Currencies | Aug 20 2010
By Chris Shaw
Danske Bank has revised its currency forecasts to reflect its latest review of market and economic conditions, the bank taking the view the global mid-cycle slowdown is likely to prove supportive for the US dollar, the Japanese yen and the Swiss franc.
Looking at specific currency pairs, Danske Bank expects the EUR/USD to adjust lower in the shorter-term as it sees the US currency as too negatively priced at present. As well, the bank's view is the European economy is not as positive a story as the exchange rate currently suggests.
This implies a move to 1.24 for the EUR/USD shorter-term, though longer-term the bank suggests more factors are dollar negative so it sees the EUR/USD rate trading higher than current spot levels of around 1.28 on a 12-month horizon. Danske's 12-month forecast is a rate of 1.32.
Japanese economic data have disappointed of late, but at the same time the yen has strengthened and now is close to all-time record levels against the US dollar. Policy makers in Japan are becoming increasingly aware of the negative impacts of the yen's strength, especially with regards to exporters.
According to Danske Bank, this could trigger either intervention, which would be a negative for the yen, or a blow-up in risk aversion or diversification away from the US dollar. Both of these would be yen positive.
In Danske Bank's view, the USD/JPY has fallen too far on concerns of a hard landing in the US economy, but a recovery to fair value in the range of 90-100 will require a normalisation of US yields. While global interest rates remain subdued the 80-90 range for the USD/JPY appears appropriate in the bank's view for the next six to nine months.
With respect to the EUR/GBP pair Danske Bank notes recent growth in both economies has been below structural levels, the difference being Germany is currently supporting Euro growth while prospects for the UK economy are worsening.
Short-term, sterling appears overbought and so Danske expects the EUR/GBP rate to rise slightly from current spot levels. Longer-term, the bank suggests the EUR/GBP remains well above the long-term equilibrium and so it expects EUR/GBP will fall below current spot given valuation effects.
On both a one month and three month basis, Danske expects a EUR/GBP rate of 0.84, rising to 0.85 on a six month view and 0.82 on a 12-month view.
For the EUR/CHF Danske Bank suggests current fundamentals justify an expensive franc as Switzerland is running a current account surplus at present and there remains risk of an early monetary tightening by Swiss authorities.
Danske Bank expects a EUR/CHF rate in the 1.30-1.40 range with potential for more oversold levels to be tested before year's end. Longer-term the current excess euro premium should be priced out and Danske expects this to lead to a gradual normalisation of the cross rate.
With respect to the AUD/USD pair, Danske Bank suggests the relative cyclical outlook favours the Aussie dollar as US economic data continue to disappoint while Australian data remain supportive.
The market is no longer pricing in further interest rate hikes in Australia, but relative rates should continue to support the AUD/USD rate in coming months, while the Reserve Bank of Australia could quickly turn more hawkish if data require such a move.
The relative balance of payments situation between the two economies also supports the Aussie dollar at present and so while the currency is currently overvalued relative to the US dollar, Danske Bank sees scope for this trend to continue over the shorter-term.
Looking further ahead, the bank sees a correction lower in the AUD/USD rate as the market prices in a global economic slowdown so it is forecasting rates of 0.87 on a three month basis, rising to 0.90 on a six month view and 0.92 on a 12-month basis.
In New Zealand, the economy has enjoyed six successive quarters of expansion but Danske Bank suggests the outlook is becoming increasingly shaky as leading indicators have peaked. The Reserve Bank of New Zealand has been lifting rates and the market is pricing in further hikes over the next 12 months.
An improved balance of payments situation has also reduced the risks for the New Zealand dollar, though Danske Bank notes a more severe global slowdown than expected could see relative rates move against the Kiwi currency.
With potential for a lower global growth environment to see the market price out further rate hikes in New Zealand, the NZD/USD is likely to trend lower in coming months, though as Danske notes if the global economy doesn't see a double dip the NZD/USD rate should remain supported at currently overvalued levels.
Danske Bank's NZD/USD forecasts stand at 0.69 on a one month and 0.67 on a three month view, while it expects a rate of 0.70 on a six month and 0.72 on a 12-month view.
Expectations remain high for the Canadian economy though as Danske Bank notes, the risk is these expectations won't be met given recent data and the potential for downside surprises. A further 50-basis points of rate hikes are priced in at present and Danske suggests this is likely to be the maximum of any moves.
If the global economy slows further this will impact on oil prices and Danske Bank sees this as a potential negative for the Canadian dollar, while the market could also price out expectations for further rate hikes. At present, Danske Bank notes the USD/CAD is in line with its model but it suggests this is too low when relative rate expectations are factored in.
For the CAD/USD Danske Bank is forecasting one and three month rates of 1.05.moving to 1.07 on a six month view and 1.10 on a 12-month basis.
