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FX Convictions

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29 January 2016

Central banks tackle sentiment

Yen in favour followed by the dollar…

Since the end of November, sentiment in financial markets has clearly deteriorated. The

continued slide in the oil price and uncertainty about global growth have been the main

reasons behind this. In this environment the yen has outperformed in currency markets

because of its safe haven status. The US dollar has been the runner-up mainly because its

current cyclical behaviour has capped the upside versus major currencies such has the yen

and the euro.

…meanwhile investor sentiment towards sterling has deteriorated…

The downward adjustment in expectations about the UK economy, expectations of a later BoE

rate hike and uncertainty surrounding the Brexit referendum has seriously weighed on

sterling. As a result, it is one of the few non-commodity currencies that has underperformed.

…while currencies of commodity exporters came under pressure

Currencies of commodity exporting countries have been aggressively sold off for several

reasons. For a start, the slide in oil prices pressured currencies of oil exporting countries such

as NOK, CAD, RUB and MXN. Moreover, this oil price slide weighed on risk sentiment

because of its impact on economies of oil exporters and the impact of a sharp reduction in

petrodollars towards other financial assets. Moreover, the consistent decline in oil prices has

resulted in concerns about the state of the global economy. In turn, this has led to a sharp

deterioration in sentiment towards commodities, currencies of other commodity exporting

countries and growth sensitive currencies. As a result, AUD, NZD, ZAR and BRL moved

sharply lower versus the US dollar and the yen. However, the recovery in investor sentiment

and oil prices helped by central bank reflation efforts has resulted in some recovery in prices.

Group EconomicsMacro & Financial Markets

Georgette Boele

Co-ordinator FX & Precious Metals

Strategy

Tel: +31 20 629 7789

georgette.boele@nl.abnamro.com

Roy Teo

Senior FX Strategist

Tel: +65 6597 8616

roy.teo@sg.abnamro.com

• Risk off favours yen and US dollar…

• …but weighs on commodity and growth-sensitive FX

• Central banks reflation efforts starting to gain some traction

• We keep our US dollar longs versus the euro, the sterling, the

Japanese yen, the Australian and New Zealand dollars in place

Marketing Communication

2 FX Convictions – Central banks tackle sentiment - 29 January 2016

CEE FX at the margin more vulnerable

In general, currencies of central and Eastern Europe are shielded from these negative

developments as long as the eurozone economy is holding up relatively well. However, this

time around fears that Poland is moving towards a Hungarian-style political regime and

uncertainty surrounding Turkish monetary polish have weighed on the zloty and the lira.

Performance of major FX 4 Dec – 29 Jan Performance of our EM FX coverage 4 Dec – 29 Jan

In % with USD as basis In % with USD as basis

Source: Bloomberg Source: Bloomberg

Our convictions views

Since our latest report on 4 December 2015, we have kept in place our long US dollar views

versus the euro, the sterling, the Japanese yen the Australian and New Zealand dollar.

-6

-4

-2

0

2

JPY EUR NZD SEK NOK CHF AUD CAD GBP-15

-10

-5

0

5

THB

IDR

HU

F

CZK

CLP INR

SG

D

TW

D

TRY

PLN

CN

Y

KR

W

BR

L

MX

N

RU

B

ZAR

Our open and closed high conviction 2016 views

High conviction views

Source: ABN AMRO Group Economics

High conviction views

Open Position base currencyUSD/JPY Long since 20 November 2013

AUD/USD Short since 3 July 2014

NZD/USD Short since 30 March 2015

EUR/USD Short since 12 Nov 2015 15.15

GBP/USD Short since 26 Nov 2015 15.11

Closed

AUD/USD Closed short on 5 February 2014, re-opened on 3 July 2014

NZD/USD Closed short on 6 January 2014

USD/CAD Closed long on 5 February 2014

USD/CNY Closed short on 6 February 2014 on opening

KRW/JPY Closed long on 5 February 2014

EUR/GBP Closed short on 16 June 2014

EUR/CHF Closed long on 1 July 2014

EUR/SEK Closed long on 3 July 2014

EUR/PLN Closed short on 2 September 2014

USD/MXN Closed short on 30 September 2014

USD/CHF Closed long on 31 October 2014

CNH/JPY Closed long on 10 November 2014

EUR/MXN Closed short on 12 December 2014GBP/USD Closed short on 19 May 2015 at 14.30

EUR/USD Closed on 15 Oct 2015 at 1.1440USD/SGD Closed on 15 Oct 2015 at 1.1780

3 FX Convictions – Central banks tackle sentiment - 29 January 2016

Patience with euro short

Ahead of the FOMC meeting market expectations about possible rate hikes had been scaled

down. Therefore investor sentiment was more constructive and the US dollar was under

pressure. The statement was more dovish-than-expected and as a result the US dollar

remained slightly under pressure. Financial markets now expect only one rate Fed hike for this

year. We still expect three rate hikes of 25bp with the next rate hike scheduled for June.

Though the risk has increased for later or fewer rate hikes. On the other side of the Atlantic,

we expect the ECB to reduce the official deposit rate to -0.5% with a 10bp rate reduction in

March and a 10bp rate cut in June. In addition, we expect an increase of the Asset Buying

Program by 10bn per month at the March meeting. If investor sentiment improves again on

the back of improvement in economic data and a stabilisation in oil and other commodity

prices, monetary policy divergence should make a come-back as main driver in currency

markets. Therefore, we expect EUR/USD to move to parity in the course of this year.

Sterling short versus US dollar

Since we have initiated the position short sterling versus dollar as of our top convictions, it has

gained more than 5% mainly because of a downward adjustment in expectations about the

US economy, a later start of the BoE tightening cycle and the uncertainty surrounding the

Brexit referendum. Currently financial markets are only pricing in a 50% probability of a BoE

rate hike this year. This is around our expectations. It is likely that sterling will weaken further

as uncertainty about the Brexit referendum will unlikely fade in the coming months. In addition,

UK economic data could disappoint, which will weigh on sterling as well. Our main scenario is

that Brexit will be avoided. As a result, we expect sterling to recovery strongly following this

referendum outcome also because the focus will turn to the start of the BoE rate hike cycle.

Compared to market expectations, we see more tightening in 2017. Therefore, we expect a

rally of sterling in 2017.

Further weakness in JPY as BoJ starts negative interest rate policy

This morning the Japanese yen (JPY) plunged from 118.50 to 121 against the USD. The BoJ

became the latest central bank to join global reflation efforts by cutting its interest rate on new

excess reserves into negative territory. The BoJ’s negative rate system differs from that of the

ECB. For excess reserves, the BoJ has a dual system as it will only be new reserves that will

face the 10bp charge. Existing balances will continue to earn a rate of +0.1% (while required

reserves will earn no interest). This has the advantage of cushioning the blow for commercial

banks but has the disadvantage of making the impact on market interest rates less significant.

Having said that, the BoJ has left the door wide open to cut the rate on new reserves (now the

policy rate) deeper into negative territory. So this move may actually also just be to test the

water. The BoJ showed its determination to inflate the economy by stating that it will cut

interest rate further into negative territory if this was judged to be necessary. The size and

average maturity of JGB purchases remain unchanged. Inflation is now projected to reach

around 2% target in the first half of fiscal year 2017 compared to previous assessment of

second half of fiscal year 2016. We expect lower domestic yields and a weaker JPY to

incentivise more outward investments from domestic investors going forward. We continue to

4 FX Convictions – Central banks tackle sentiment - 29 January 2016

see further yen weakness ahead. Our year-end forecast for USD/JPY is 130. A weaker JPY

towards 130 against the USD is likely in our view.

RBNZ to lower OCR as soon as March – Downside risk in NZD to persist

We see a material risk that the RBNZ will resume lowering the Official Cash Rate (OCR) by

25bp to 2.25% in March. This is earlier than what is priced in by financial markets. Inflation in

the last quarter of 2015 was weaker than the RBNZ forecast (0.1% vs 0.4% yoy). The pass-

through effect of a weaker exchange rate to tradable inflation has been less than expected. In

addition, we expect non-tradable inflation to ease lower as house price inflation moderates in

the coming months. Slower house price inflation will also give the RBNZ more comfort to

lower monetary policy further to support the economy given their current concerns on housing

market risk. Second, the decline in the NZD in the past one year has been of a smaller

magnitude than that of New Zealand’s key commodity export prices. Despite the 4 cents

depreciation in the NZD since the start of this year, the central bank reiterated that a weaker

NZD is appropriate given the ongoing weakness in export prices. Last but not least,

speculative short positions in the NZD have more room to increase in our view, which would

put downward pressure on NZD. We expect the NZD to decline towards 0.58 against the USD

by the end of this year.

Stay bearish in AUD – RBA to lower OCR in May

Our bearish view on the AUD has not changed. In our view, the Reserve Bank of Australia

(RBA) is likely to lower the Official Cash Rate (OCR) by 25bp to 1.75% in May. We expect

inflation to move lower because of fading out of the specific supportive factors, slower house

price inflation and soft labour market. A weaker AUD is also needed to cushion the economy

given that Australia’s key commodity export prices fell by almost 20% in 2015 compared to

10% decline in the AUD against basket of currencies of Australia’s main trading partners.

Weak business investment is also expected to weigh on economic growth in the coming

quarters. As financial markets have not fully priced in the monetary divergence between

Australia and the US, we expect the AUD to decline towards 0.62 against the USD by the end

of this year.

5 FX Convictions – Central banks tackle sentiment - 29 January 2016

ABN AMRO major currency forecasts

Changes in red/bold

Source: ABN AMRO Group Economics

ABN AMRO emerging market currency forecasts

Changes in red/bold

Source: ABN AMRO Group Economics

29-Jan Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017EUR/USD 1.0914 1.06 1.04 1.02 1.00 1.00 1.02 1.05 1.10

USD/JPY 120.79 120 123 126 130 126 123 120 120

EUR/JPY 131.83 127 128 129 130 126 125 126 132

GBP/USD 1.4346 1.41 1.37 1.32 1.33 1.35 1.40 1.46 1.57

EUR/GBP 0.7607 0.75 0.76 0.77 0.75 0.74 0.73 0.72 0.70

USD/CHF 1.0183 1.04 1.08 1.12 1.15 1.15 1.13 1.14 1.09

EUR/CHF 1.1113 1.10 1.12 1.14 1.15 1.15 1.15 1.20 1.20

AUD/USD 0.7092 0.68 0.66 0.64 0.62 0.64 0.68 0.70 0.72

NZD/USD 0.6503 0.62 0.60 0.58 0.58 0.60 0.62 0.64 0.66

USD/CAD 1.4048 1.44 1.46 1.47 1.48 1.40 1.38 1.35 1.30

EUR/SEK 9.3103 9.50 9.50 9.50 9.50 9.25 9.00 8.75 8.50

EUR/NOK 9.4589 9.50 9.25 9.00 9.00 8.75 8.50 8.25 8.00

EUR/DKK 7.4627 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46

29-Jan Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

USD/CNY (onshore) 6.58 6.55 6.60 6.65 6.70 6.70 6.65 6.65 6.60

USD/CNH (offshore) 6.61 6.65 6.65 6.70 6.73 6.70 6.65 6.65 6.60

USD/INR 67.8837 67.00 67.50 68.00 68.00 67.50 67.00 66.50 66.00

USD/KRW 1,199 1,200 1,230 1,250 1,260 1,250 1,240 1,220 1,200

USD/SGD 1.42 1.45 1.48 1.50 1.52 1.50 1.48 1.46 1.45

USD/THB 35.70 36.70 37.20 37.50 38.00 38.00 37.50 37.20 37.00

USD/TWD 33.33 33.50 33.80 34.20 34.50 34.30 34.00 33.70 33.50

USD/IDR 13,778 14,200 14,600 14,800 15,000 15,000 14,700 14,500 14,200

USD/RUB 76 74 72 70 68 66 64 62 60

USD/TRY 2.97 3.00 2.95 2.95 2.90 2.85 2.80 2.75 2.75

USD/ZAR 16.08 16.50 16.25 16.00 16.00 15.80 15.60 15.40 15.00

EUR/PLN 4.44 4.35 4.30 4.30 4.25 4.20 4.15 4.15 4.10

EUR/CZK 27.03 27.00 27.00 27.00 27.00 26.50 26.25 26.00 25.50

EUR/HUF 312 315 310 310 305 300 300 295 290

USD/BRL 4.07 4.00 4.00 4.00 4.00 3.95 3.90 3.85 3.80

USD/MXN 18.21 17.75 17.50 17.25 17.00 16.50 16.25 16.00 15.50

USD/CLP 710 720 715 710 700 680 670 660 650

6 FX Convictions – Central banks tackle sentiment - 29 January 2016

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