Currencies | Nov 16 2011
– Danske Bank revises forex forecasts
– Euro to depreciate shorter-term
– US dollar to hit all-time lows against yen in coming months
– Parity likely for Canadian dollar against greenback
– Australian and New Zealand dollars to see support against US dollar
By Chris Shaw
The combination of sharply higher funding costs in Southern Europe and a weakening in the economic outlook in the region means EUR/USD downside risks have increased significantly in the past month according to Danske Bank.
With the Eurozone economy likely having entered recession in the fourth quarter the European Central Bank (ECB) is expected to deliver further rate cuts, Danske suggesting the policy rate could fall below 1.0% for the first time.
This is a significant shift in policy, as Danske notes in other episodes of rising debt fears the euro has been supported by relatively tighter monetary conditions. To reflect this shift, and the expectation the US economy will outperform the Eurozone in coming quarters, Danske has adjusted its forecast for the EUR/USD rate to 1.30 on both a 3-month and 6-month view.
From a medium-term perspective, Danske continues to expect underlying US dollar weakness, this due to the US external deficit and the potential for renewed Fed easing. This means on a 12-month view Danske Bank is forecasting a EUR/USD rate of 1.38.
For the euro relative to the British pound Danske sees scope for the EUR/GBP to continue lower on a 3-month basis, with 0.83 likely to be tested. Longer-term the outlook is more uncertain, but Danske currently expects on a 6-month view the EUR/GBP rate will return to a current spot rate around 0.86 and to 0.89 on a 12-month time frame.
While intervention by the Bank of Japan temporarily strengthened the US dollar against the yen the dollar has again fallen below 77 yen in recent weeks. Danske expects this trend of a weaker greenback will continue, not least because there is the risk of more aggressive policy moves by the Fed.
Danske expects the US dollar will reach new all-time lows of 75 and 74 against the yen on 3-month and 6-month horizons. These compare to previous estimates of 78 yen and 79 yen respectively. On a 12-month basis Danske expects to see some upside potential for the USD/JPY, forecasting a rate of 78 against the yen.
For the Canadian dollar, weak risk sentiment could see further depreciation relative to the US dollar in coming months, but the medium-term outlook remains positive in Danske's view. This reflects expectations of higher commodity prices, reduced global recession fears and further Fed easing. Danske Bank is forecasting a 3-month CAD/USD rate of 1.00 and a 12-month rate of 0.96.
With respect to the Australian dollar, Danske Bank takes the view while weaker global growth will translate into weaker Australian growth, Australia should still outperform most developed economies.
Following the cut in official rates in November, Danske Bank expects further rate cuts by the Reserve Bank of Australia (RBA) in coming months. But for the currency, the market is already pricing in more than 100-basis points of cuts and Danske doesn't expect cuts of this magnitude will be delivered.
While Australia's terms of trade has likely peaked, Danske expects higher commodity prices in 2012 will generate renewed demand for the Australian dollar. This, plus weak US economic fundamentals, supports the AUD/USD rate even though on a purchasing power parity basis Danske notes the exchange rate should be closer to 0.76 against the US dollar.
Given expectations of an improved terms of trade in 2012 and less rate cuts by the RBA than the market currently expects, Danske sees the AUD/USD rate appreciating. From a 3-month forecast of 1.00, Danske sees the rate rising to 1.10 on a 12-month basis.
For the New Zealand currency Dankse notes relative rates remain supportive, particularly as the Reserve Bank of New Zealand (RBNZ) is expected to tighten monetary policy further in coming months.
As with the Australian dollar, the New Zealand dollar remains over-valued relative to the US dollar, but again terms of trade and weak US fundamentals support this in Danske's view. Reduced global recession fears and rising commodity rates should be supportive, so Danske is forecasting a 3-month NZD/USD rate of 0.80, rising to 0.85 on a 12-month basis.
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