FYI | Nov 17 2008
By Chris Shaw
Having factored further risk aversion into its foreign exchange forecasts late last month Danske Bank now notes the rapid rise in risk aversion has stopped. This, the bank suggests, means limited upside from here for both the Japanese yen and the Swiss franc, as both are beneficiaries of any trend in financial markets that favours the reduction of risk.
What hasn’t changed in the bank’s view is the two themes dominating investment decisions at present, being the ongoing financial crisis and the global recession. Its forecasts indicate there will be no expansion in global economic activity levels until the second half of 2009 at the earliest.
Key data have been supportive to this outlook and are likely to continue to be, hence why the bank expects no upcoming change to what are tough conditions. Both household and business conditions are expected to weaken further given in both cases access to credit has been tightened in the wake of the financial crisis. As well, Danske Bank suggests there is still scope for a further wave of bad news to hit the global economy, which supports its view there won’t be any improvement in global growth for some time yet.
While the counter-cyclical currencies such as the yen and the Swiss franc would ordinarily be beneficiaries of such conditions, this is offset in the bank’s view by the expected reduction in systematic risk, so it has lifted its forecast profiles for both the US dollar and the euro.
Taking a longer-term view, the bank expects the global financial recovery will be a gradual one, the slow normalisation of conditions meaning risk premiums will come down but remain at elevated levels. Such conditions are supportive for ongoing US dollar strength at the expense of both the yen and the Swiss franc, in its view.
In terms of the yen/US dollar rate, the bank is forecasting a one and three month rate of 94, moving to 102 on a 12-month timeframe, while for the Swiss franc/US dollar the bank is forecasting a rate of 1.19 in one month, 1.21 in three months and 1.28 in 12 months. These forecasts compare to current spot rates of around 97 for the yen and 1.19 for the franc.
In terms of the euro, the bank has lifted its profile for the currency against the British pound as well given the Bank of England’s latest rate cut and the announcement it will cut rates to whatever level is needed to support the UK economy in the wake of the current crisis.
The move also reflects Danske Bank’s view the outlook for the UK economy and as a result the prospects for the pound remain very poor given the housing market continues to fall and consumption is trending lower. In terms of its forecasts, the bank sees a British pound/Euro rate of 0.88 in a month’s time, 0.86 in three months and 0.80 in 12 months, which compares to a current spot rate of around 0.86.
