical uptrend. 

  • The problems about the debt situation in Southern Europe are still lurking in the wings.

Risk factors

  • For the short term: risk of USD weakening since the strengthening has been solid and the market is stretched. 

  • Decreasing concern about the situation in Southern Europe may result in a EUR comeback. 

  • Need for fiscal-policy strengthening in the US may delay the time of the first interest-rate hike. 

  • Any problems selling government bonds in the US may put USD under pressure. 

  • Doubt about the status of USD as a reserve currency may enhance the pressure on the US currency.


Pound sterling – GBP

The UK has one of the largest economies in Western Europe and is Europe’ financial centre. The largest trading partners are (% of exports): The US (13.1%), Germany (11.5%), The Netherlands (7.8%). Services such as banking and insurance services make up the largest part of GDP: Service (80.4%), Manufacturing industry (18.2%), Agriculture (1.4%).

Fundamental valuation

  • GBP is undervalued by approx. 18% based on the purchasing power parity – equilibrium is approx. 0.72 (EUR/GBP) and 10.35 (GBP/DKK). 

  • The growth prospects for the UK are not particularly good, and the economic situation does not allow an expansive fiscal policy. 

  • Throughout the financial crisis, the British government has pursued a very expansive fiscal policy (up to 13% of GDP), and this means that in the coming years the debt overhang will have to be cleared.

Price triggers

  • A widening of the yield spread to the euro zone (2Y and 10Y) will support sterling. 

  • Economic indicators improve and the upturn gains momentum. 

  • An end to the quantitative easing which keeps market rates artificially down. 

  • Inflation is increasingly sustainable and hikes are made sooner than expected.

Investment case

  • We expect a minor but gradual appreciation up to the summer of 2010. The greatest potential of pound sterling is some months ahead. 

  • The end to quantitative easing and an interest-rate hike from the BoE in November (ECB will wait until early 2011) will support pound sterling. 

  • A gradual improvement of the economic situation and clarification about the political situation will reduce uncertainty related to sterling and the risk premium in the long term.

Risk factors

  • The UK falls back into recession and interest rates remain low for a longer period than expected. 

  • An escalation of the financial crisis may result in a high risk premium on GBP due to the exposure to the financial sector in London. 

  • Hung parliament may mean that the economic-reform process is long in coming. 

  • The euro zone gets the debt problems in Southern Europe under control and EUR is lifted. 

  • The ECB raises its interest rates before the BoE.


Swiss franc – CHF

Switzerland has a wealthy and stable market economy with a GDP per capita among the highest in the world. The largest trading partners are (% of exports): Germany (33.3%), Italy (11%) and France (9.4%). Important industries: machines, watches, bank and insurance. GDP per sector: Service (73%), Manufacturing industry (23%), Agriculture (4%).

Fundamental valuation

  • Based on the purchasing power parity, CHF has a rather fair valuation – equilibrium around 1.4540 (EUR/CHF) and 5.15 (CHF/DKK). 

  • 2Y yield spread still indicates a stronger CHF but 10Y indicates a weaker CHF.

  • The economy has gained momentum. We expect that the good trend will continue in 2010 and 2011. 

  • Inflation is back in positive territory. 

  • We do not expect that the SNB will raise its interest rates until the ECB has taken steps (i.e. in early

Price triggers

  • Changes in the rhetoric from the SNB about intervention in relation to gradually allowing a stronger CHF (also keep an eye on speeches from e.g. Jordan and Hildebrand from the SNB). 

  • Continued inflow of capital and the current-account surplus support CHF. 

  • A further narrowing of the yield spread will support CHF unless the SNB intervenes. 

  • Technical breach of the levels around 143-144 in EUR/CHF may lead to a further CHF strenghtening.

Investment case

  • Fundamentally, there is a basis of a minor strengthening of CHF over the next six months… 

  • …. but the investment case is under very heavy influence from the SNB’s rhetoric and intervention. 

  • There are probably no prospects of a weaker CHF until H2, and this will only happen if the interest-rate levels begin to normalise.

Risk factors

  • Change of the ECB’s liquidity initiatives may push up EUR rates and again make CHF funding more attractive. 

  • Over the coming six months, intervention by the SNB may cause CHF to weaken for shorter periods. 

  • At 12 months’ term, the risk involved in our estimate is that the crisis will drag on and hence that the financing case will remain less attractive. 

  • If the SNB tightens its monetary policy before the ECB, it may also affect the 12-month estimate.


Japanese yen – JPY

In terms of GDP (PPP), Japan is the world’s third largest economy next to the US and China. The largest trading partners are (% of exports): The US (17.8%), China (16%), South Korea (7.6%). Japan produces: motorcycles, electronic equipment, ships and chemicals. GDP per sector: Service (66.4%), Manufacturing industry (27.9%), Agriculture (4.4%).

Fundamental valuation

  • Economic growth slows down in H1 2010 since e.g. the impact from the fiscal policy flags off. 

  • A number of factors put a damper on the growth prospects including particularly the need to consolidate the public finances, which are in a dreadful state. 

  • Deflation is again a reality in Japan, and in our view this means that interest-rate hikes will not be on the agenda until 2010 at the earliest.

Price triggers

  • Increased appetite for risky assets. 

  • A widening of the yield spread between Japan and the other G10 nations gives renewed focus on the yen as a funding currency. 

  • Renewed focus on the possibility of intervention may put pressure on the yen. 

  • The BoJ increases the purchase of government bonds (extends the quantitative easing). 

  • Focus on the development in public debt (close to 200% of GDP) creates distrust in JPY.

Investment case

  • We expect a yen weakening for the long term. 

  • Japan may look forward to a battle against deflation until end-2011. Therefore the BoJ will not tighten its monetary policy until 2012 at the earliest. 

  • In return, we expect that the other G10 central banks will begin tightening their monetary policies during the last six months of 2010. 

  • A widening of the yield spreads will squeeze the yen.

Risk factors

  • An outbreak of renewed risk aversion.

  • The global crisis is slow in progress and the normalisation of the interest-rate levels in the other G10 countries is long in coming. 

  • Tax exemption for profits generated in Japanese companies’ foreign subsidiaries may cause a higher capital inflow into Japan towards the end of the financial year (late March). 

  • Technical breach of 6.20 in JPY/DKK (120 in EUR/JPY) may trigger a further JPY strengthening.


Norwegian krone – NOK

Norway has a solid and wealthy economy and one of the world’s highest per capita GDP. The largest trading partners are (% of exports): The UK (27%), Germany (12.8%), The Netherlands (10.4%). Main industries: oil, gas, shipbuilding and chemicals. GDP per sector: Service (76%), Manufacturing industry (21.1%), Agriculture (2.9%).

Fundamental valuation

  • NOK has a fair valuation with respect to purchasing power parity – equilibrium 8.04 (EUR/NOK) and 92.55 (NOK/DKK). 

  • The recession in Norway was ultra short and the upturn has set in. 

  • Norges Bank has begun the normalisation of the interest-rate level and has already hiked twice by a total of 50 bp to 1.75% since October. 

  • We anticipate growth at 2.4% and 2.6% for 2010 and 2011 and project further interest-rate hikes of 125 bp to 3% at 1-year term

Price triggers

  • Increased appetite for risky assets will support NOK. 

  • A further strengthening of the yield gap between Norway and the other G10 countries supports NOK since the prospects of a positive return supports the demand for NOK. 

  • Any rises in the oil price may support NOK.

Investment case

  • The Norwegian krone has already strengthened considerably during the past twelve months. 

  • We still see a potential of a NOK strengthening, and we expect Norges Bank to raise its interest rates further whereas the majority of the other central banks in the G10 universe will still be hesitant. 

  • NOK has already strengthened by 15% in 2009, and therefore we assess that the potential will be more moderate in 2010 (2%-3%),

Risk factors

  • NOK has generally strengthened considerably in the past months, and this is beginning to hurt exporters. 

  • The NOK strengthening may prompt Norges Bank to postpone the hikes to help the manufacturing industry back on track. 

  • Disappointment about growth compared to our and Norges Bank’s forecasts. 

  • A possible deterioration of the sentiment in the financial markets may put pressure on NOK.


Swedish krona – SEK

The Swedish economy has been hit hard by the global crisis but is slowly recovering. The largest trading partners are (% of exports): Germany (10.4%), Norway (9.5%) Denmark (7.4%). Iron, steel, defence equipment and auto are the largest industries. GDP per sector: Service (70.5%), Manufacturing industry (28%), Agriculture (1.6%).

Fundamental valuation

  • SEK is undervalued based on the purchasing power parity – equilibrium 7.65 (EUR/SEK) and 97.25 (SEK/DKK). 

  • The upswing sets in in 2010 after deep recession. 

  • Consumers are more optimistic, but manufacturing industry and exports are still lagging behind. 

  • We expect Swedish growth of 1.7% and 2.4% in 2010 and 2011, respectively (in comparison we project euro- zone growth of 1-1.5% over the same period). 

  • We expect that Riksbanken will begin raising its interest rates in Q3 2010 (the ECB waits till early 2011).

Price triggers

  • Increased appetite for risky assets will support SEK. 

  • Further signals from the Riksbanken of a tightening of the monetary policy and an early normalisation of the interest-rate level. 

  • Positive surprises with respect to economic indicators globally as well as locally (including improvements in exports). 

  • Breach of levels around 9.65 against EUR (approx. 77.10 against DKK) may lead to a further SEK strengthening.

Investment case

  • The Riksbanken has indicated that interest rates will be hiked during the summer or the early autumn. 

  • We expect that the difference in growth between Sweden and the euro zone will be in favour of Sweden. 

  • In Q2 & 3 we believe that the 2Y swap spread to the euro zone will widen and this will support the Swedish currency.

Risk factors

  • An outbreak of risk aversion in the financial markets (for instance based on a government-debt crisis). 

  • The global upturn loses momentum, and the Swedish economy is put under renewed pressure. 

  • Market rates reflect an expectation of hikes of up to 100 bp in H2. We expect the Riksbanken to raise its interest rates by 50 bp in Q3-Q4 – risk of disappointments. 

  • Renewed focus on losses in the Swedish financial sector due to the fragile situation in the Baltic region.


Turkish lira – TRY

The Turkish economy is a mix between modern industry and trade and a traditional agricultural sector. The largest trading partners are (% of exports): Germany (9.8%), UK (6.2%) and China (7.8%). Large industries: textiles, cars and electronics. GDP per sector: Service (45.8%), Industry (24.7%), Agriculture (29.5%)

Fundamental valuation

  • The upswing is now also materialising in Turkey, and Turkey will report positive growth again this year. 

  • Turkey has a relatively healthy banking sector which will support the coming upswing in Turkey. 

  • The Turkish government is working on a number of initiatives designed to secure fiscal-policy discipline in Turkey. This is a positive trend which will in the long term contribute to reducing the risk involved in Turkish assets.

Price triggers

  • The CBRT begins raising its interest rates from the record-low 6.50%. This happens before the ECB and the Fed begin raising their interest rates, i.e. relative risk premium on TRY increases. 

  • Stronger USD/weaker EUR. 

  • The global upswing continues – also in Turkey.

Risk factors

  • The global economic upturn is long in coming. 

  • Too aggressive and too early withdrawal of monetary-policy easing from the ECB and the Fed. 

  • Debt problems in parts of the euro zone continue hitting the headlines with a resultant general reassessment of the country risk. 

  • The CBRT maintains its interest rate at the current 6.50% instead of initiating interest-rate hikes. 

  • A sharp weakening of USD/strengthening of EUR.


Czech koruna – CZK

Compared with the other former communist states, the Czech Republic is the most stable and wealthy economy. The largest trading partners are (% of exports): Germany (30.3%), Slovakia (6.6%) and Russia (6.2%). Primary industry: cars, metal and machinery. GDP per sector: Service (56.2%), Manufacturing industry (37.6%), Agriculture (2.3%).

Fundamental valuation

  • The Czech Republic was also hit by the global economic slowdown, but now the Czech economy is beginning to show signs of growth but the upturn in the Czech Republic will be relatively sluggish. 

  • The Czech Republic is a very open economy. A large share of its exports goes to Germany. The upturn in the Czech Republic will therefore proceed in line with the upturn in Germany. 

  • In comparison with the rest of the region, the Czech banking sector is relatively healthy.

Price triggers

  • The CNB is already showing higher tolerance to a strong CZK. If the CNB continues to show such tolerance, it will, of course, support CZK. 

  • The CNB begins raising its interest rates from the record-low 1.00%. 

  • The global upswing including the improvement in German and Czech economic growth continues.

Investment case

  • In the next 12 months we anticipate a stronger CZK, but the strengthening will only be moderate. 

  • CZK has already recovered considerably after the sharp weakening in 2008/09, and the economic activity in the Czech Republic is still relatively slow. 

  • Exactly when CZK will begin to strengthen again will depend very much on when the CNB begins signalling interest-rate increases and the trend in German economic growth.

Risk factors

  • The CNB’s greater tolerance to the CZK strengthening does not continue. 

  • Growing interest in using CZK as a funding currency for taking up long positions in the other currencies of the region. 

  • Parliamentary election in May – how does the composition of the new Parliament affect the prospects of reducing the budget deficit? The risk involved in the election is moderate. 

  • The global economic upturn is long in coming.