2 FX Convictions Time for Draghi to deliver - 04 March 2016

Sterling has been one of the weakest currencies. It had a good start into February but it

erased more than earlier gains once Prime Minister Cameron announced 23 June as the

referendum date and on news that London Mayor and Conservative political heavy-weight

Boris Johnson will campaign for UK exit from the EU.

Our convictions views

Since our latest report we have added NOK long versus euro. We have kept in place our long

US dollar views versus the euro, sterling, the Japanese yen, and the Australian and New

Zealand dollars. We have also implemented stop loss levels to our high conviction views.

Expectations of ECB monetary stimulus weigh on euro

Weak inflation data and dovish ECB commentary have increased expectations of aggressive

monetary policy easing by the ECB in March. Our base case is that the ECB will cut its

deposit rate by 20bp in March and by another 20bp in June. We expect measures to cushion

the blow for banks. A tiered deposit rate system and even longer duration refi loans look likely.

Finally, we expect a EUR 10bn increase in monthly asset purchases and an extension of the

programme to June 2017. This will be facilitated by removing the deposit rate floor for asset

purchases. As our base scenario is not fully priced in by financial markets, we expect more

downward pressure on the euro.

Keep short sterling versus US dollar

Since Prime Minister Cameron agreed a deal with EU and announced 23 June as the

referendum date, sterling has fallen sharply. Although, financial markets already widely

anticipated that the referendum would be held in June, by officially setting the date Brexit risks

Our open and closed high conviction 2016 views

High conviction views

Source: ABN AMRO Group Economics

High conviction views

Open Position base currency Stop loss

USD/JPY Long since 20 November 2013 112

AUD/USD Short since 3 July 2014 0.74

NZD/USD Short since 30 March 2015 0.69

EUR/USD Short since 12 Nov 2015 15.15 1.15

GBP/USD Short since 26 Nov 2015 15.11 1.4675

EURNOK Short since 19 Feb 2016 17.00 10.00

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 2014

GBP/USD Closed short on 19 May 2015 at 14.30

EUR/USD Closed on 15 Oct 2015 at 1.1440

USD/SGD Closed on 15 Oct 2015 at 1.1780


have come more into focus. In addition, news that London Mayor and Conservative political

heavy weight Boris Johnson will campaign for UK exit from the EU was seen as increasing

chances of a Brexit. As a result sterling fell sharply; GBP/USD dropped to even below 1.40

and EUR/GBP surpassed 0.79. Recently, sentiment has calmed somewhat resulting in a slight

recovery of sterling. Although a Brexit is not our base scenario, we have been negative on

sterling versus the US dollar since November 2015 because of a delay in BoE rate hikes, a

weaker economy and fears about Brexit ahead of the referendum. As such our short sterling

versus US dollar high conviction view has been our top-performing trade this year. We expect

GBP/USD to move towards 1.35 ahead of the referendum. However, in the case of no Brexit,

sterling could recover sharply as the risk premium is being priced out. Therefore, we have

adjusted our end-2016 GBP forecasts. We have recently published a note on the impact of

various Brexit scenarios (see Macro Focus Brexit Scenarios).

We added long NOK versus euro on 19 February 2016

We have added a new high conviction call: long Norwegian krone versus the euro (short

EUR/NOK) on 19 February 2016. For a start, our energy analyst expects a recovery in oil

prices during the course of this year. This will give a boost to the sentiment for currencies of

oil exporting countries such as the Russian ruble, Mexican peso and the Norwegian krone.

Norway has relatively strong fundamentals compared to other oil exporting countries, as it has

a fiscal surplus and current account surplus. In addition, although we expect the Norges bank

to cut policy rates by 25bp in March, most of this is already reflected in the price. It is likely the

last cut in the cycle and this would be an insurance rate cut. If oil prices recover as we expect,

the Norges bank will likely become less dovish as inflation is close to target. The Norwegian

economy is more geared towards the eurozone than the US. We have already in place

positions with exposure to the US economy and to the US dollar. A new position in EUR/NOK

will therefore diversify our calls as well as an indirect position for an oil price recovery. Last but

not least, the Norwegian krone is cheap in terms of valuation. The Purchasing Power Parity

level is around 8.15 in EUR/NOK. In short, we expect the ECB to be more dovish than the

Norges bank this year and oil prices to recover. In addition, the Norwegian krone is relatively

cheap. Therefore, we enter long Norwegian krone versus euro as high conviction view. We

place our stop loss at 10.

Yens resilience to be temporary

Since the Bank of Japan (BoJ) introduced negative interest rates on 29 January 2016, the

Japanese yen (JPY) has defied gravity. A deterioration in investor sentiment pushed the yen

to 111 against the US dollar. Afterwards the yen has eased to around 114 versus the US

dollar. However, taking into account the overall improvement in sentiment, the yen has

remained relatively resilient. One would have expected a much weaker yen versus the US

dollar in the current environment. The reasons for this behaviour are a bit unclear. Therefore,

we have raised our stop loss in USD/JPY from 110 to 112.

Nevertheless, we expect the yen to weaken going forward because of an improvement in

investor sentiment, more easing by the BoJ and Japanese investors turn abroad for higher

return. Indeed, the Government Pension Investment Fund (GPIF) reported that in the quarter


ending December 2015, they have continued to reduce their holdings in domestic bonds and

increased allocations to domestic equities and foreign assets. With domestic yields under

pressure since the Bank of Japan (BoJ) introduced negative interest rates on 29 January, we

expect the GPIF and other insurers to increase their purchases or overseas assets in search

for higher yielding assets. Data from the Ministry of Finance also showed that domestic

investors have increased purchase of overseas assets in the month of February after the BoJ

introduced negative interest rates on 29 January. This will be negative for the yen as their

foreign currency exposures are not fully hedged.

GPIF investment allocation shift Outward investments from Japan have increased

% JPY bn

Source: GPIF, *FB: Foreign bonds; FS: Foreign stocks; DB: Domestic bonds; DS: Domestic stocks

Source: MoF, Japan

Both the BoJ Governor and Deputy Governor have recently stated that they are unlikely to

lower interest rates further in the next monetary policy meeting this month. This is priced in by

financial markets. However, we do not rule out that other monetary stimulus including an

enhancement of their qualitative and quantitative easing program will be announced. They are

also likely to reinforce that even lower interest rates remains on the cards. In our view, lower

deposit rates, further increase in the size of qualitative and quantitative easing program and

ETF purchases will result in an indirect weakness of the yen.

RBNZ dovish bias to weigh on NZD

We maintain our bearish view on the New Zealand dollar (NZD). The business confidence and

outlook indicators declined in February that are weaker than when the RBNZ last cut the OCR

by 25bp to 2.5% in December last year. In addition, consumer confidence and inflation

expectations have also eased lower. Furthermore, key commodity export prices remain weak

and the NZD is stronger than the RBNZs forecast by about 4%. However, we expect the

RBNZ to keep the OCR unchanged this month as the unemployment rate in the last quarter of

2015 was surprisingly better than the central banks estimate. We also suspect that the RBNZ

would want to wait for house price gains to slow further before easing again. As financial

markets are pricing in about 20% probability that the RBNZ will ease next week, a relief

recovery in the NZD is possible. However, we expect the RBNZ to strike a dovish tone next

week and signal their discomfort on the exchange rate. Upside in the NZD is likely to be

0

10

20

30

40

50

FB FS DS DB

FY 14 Q3 FY 15 Q3 Lower target Upper target

0

500

1000

1500

2000

2500

3000

3500

Jan-16 Feb-16

Jap purchase foreign bonds Jap purchase foreign stocks


limited towards 0.68. We have our stop loss in place at 0.69. A combination of further rate cuts

and intervention by the RBNZ should push the NZD towards our year-end target of 0.61.

Resilient AUD challenging our short conviction view

The strength in the Australian dollar (AUD) in the past month is challenging our short

conviction view in the AUD. Firmer iron ore prices and stronger than expected economic

growth in the last quarter of 2015 have resulted in market paring bets that the Reserve Bank

of Australia (RBA) will ease monetary policy anytime soon. The RBA has also maintained their

neutral outlook stating that the current low inflation outlook would provide scope for easier

policy if deemed necessary to support demand. On the exchange rate, the RBA stated that

the AUD has been adjusting to the evolving economic outlook. Our bearish view in the AUD

remains intact for the following reasons. First, the stronger than expected 2015 Q4 GDP

print was partly due to favourable base year effects and strong contribution from

domestic demand. We remain sceptical that the latter will persist given that the household

savings rate has declined to the lowest level since late 2008. We expect the labour market to

deteriorate further and this will weigh on consumer spending especially when wage growth is

at the weakest level since the Australian Bureau of Statistics (ABS) compiled data in 1998.

Second, businesses investment intentions in the new fiscal year about 20% lower based on

initial estimates compiled by the ABS. Third, we do not expect the current recovery in iron ore

prices to persist. Last but not least, there is room for liquidation of long speculative futures

positions in the AUD when the RBA turns dovish in the coming months. We maintain our view

that the RBA will cut the Official Cash Rate by 25bp in May. This is not fully priced in by

financial markets. We expect the AUD/USD to decline to 0.65 by the end of this year.


ABN AMRO major currency forecasts

Changes in red/bold


ABN AMRO emerging market currency forecasts

Changes in red/bold


03-Mar Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

EUR/USD 1.0910 1.10 1.05 1.05 1.05 1.05 1.05 1.05 1.05

USD/JPY 113.82 116 117 118 120 122 124 122 120

EUR/JPY 124.13 128 123 124 126 128 130 128 126

GBP/USD 1.4096 1.40 1.35 1.42 1.48 1.50 1.50 1.50 1.50

EUR/GBP 0.7727 0.79 0.78 0.74 0.71 0.70 0.70 0.70 0.70

USD/CHF 0.9916 1.00 1.05 1.05 1.05 1.06 1.07 1.08 1.09

EUR/CHF 1.0834 1.10 1.10 1.10 1.10 1.11 1.12 1.13 1.14

AUD/USD 0.7336 0.70 0.68 0.66 0.65 0.63 0.62 0.64 0.65

NZD/USD 0.6703 0.65 0.63 0.62 0.61 0.60 0.58 0.60 0.62

USD/CAD 1.3439 1.40 1.40 1.38 1.36 1.38 1.40 1.42 1.44

EUR/SEK 9.3672 9.50 9.50 9.50 9.50 9.25 9.00 8.75 8.50

EUR/NOK 9.4398 9.60 9.20 9.00 9.00 8.75 8.50 8.25 8.00

EUR/DKK 7.4592 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46

03-Mar Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

USD/CNY (onshore) 6.54 6.50 6.55 6.60 6.70 6.75 6.80 6.80 6.80

USD/CNH (offshore) 6.54 6.50 6.58 6.63 6.73 6.78 6.83 6.80 6.80

USD/INR 67.34 68 69 69 70 70 70 70 70

USD/KRW 1,215 1,200 1,230 1,250 1,260 1,260 1,270 1,270 1,270

USD/SGD 1.39 1.40 1.42 1.44 1.46 1.48 1.50 1.50 1.50

USD/THB 35.45 35.50 36.00 36.50 37.00 37.50 38.00 38.00 38.00

USD/TWD 33.06 33.40 33.80 34.20 34.50 34.70 35.00 35.00 35.00

USD/IDR 13,232 13,400 13,700 14,000 14,300 14,500 14,700 14,700 14,700

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

USD/TRY 2.93 2.90 2.85 2.80 2.75 2.75 2.75 2.75 2.75

USD/ZAR 15.70 15.80 15.80 15.60 15.40 15.40 15.20 15.20 15.00

EUR/PLN 4.34 4.35 4.30 4.30 4.25 4.20 4.15 4.15 4.10

EUR/CZK 27.06 27.00 27.00 27.00 27.00 26.50 26.25 26.00 25.50

EUR/HUF 309 310 310 310 305 300 300 295 290

USD/BRL 3.86 4.00 4.00 4.00 4.00 3.95 3.90 3.85 3.80

USD/MXN 17.93 18.75 18.50 18.25 18.00 17.75 17.50 17.25 17.00

USD/CLP 685 700 700 700 700 685 680 675 670


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