The combination of a weakening euro

Jyske Bank's FX forecasts

FX overview - USD, GBP, CHF, JPY, NOK, SEK, CZK, PLN, HUF, TRY, MXN, BRL, ZAR and CNY

In short

US dollar - USD

The worst panic surrounding the European debt crisis has abated somewhat over recent weeks, and market participants have been pleasantly surprised at the ability of the Mediterranean countries to obtain funding by auctioning government bonds.
This helped to buoy up the euro, and the IMM positions show many indications that speculative investors have already closed a good deal of the short EUR positions accumulated during the spring. In our view, this indicates that the potential for additional appreciation of the EUR against the US dollar from current levels is probably limited, and in general we also find it too early to sound the all-clear with regard to the European debt crisis. In our view, there will still be a risk of renewed political turmoil after the summer holidays, so we also maintain a negative bias for the EUR/USD rate at three months’ term – although we have raised our target to 1.23 in the light of the significant euro appreciation seen over recent weeks. For the longer term we believe that the euro will regain some of what it has lost in step with the reduction of political risk and the narrowing of the massive risk premium which has weighed on the euro for the first half of 2010. Moreover, we expect USD to depreciate when focus homes in on the fiscal-policy tightening measures and the public debt burden of the US – possibly already up to the mid-term elections in the US in early November. Particularly towards the end of our estimate period will pressure against the dollar intensify when the growth differences across the Atlantic lessen.

Pound Sterling - GBP

The predominant issues with regard to sterling are still the huge public-sector deficits and the growing debt burden. The most important task for David Cameron’s new government has therefore been to get the public finances back to a sustainable level. The long-awaited austerity budget announced on 22 June was welcomed by the financial markets and helped to support sterling. The UK will have its work cut out, and the coming years will show whether the economic cure in combination with global growth suffice to save the economy in the long term. Moreover, we do not yet know whether the fiscal tightening and its dampening effect on economic activity will affect the Bank of England’s (BoE’s) monetary policy. It was slightly surprising when Mr Andrew Sentance who is a member of the monetary-policy committee, voted in favour of an interest-rate hike at the monetarypolicy meeting in June. The reason why Mr Sentance voted for higher interest rates was, among other things, concern that rising inflation might be ensconced for a long period. However, we expect that inflation will slow down, and that this fact in addition to the sharp fiscal-policy tightenings will enable the BoE to adopt a waiting stance. Therefore, we still assess that the BoE will keep interest rates at the record low of 0.5% until February 2011. We still expect sterling to head higher in line with the slow decline of the risk premium which has weighed on GBP since the financial crisis peaked. Yet we still find that uncertainty about future developments indicates that developments will be gradual, and that there may be a few bumps on the road.

Swiss franc - CHF

The Swiss consumer price index surprised on the downside in June when inflation fell to 0.5% y/y from 1.1%. An annual growth rate of 1% had been expected, and hence inflation turned out to be somewhat lower than expected. The Swiss National Bank (SNB) toned down concern about deflation considerably in connection with the monetary-policy meeting held on 17 June, intimating that the SNB has abandoned its intervention policy, so that the franc can float more freely. However, the rising inflation rate and concern that the strength of the currency will hit exports has caused market participants to speculate in that the SNB will draw a line in the sand at some time despite its announcement at the interest-rate meeting. The SNB’s currency reserves have fallen steadily since the monetarypolicy meeting in June, and indeed there have been no indications that the SNB has resumed its intervention policy. Still, the franc has weakened somewhat against the euro, which has performed well for the past weeks, and technical analysis indicates that there may be scope for additional weakening of the franc towards 136.50 against the euro. In this connection, we find it important to stress that for the long term we are still of the opinion that the fundamentals (and it cannot be ruled out that the SNB may raise interest rates before the ECB begins a series of cuts) continue to point to appreciation of the franc, and that the uptrend of the franc remains intact. Therefore we still think that investors should close down CHF funding at corrections of the uptrend .

Japanese yen - JPY

The combination of a weakening euro and growing risk aversion in the markets has boosted the yen for months. In recent weeks fears about a euro-zone collapse have abated somewhat, and the VIX index (which indicates the general risk aversion in the markets) has been falling. Anxiety is still not far away, and the more optimistic undertone we have seen in the markets lately still appears fragile. So far, we maintain our estimate of the 3M EUR/JPY rate at 110. Still, in our view the anxiety that has characterised the markets for the past months is merely a correction. Accordingly, we expect anxiety to decrease further. All other things being equal, this will mean that pressure against the yen will grow as investor appetite for risky assets increases.
Another thing in favour of a yen weakening in the longer term is the deflation spectre which acts as a heavy damper on the Japanese economy. Although the economic growth rate has been fairly high for some quarters, Japan has again had to struggle with the deflation spectre, and in our view this means that there are no prospects of interest-rate hikes in Japan until some time in 2012. Economies elsewhere in the world are still showing signs of progress, and even if there are no interest-rate hikes in the pipeline, for instance in the US, the Fed is on present showing likely to begin to tighten its monetary policy in early 2011. The prospect of a wider yield spread to the US, among other countries, will add to the pressure against the yen – particularly towards the end of our estimate period. Last but not least, Prime Minister Kan's government lost its majority in the upper house at the election at mid-July.
Even if the defeat at the election was not fatal, the government came out weaker, and the decision process leading to, e.g., economic reform intended to force the public finances into balance have become considerably more difficult. All other things being equal, this will also depress the yen.

Norwegian krone - NOK

Increased anxiety among investors occasioned by the debt crisis in the euro zone has abundantly demonstrated that the krone is probably still sensitive to higher risk aversion in the markets. Overall, the krone is still supported to some extent by healthy fundamentals and in particular by the gradual tightening by Norges Bank of its monetary policy. On earlier occasions, we have argued that the potential of the krone would probably be relatively little – among other things because the exchange rate is by now nearly back at pre-crisis levels, and because focus on the krone is likely to weaken when the world’s other central banks begin to raise interest rates. Moreover, the economic indicators were somewhat disappointing at the beginning of 2010, and Norges Bank in its latest monetary-policy report envisaged only a single interest-rate hike in the second half of 2010. This supports our expectation expressed earlier that the potential of the krone will be smaller this year than it was in 2009.
Overall, we still expect the krone to be stable to slightly stronger during our estimate period, but if anxiety in the financial markets intensifies, the currency may again suffer a blow.

Swedish krona - SEK

The krona still shows signs of weakness when sentiment in the markets is depressed. GDP growth proved very high at the beginning of this year, and the economic growth rates for Q2-Q4 2009 were subject to significant upward revisions. It also meant that the Riksbank raised interest rates for the first time at the monetarypolicy meeting in July, and although many uncertain points remain about the Swedish economy (among other things, the ongoing debt crisis in the euro zone and, notably, the prospects of global growth), we expect the Riksbank to tighten its monetary policy gradually to a repo rate of 1.75% at one year's term.

All things considered, the Swedish economy has progressed well, and now that anxiety in the markets seems to have abated somewhat, much indicates that the value of the krona will continue to edge up. But the EUR/SEK rate is almost back to its old trading range from before the outbreak of the financial crisis, and we therefore do not expect the krona to strengthen significantly. Panic about the debt crisis in the euro zone has, however abated somewhat, and even if there is a risk – particularly over the coming months – that anxiety will flare up again and put pressure on the krona, we expect the currency to continue to find a certain amount of support in the prospects of interest-rate hikes on the part of the Riksbank.

US dollar - USD

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 slightly undervalued – equilibrium around 1.20 (EUR/USD) and 6.20 (USD/DKK).
We expect US growth to be markedly higher than eurozone growth (at least twice as high) in both 2010 and 2011.
Interest-rate hike from the Fed in March 2011. ECB will wait until June 2011.
The debt crisis in the euro zone and the need for fiscal-policy tightening may have an adverse effect on growth in the euro zone.

Price triggers

Improvement of economic indicators from the US (relative to the euro zone).
Narrowing of credit spread between Europe and the US at the short end of the yield curve (up to 2Y) will support USD.
Negative surprises in the euro zone, e.g. in the form of failed government bond auctions.
The Fed is setting the scene for a normalisation of the monetary policy (e.g. by removing the promise to keep interest rates low and withdrawing quantitative easing)

Investment case

The debt crisis in Southern Europe and uncertainty about its consequences for growth have flagged off, but the danger is not over yet.
Risk of political turmoil after the summer holidays.
Relatively better prospects for the US economy will support USD.
The yield spread will narrow in favour of USD over the coming quarters.
USD is still in a technical uptrend.

Risk factors

For the short term: risk of USD weakening if US economic indicators continue to disappoint.
Continued decreasing concern about the situation in Southern Europe may support EUR.
Need for fiscal-policy tightening in the US may delay the first interest-rate hike.
New monetary-policy easing may put USD under renewed pressure.
Doubt about the status of USD as a reserve currency may enhance the pressure on USD.

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%). 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 based on the purchasing power parity – equilibrium is approx. 0.7360 (EUR/GBP) and 10.13 (GBP/DKK).
The upturn in the UK is still weak and massive savings of public budgets will over the coming years slow down growth further.
Inflation and inflation anticipations are, however, rising and this leaves BoE in a dilemma.

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 will be more sustainable and hikes will be made sooner than expected.

Investment case

We expect a stable to slightly stronger GBP over the coming months. The greatest potential in GBP is some months ahead.
The end to quantitative easing and an interestrate hike from the BoE in February 2011 (ECB will wait until June 2011) will support pound sterling.
A gradual improvement of the economy and clarification about the new government’s fiscal line 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.
Renewed uncertainty about the sustainability of the UK economy may raise doubt whether the UK will be able to maintain its current credit rating.
The euro-zone countries succeeded in putting a damper on the worse uncertainty and EUR is lifted.

Swiss franc – CHF

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

Risk of further CHF appreciation

Our scenario of an upward shift to a new level in the Swiss franc is still relevant (see the research report Risk of CHF appreciating further from 20 May).
At the June meeting, the Swiss National Bank (SNB) did maintain its rate, but its subsequent comment did not contain the by now so well-known remark that it would 'prevent any excess strengthening of the Swiss franc'.
Instead the SNB said that it would intervene if the appreciation becomes a problem again in respect of renewed risk of deflation.
The SNB stated also that the threat of deflation has generally been eliminated.
This indicates that at this point in time, the SNB is not overly concerned that an appreciation of the franc will have serious consequences for the economy, and with these signals there is every indication that the franc will appreciate further.
The debt crisis in Southern Europe has so far prompted the SNB to leave interest rates unchanged but seen in isolation developments in the domestic economy indicate that a hike may soon be appropriate. When the SNB indicates a tightening of its monetary policy, it will be another supportive factor for the currency.
Fundamentally, there are many indications of a stronger franc for the period ahead.
Technically, EUR/CHF is in a downtrend with resistance at the moment around 140 and for the short term around 136-136.50.
It appears increasingly likely that we will see a test of 134.80 in EUR/CHF.
There are thus still many indications of a shift to a new level for the Swiss franc where the new, strong level is maintained for both the short and long term.
Investors should therefore use corrections towards 140 in EUR/CHF to close Swiss franc funding.
The new major range in EUR/CHF is now 122-140.

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 (% of exports): The US (17.8%), China (16%), South Korea (7.6%). Japan produces: motorcycles, electronics, ships and chemicals. GDP per sector: Service (66.4%), Manufacturing industry (27.9%), Agriculture (4.4%).

Fundamental valuation

Based on purchasing power parity, JPY is overvalued – equilibrium around 1.47 (EUR/JPY) and 5.07 (JPY/DKK).
Growth declines – e.g. the effect from the fiscalpolicy easing fades away.
A number of factors puts a damper on growth, including the need to consolidate the public finances, which are in a sorry 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 2012 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 will increase the purchase of government bonds (extend 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. The BoJ will not tighten its monetary policy until 2012 at the earliest.
We expect, however, that the other G10 central banks will start tightening their monetary policy early next year (BoE in February and Fed in March 2011).
A widening of the yield spreads will squeeze the yen.

Risk factors

Renewed outbreak of risk aversion due e.g. to the debt crisis in the euro zone
The global crisis is slow in progress and the normalisation of the interest-rate levels in the other G10 countries is long in coming.
Technical breach of 108 for EUR/JPY may pave the way for further strengthening of JPY down towards 100.

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 is slightly undervalued with respect to purchasing power parity – equilibrium 7.80 (EUR/NOK) and 95.4 (NOK/DKK).
The upswing in Norway has begun.
Norges Bank has begun the normalisation of the interest-rate level and has already hiked three times by a total of 75 bp to 2% since October.
We expect growth of 1.9% and 2.6% in 2010 and 2011, respectively, and we expect further hikes totalling 100 bp to 3% at 12-months' term.

Price triggers

Increased appetite for risky assets will support NOK.
Further widening of the yield spread between Norway and the other G10 nations supports NOK since the prospect of a positive return supports the demand for NOK.
Any rises in the oil price may support NOK.

Investment case

The krone has already strengthened somewhat over the past twelve months.
We believe in a stable to weak positive development in NOK over the coming year, as Norges Bank will raise interest rates further, while the majority of the other G10 central banks will remain reluctant.
NOK has already strengthened by 15% in 2009, and we therefore assess that the potential will be more limited in 2010 (2-3% over the year).

Risk factors

The NOK strengthening may prompt Norges Bank to postpone the hikes to help the weak manufacturing industry to get back on track.
Growth has disappointed in early 2010 and if this trends continue it may have consequences for Norges Bank’s future interest-rate path.
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 automotive are the largest industries. GDP per sector: Service (70.5%), Manufacturing industry (28%), Agriculture (1.6%).

Fundamental valuation

SEK is undervalued based on purchasing power parity – equilibrium 7.60 (EUR/SEK).
The upswing will begin in 2010 after the deep recession.
Consumers are still optimistic and the industry and the export are now also improving.
We expect growth in Sweden of 3.2% and 2.4% in 2010 and 2011, respectively (we believe euro zone growth will be 1-1.5% for the same period).
We expect the Riksbanken to begin to raise interest rates in July 2010 (ECB waits until mid-2011).

Price triggers

Increased appetite for risky assets will support SEK.
Signals from the Riksbanken of a further tightening of the monetary policy and an early ‘normalisation’ of the interest-rate level.
Positive surprises with respect to economic indicators both globally and locally (including continuing improvements in exports).

Investment case

Riksbanken has indicated that interest rates will be hiked during the summer or early autumn.
The strong growth in early 2010 indicates an interest-rate hike in July.
We expect that the difference in growth between Sweden and the euro zone will be in favour of Sweden.
The yield spread (2-year swap spread) to the euro zone will develop in favour of Sweden over the coming quarters, and this will support the SEK.

Risk factors

An outbreak of risk aversion in the financial markets (e.g. based on a government-debt crisis).
The global upturn loses momentum, and the Swedish economy is put under renewed pressure.
Market rates reflect expected hikes of up to 75 bp in H2. Risk of disappointments if the crisis in the euro zone escalates.

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%), Russia (6.2%). Primary industry: auto, 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. The activity level in the Czech Republic is still relatively low.
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 begins lifting its interest rates from the record-low 0.75% (the prospects are relatively long).
Focus on the debt problems in the euro zone fades.
The global upswing including the improvement in German and Czech economic growth continues.

Investment case

Over the next twelve months, we have a neutral view on CZK against EUR and DKK.
CZK has already recovered considerably after the strong weakening in 2008/09.
The Czech central bank (CNB) took the market by surprise with an interest-rate reduction at its meeting in early May. Together with the current focus on the debt problems in the euro zone this may delay the time for interest-rate hikes and prevent a further strengthening of CZK.

Risk factors

Concern about the debt problems in the euro zone escalates. The Czech Republic does not show the same vulnerability with respect to public indebtedness as for instance Greece but the theme still tends to have an adverse effect on CZK.
The CNB lowers its interest rates even further.
The global economic upswing is long in coming.

Polske zloty – PLN

Poland has successfully liberalised its economy since 1990. First in line to adopt the euro. Largest export countries: Germany (24.4%), France (6%) and Italy (5.9%). Large industries: machinery, iron, steel, coal, chemicals, ships. GDP per sector: Service (67.3%), Manufacturing industry (28.1%), Agriculture (4.6%).

Fundamental valuation

As the only country in the region, Poland came through the global economic slowdown without negative growth rates. Notably domestic demand supported growth. Poland is in a strong fundamental position for the period ahead.
Foreign-currency loans make up a lower proportion than in e.g. Hungary - they constitute a lower risk for the economy.
Poland’s weak point is the budget deficit which was 7.5% of GDP in 2009.

Price triggers

The government’s privatisation plans for 2010 should support the zloty.
Focus on debt problems in the euro zone fades.
The Polish central bank begins to hike rates.
We may see positive surprises from this year’s budget deficit. If so, it would be positive for the zloty.

Investment case

The zloty is still undervalued; we expect the zloty to appreciate against the euro over the next 12 months.
The Polish central bank will begin to hike interest rates before the ECB. This will most likely not happen until early 2011.
The degree of focus on the debt problems in parts of the eurozone may determine the timing and the speed of a zloty appreciation.

Risk factors

Zloty is one of the region’s most liquid currencies and is used to take a negative view on the region.
If the pressure on the euro continues, there is a risk that the zloty may appreciate against the euro.
Higher-than-expected budget deficit.
In April, the Polish central bank intervened for the first time in ten years against the zloty. Further intervention is a risk but the new Central-Bank Governor Belka appears less willing to use the intervention tool.

Hungarian forint – HUF

Hungary is dependent on exports to the other EU countries. The country has challenges due to high private indebtedness in foreign currencies. Largest export countries: Germany (25.4%), Italy (5.2%), Romania (5.1%). Large industries: mining, machinery, textiles, chemicals. GDP per sector: Service (62.4%), Manufacturing industry (34.3%), Agriculture (3.4 %).

Fundamental valuation

An economic upswing is very dependent on rising export demand (exports account for approx. 80% of GDP). The Hungarian authorities are therefore not interested in a much stronger forint. At the other end is the large share of foreign-currency loans.
At the parliamentary election in April, Fidesz received 2/3 of the votes. This gives the new government the possibility to implement reforms which are necessary to increase the country’s potential growth rate. There are doubts about the government’s willingness to do so.

Price triggers

The political development is currently decisive for the forint. The new government’s future cooperation with the IMF may for instance be crucial (the current loan programme expires in October 2010). The planned examination in July was interrupted.
Hungary is not in acute need of liquidity, but if EUR/HUF should be able to return to the 265/280 range, it is necessary that the cooperation with the IMF is back on track.

Investment case

So far, the new government has not acted in a way which can be considered market friendly. In addition, the recent routine negotiaions with the IMF have been interrupted. This means that the political risks involved in HUF have increased.
The central bank should be ready to implement extraordinary interest-rate hikes/intervention, if EUR/HUF increases to around 300.
The fundamental case should prevent appreciation of the forint.

Risk factors

The forint is vulnerable to the current negative focus on the debt problems in the eurozone since Hungary shows some of the same vulnerabilities. The important difference is that Hungary initiated the consolidation of the public finances already in late 2008 and has a better starting point than e.g. Greece.
Political announcements from the government which has just taken up office.
The cooperation with the IMF does not continue.
Increasing risk aversion.

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: textile, auto and electronics. GDP per sector: Service (45.8%), Manufacturing industry (24.7%), Agriculture (29.5%).

Fundamental valuation

The upswing has now gained a firm foothold in Turkey, and Turkey will report positive economic growth again this year. This is supported by recent activity indicators in Turkey.
A relatively healthy banking sector will support the upswing.
The government is working on initiatives to secure fiscal-policy discipline in Turkey. This is positive and will reduce the risk involved in Turkish assets over the long term.

Price triggers

The CBRT begins raising its interest rates from the record-low 7%. This happens before the ECB and the Fed begin raising their interest rates, i.e. the relative risk premium on the lira increases. We anticipate the first interest-rate hike in Turkey in early 2011.
Weaker euro/stronger US dollar.
The global upswing continues – also in Turkey.
General risk appetite.

Investment case

Seen in relation to before the sale of risky assets in 2008, the lira is still weaker against the euro and the US dollar – still catch-up potential.
The lira is a dollar-related currency, i.e. our expectations of a fall in EUR/USD will support the lira against the euro.
The timing of a TRY strengthening will for instance depend on when the CBRT begins to signal hikes.

Risk factors

The largest risk for the lira against the euro is currently a sharp appreciation of the euro against the US dollar.
The global economic upswing is long in coming.
Too aggressive and too early withdrawal of monetary easing from the ECB and the Fed.
Debt problems in the euro zone escalate with a resultant general re-assessment of country risk.
The CBRT maintains interest rates at the current 6.50% rather than beginning to hike interest rates.

Mexican peso – MXN

Mexico is also called the 51st state of the US since the country is so dependent on exports to the US. Largest export countries: the US 80.5%, Canada 3.8% and Germany 1.4%. Large industries: food, beverages, tobacco, oil and chemicals. GDP per sector: Service (65%), Manufacturing industry (31%), Agriculture (4%).

Fundamental valuation

We expect growth of 4% in 2010 and 2011 after the worst recession in 2009 in living memory.
The IMF’s growth expectations of Mexico have been revised up.
Much depends on developments in the US which accounts for about 80% of Mexico’s exports.
Given expected solid US growth in 2010 (3.2%) and 2011 (2.9%), exports are solidly supported.
Good signs that the domestic economy will also be growth engine. Unemployment has fallen from 6.5% to 5 1%

Price triggers

MXN has high correlation with USD so continued USD appreciation will support MXN against EUR.
US growth and employment data.
Mexican growth and inflation data.
If the recovery gains momentum, the country may be upgraded. S&P downgraded Mexico last year. Mexico still has an investment-grade rating with stable outlook at the three major credit rating agencies.

Investment case

We expect the peso to strengthen against both USD and EUR. Still catch-up potential to the levels before the Lehman collapse in the autumn of 2008.
MXN will appreciate the most against EUR in a scenario with a concurrent fall in EUR/USD. Our expectations of EUR/USD at 1.23 at three months’ term should therefore be supportive of MXN. The opposite will be the case for our expectations of EUR/USD at 1.33 at 12 months’ term.

Risk factors

USD weakening is a risk factor.
Rising concern about economic growth in the US.
We see higher focus on drug-related violence because a prominent local politician was murdered prior to the local elections on 4 July. If the violence escalates, it may weaken confidence around Mexico.
Intervention – the central bank’s purchase of USD.
Political deadlock in Mexico. The Liberals hold the presidency and the Social Democrats are biggest in the parliament so reforms are difficult.

Brazilian real – BRL

South America’s largest economy and one of the powerful BRIK countries. Has since 2002 improved its economy in key areas. Largest export countries: the US (13.7%), Argentina (8.7%) and China (8.1%). Large industries: textiles, auto, chemicals and wood. GDP per sector: Service (67.7%), Manufacturing industry (25.8%), Agriculture (6.5%).

Fundamental valuation

Brazil has escaped from the crisis; the GDP level prior to the crisis was reached already in Q4 2009. In Q1, economic growth was 9.0% y/y.
We have just revised up our growth estimate for full 2010 to 7.5% and 4.7% for 2011.
Economic growth will push up inflation. Most recently calculated at 4.84%. Still within the target of 2.5% – 6.5%.
The country is gaining influence (BRIK country) and is in focus on the global political scene.

Price triggers

Brazil has a BBB- rating (lowest investment grade). Is in a strong position for an upgrade.
Presidential election in October. Lula’s line is expected to be continued, which is positive for BRL.
Fiscal tightening after the presidential election will be welcomed by the financial markets.
Still strong domestic growth and fair exports to growth areas such as the US and China make the country immune to the eurozone crisis.

Investment case

The real is supported by an attractive interest-rate level. Interest rates were increased by 2 x 75 bps plus 1 x 50 bps in 2010 to 10.75%.
Further interest-rate hikes are in store. We expect an interest rate of 12.50% at 12 months’ term.
A less dollar-related investment in Latin America than MXN and COP.
Against USD, BRL is weaker than before the Lehman collapse in 2008, so still catch up. Against EUR, BRL is weaker, so limited potential.

Risk factors

Intervention – purchase of USD against BRL.
Higher taxes on capital flows. In late 2009, the government introduced a 2% tax on capital inflows.
Presidential election in October. Keep an eye on announcements regarding a more relaxed fiscal policy and whether any candidates question the independence of the central bank.
Negative news on public indebtedness.
Rising concern about global economic growth.

South African rand – ZAR

Many natural resources and healthy banking sector but after-effects of apartheid – e.g. high unemployment. Largest export countries: Japan (11.1%), The US (11.1%) and Germany (6.8%). Large industries: mining, machinery and textiles. GDP per sector: Service (64.4%), Manufacturing industry (32.1%), Agriculture (3.5%).

Fundamental valuation

The FIFA World Cup is well over with exclusively positive press coverage. The FIFA World Cup was a fine exposure of the country.
The FIFA World Cup supports GDP directly in Q2-Q3. Then the contribution will be more uncertain, but we see more gains than risks for South Africa.
Inflation under control and within target
Too many South Africans live on public aid. Constitutes a risk to public finances but also potential if they are educated and employed.

Price triggers

South Africa is on negative outlook at S&P and Fitch. Change of negative outlook will be positive.
Price rises of commodities (our main scenario).
Increases in the US equity markets are usually supportive of ZAR.
Continued fair growth indicators combined with an inflation rate which is still under control.

Investment case

Buy the rand against the euro, e.g. via 10-year bonds. In July, the y-t-m fell from 8.90% to 8.40%. We believe that the fall will continue to 8.25% at end-2010.
High real interest rate (almost 4%) supports the rand
Debt crisis in the eurozone does not spoil the global growth picture, which is very positive. Especially Asia is on the rise, which will support the rand due to the large export of commodities to Asia.
We see a moderate strengthening towards USD. We see ZARDKK at 0.77 at 12 months’ term (=EURZAR at 9.64).

Risk factors

South Africa is currently on negative outlook at S&P and Fitch. A downgrade will be negative.
Falling US equity markets and price declines on commodities.
Currently concern about US economic growth. If the concern about growth spreads to the Asian economies, it is bad news for ZAR since South Africa benefits from exports to Asia.
The current account deteriorates again. Further deterioration is negative.

Chinese yuan – CNY

China has moved from planned economy to a rapidly growing market economy and is now a key player in the global economy. Largest export countries: The US (17.7%), Hong Kong (13.3%) and Japan (8.1%). Large industries: mining, consumer discretionaries and machinery. GDP per sector: Manufacturing industry (48.6%), Service (40.5%), Agriculture (10.9%).

Fundamental valuation

Until mid-2008, the exchange-rate policy in China aimed at allowing CNY to strengthen gradually against USD. But the global economic slowdown hit China too and the Chinese Central Bank (PBoC) changed its policy. Since mid-2008 and up to mid- June 2010, CNY was fairly stable against USD at 6.83.
The PBoC has already begun to tighten banks’ reserve requirements and on 19 June the PBoC announced increased flexibility of the yuan.

Price triggers

Continued strong growth indicators from China although growth is expected to fall slightly. Particularly the development of China’s exports is important to yuan appreciation.
Global growth continues to show signs of improvement.
A long period with a weakening of the US dollar may lead to a sharper appreciation than the 5%-6% against the US dollar a year.

Investment case

In principle, the PBoC’s statement of increased flexibility of the yuan does not vow anything about future appreciation of the currency.
We expect it will lead to appreciation of the yuan against the US dollar.
It will not be a revaluation of the yuan but a gradual appreciation of the yuan against the US dollar by 5-6% a year.

Risk factors

Disappointing Chinese exports may put a damper on a yuan appreciation.
So will a period of sharp appreciation of the US dollar. It is not unlikely that such a scenario may lead to a rise in USD/CNY.
Increasing risk aversion.