SEB sees the dollar remaining weak


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The dollar has come under pressure as the Federal Reserve remains on hold for an extended period. SEB’s strategists say in the latest issue of Currency Strategy that it is likely that the dollar continues to remain weak. They do however note that we are closer to see the dollar finding some traction versus other G10 currencies. The bank’s experts forecast a slow grind lower in the euro/Swedish krona echange rate.

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SEB sees the dollar remaining weak

  1. 1. TUESDAYThe dollar duality 10 MAY 2011We still expect good support for risk appetite overall. Despite some weaker leading indicators EDITORreacting to high commodity prices and uncertainties following the crises in Japan, we still Carl Hammerbelieve global growth will remain close to trend driven by Asia/Emerging markets. There is + 46 8 506 231 28now more evidence to suggest Asia together with other developing countries will continue totighten monetary policy as inflation moves even higher. Asian FX appreciation will clearly be akey weapon in fighting inflation – we expect China to allow the Renminbi to appreciate fasterthan consensus. The end of QE2 also creates uncertainty; we do not believe US interest rateswill rise substantially as this is already discounted in US Treasury prices. US monetarytightening will begin by stopping reinvesting maturing principals on the Feds mortgageportfolio, probably in H2 2011. We still expect the first Fed rate hike in Jan 2012. With the FX-market closely linked to changes in interest rate differentials the USD has come underpressure with the Fed remaining on hold for an extended period. While it is therefore likelythat the broad trade-weighted dollar will continue to weaken, the USD is now closer to findingtraction vs. other G10 currencies as the Fed prepares to cautiously tighten monetary policy.We expect the EUR/USD moving back up towards 1.50 during summer, which however willprove a more lasting top. The euro will be increasingly vulnerable to bad news and markets arefully discounting ECB rate hikes. We expect a stronger USD H2 2011 which will also facilitatesome SEK strength vs. the euro again.BASKET TRADE: BUY TOP 3 VS BOTTOM 3. Werecommend to buy the top 3 currencies (AUD, RUB, TRY) vs Currency outlook (end Q2)the bottom 3. Still, procyclical currencies are found at thetop against the JPY, GBP and USD. Once tighter monetary AUD +4policy is required in the US we would expect a set-back to RUB +4this trade; however that’s expected to happen early 2012. PLN +4 TRY +4BUY EUR AND USD VS JPY. We continue to expect JPY to EUR +3be the weakest G3 currency based on most ratingcategories as both monetary policy and fundamentals CAD +3hardly support the Japanese currency. NZD +3 SEK +3BUY SEAGULL IN EUR/SEK. The skew in vol makes a NOK +3seagull structure for the downside attractive: Buy a 6 DKK +3months EUR/SEK seagull 9.00 put (1x) vs. sold 9.35 call HUF +3(1.5x) and sold 8.65 put (1x) is nearly zero cost. CNY +2BUY EM-ASIAN BASKET long MYR, KRW, CNH vs. short CHF +1JPY, GBP, USD. This theme revolves around the need for USD -1further Asian FX appreciation vs. majors. Fundamentals, GBP -2interest rate expectations, flows and now also the desire by JPY -3Asian policymakers to tolerate a somewhat fasterappreciation to stem imported inflation.You can also find our research materials at our website: This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information andopinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability isaccepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice.
  2. 2. Currency Strategy Forecasts FX forecasts SEB Consensus* Contents 08-maj Q2 11 Q3 11 Q2 11 Q3 11 Forecasts 2 EUR/USD 1.4316 1.48 1.45 1.44 1.41 The big picture 3 EUR/JPY 115.43 121 122 121 120 USD 6 EUR/GBP 0.8747 0.91 0.90 0.88 0.86 EUR 8 EUR/CHF 1.2582 1.28 1.28 1.31 1.32 JPY 10 EUR/CAD 1.3838 1.39 1.36 1.38 1.35 GBP 12 EUR/AUD 1.3379 1.33 1.36 1.38 1.37 CAD 14 EUR/NZD 1.8105 1.82 1.86 1.89 1.88 AUD 16 EUR/SEK 9.0335 9.00 8.85 8.75 8.70 NZD 18 EUR/NOK 7.9204 7.95 7.85 7.73 7.68 CHF 20 EUR/DKK 7.4573 7.45 7.45 7.45 7.45 SEK 22 EUR/RUB 39.67 39.5 38.7 39.5 39.9 NOK 24 EUR/PLN 3.9446 3.92 3.82 3.93 3.86 DKK 26 EUR/HUF 264.58 265 265 269 268 RUB 28 Cross rates PLN 30 USD/JPY 80.63 82 84 84 86 HUF 32 GBP/USD 1.64 1.62 1.62 1.63 1.63 TRY 34 USD/CAD 0.9666 0.94 0.94 0.96 0.96 CNY 36 USD/CHF 0.8789 0.87 0.88 0.91 0.94 Summary ranking 38 AUD/USD 1.0700 1.11 1.07 1.04 1.03 Seasonal patterns 39 NZD/USD 0.7907 0.81 0.78 0.76 0.75 Guide to indicators 40 USD/SEK 6.3101 6.08 6.10 6.08 6.17 SEBEER 41 USD/NOK 5.5326 5.37 5.41 5.37 5.45 Fair-value models 42 USD/RUB 27.71 26.7 26.7 27.7 27.8 Contacts 43 USD/PLN 2.7554 2.65 2.63 2.73 2.74 USD/HUF 184.81 179 183 187 190 USD/TRY 1.5445 1.49 1.48 1.54 1.51 USD/CNY 6.4932 6.38 6.28 6.45 6.36 * Bloomberg survey FX forecasts. SEB policy rate forecasts maj 08, 2011 RB NB FED ECB BOE BOJ BOC SNB RBA RBNZ Current 1.50% 2.00% 0.0-0.25% 1.25% 0.50% 0.10% 1.00% 0.25% 4.75% 2.50% End-10 1.25% 2.00% 0.0-0.25% 1.00% 0.50% 0.10% 1.00% 0.25% 4.75% 3.00% jan-11 26 jan 26 jan 13 jan 13 jan 25 jan 18 jan 27 jan Feb 15 Feb* 3 feb 10 feb 17 feb 1 feb Mar 16 Mar* 15 mar 3 mar 10 mar 15 mar 1 mar 17 mar 1 mar 10 Mar* Apr 20 apr 27 apr 7 apr 7 apr 7 & 28 Apr 12 apr 5 apr 28 apr May 12 maj 5 maj 5 maj 20 maj 31 maj 3 maj Jun 22 Jun* 22 jun 9 jun 9 jun 14 jun 16 jun 7 jun 9 Jun* Jul 5 jul 7 jul 7 jul 19 jul 5 jul 28 jul Aug 10 aug 9 aug 4 aug 4 aug 2 aug Sep 7 sep 21 sep 20 sep 8 sep 8 sep 7 sep 15 sep 6 sep 15 Sep* Oct 27 okt 19 Oct* 6 okt 6 okt 25 okt 4 okt 27 okt Nov 2 nov 3 nov 10 nov 1 nov Dec 20 dec 14 dec 13 dec 8 dec 8 dec 6 dec 15 dec 6 dec 8 Dec* End-11 2.75% 2.75% 0.0-0.25% 2.00% 1.00% 0.10% 1.50% 0.25% 5.25% 2.75% Inflation target 2.0% 2.5% ~1.8% ~1.8% 2.0% 0-2% 2.0% 2.0% 2-3% 1-3% 50bps hike 25bps hike 25bps cut 50bps cut >50bps cut Italics indicate past decisions * = Strategic policy meetings 2
  3. 3. Currency StrategyThe Big PictureThe FX market is usually characterized by either one or IT’S THE RATE OF CHANGE, STUPID. Instead, theseveral key drivers. Previously we have argued that influence of monetary policy expectationsfundamentals (shown by growth in the following captured by changes in rate differentials betweenchart) were such a factor, with strong currencies currencies has been the FX market’s key driver.attracting buyers as investors diversified out of those This has supported currencies with rising interest ratescountries with large deficits and poor economic such as the EUR until fairly recently. It has also beenprospects. the main reason for USD weakness with the Fed clearly signalling it will remain one of the few central banks to SEB FX investment styles 2011 maintain a zero interest rate policy for the foreseeable 10% 10% future. 6% 6% Moreover, the importance of this theme was illustrated as the ECB proving more dovish than the market 2% 2% expected at its May meeting, causing a dramatic sell off in EUR/USD as European rates fell back. Central -2% -2% bank expectations will probably remain the key driver for FX markets going forward. However, as yield Valuation -6% Growth -6% differentials between currencies continue to widen Rate change and as FX volatilities fall back further the carry theme-10% Carry -10% is likely to become increasingly important. 31/Dec 31/Jan 28/Feb 31/Mar 30/Apr In the last issue of this report we suggested that carrywould emerge as a more important FX market theme.As volatilities decreased the risk adjusted carry returnwould increase. This would support currencies withhigh interest rates and weaken those with low such asthe yen. Despite signs that yield differentials attractinflows the carry theme has not fully materialized asexcessive currency moves following the Japanesequake pushed FX volatilities higher making carrypositioning less attractive. RISK APPETITE LIKELY TO STAY SUPPORTIVE. Risk Risk-adjusted carry vs JPY, 3m appetite has remained firm despite falling back 0.80 temporarily as the effects of the Japanese earthquake 0.70 and the nuclear accident in March created short-term 0.60 uncertainty. Going forward it appears as if risk appetite will remain supported with global growth 0.50 likely to continue around trend. Nevertheless, we 0.40 cannot fully preclude the possibility that risk appetite 0.30 could be adversely affected by a more rapid tightening 0.20 of monetary policy in high growth economies in response to surging inflation than is currently 0.10 anticipated. There have already been several signs 0.00 that financial markets are sensitive to news indicating AUD CAD EUR NZD NOK PLN KRW SEK USD GBP possibly faster than expected rate hikes, although so 2011-05-04 2011-03-02 far effects have been temporary. However with surging commodity prices feeding inflation EM central banks may be forced to tighten monetary policy more 3
  4. 4. Currency Strategyrapidly going forward, which could set back global riskappetite.USD PRESSURE TO EASE AS ASIAN CURRENCIESSTRENGTHEN. USD depreciation has taken the narrowUSD-index close to 2008 lows. This potentially limits Index Indexpotential for further USD weakness against suchcurrencies although we expect a renewed test ofrecent lows over the coming months. The USD shouldregain ground going forward although the outlook isdifferent when measured against EM currencies.Although the USD trades around previous lows, in realtrade weighted terms, we see scope for furtherdepreciation against such currencies. In nominalterms the broad USD index is far from historical Going forward tentative signs of currencylows as higher EM inflation has depressed appreciation in the EM world will probablynominal values of EM currencies vs. their G10 become more entrenched in the valuation of theircounterparts. currencies, causing further appreciation against those of the world’s largest countries. That process would most likely ease downward pressure on the USD against other G10 currencies as rebalancing flows out of the USD should moderate. OUR VIEW ON COMMODITIES. In early May warning lights were flashing in commodity markets. Record long speculative positions together with high commodity prices generally and several potential sector threats made a correction inevitable. Fears of Asian tightening, lacklustre US macroeconomic data, and marked USD appreciation provided the excuse. Commodities fell across the board as investorsHowever, the fact that EM economies continue to offloaded broad indices in the general sell-off thatgenerate significant Current account surpluses is a followed. However, we argue that the correction issign that their currencies are still some way off their unlikely to have marked the end of the current cyclicallong-term fair values. Therefore, G10 currencies bull market in commodities. Instead, it created severalincluding the USD will probably continue to depreciate attractive buying opportunities. We expect crude oil toagainst their EM counterparts. recover to $120/b and beyond in Q2-11 as the loss of Libyan sweet crude is felt to its fullest extent. In H2-11,Recently, rapid increases in energy and food prices however, we expect them to fall back to an average ofhave exerted upward pressure on global inflation, $105/b as high prices dampen demand for awhile.especially in high growth economies. Last year’s Furthermore, we still regard gold prices as wellcurrency war has ceased with currency appreciation supported by rising inflation, high geopolitical risk,having become one possible means of stemming sovereign debt fears and diversification demand fromthe effect of higher import prices, besides monetary investors and central banks. We expect gold to tradepolicy tightening. Recently we have seen signs that at $1550/ozt at year end with a potential peak aboveASEAN-3 may initiate a joint revaluation of their $1700/ozt in 2011 if the bearish dollar trend continues.currencies and that China may not entirely reject Industrial metals appear well supported in the longthe idea of letting its currency appreciate slightly term but are sensitive short term to bouts of concernfaster than usual against the USD. However, this over a possible Chinese hard-landing, which is likely toremains undiscounted in current exchange rates with provide additional buying deficit currencies having actually outperformedtrade surplus currencies vs. the USD since the start ofthe year. FED PROBABLY KEY FOR A SHIFT IN FX MARKETS. With central bank expectations the key FX market driver and cheap dollar liquidity still accessible we believe current FX market trends supporting 4
  5. 5. Currency Strategycommodity related and EM currencies are likely to China as the largest holder of treasury bonds ascontinue as long as the Fed maintains its zero interest sustained USD weakness would produce massiverate policy. As it eventually begins to communicate losses on its holdings. Is it in the interest of the USchanges in its current policy, which we expect in H2- itself? Short-term a weak dollar would improve11, it may well mark an end to current FX market conditions for exporters and at the same time dampendevelopments. imports, potentially improving the current account deficit. However, this would simultaneously generateThe shift in Fed expectations is likely to be increasing inflation, and more importantly, reducereflected in relative yields beginning to support foreign demand for US assets. Overall, this wouldthe USD against other G10 currencies currently probably drive US yields higher to compensate for thebenefiting from rising yields. As part of monetary risk of currency depreciation. With the US economypolicy tightening the Fed will stop reinvesting highly dependent on interest rates staying low tomaturing principals on its bond holdings, bringing an support growth we would argue that a weak USD isend to cheap USD liquidity, which should ease actually not even in the interests of the US. There arepressure on commodity prices and capital inflows to therefore very few, if any, winners from long-term USDEM countries. Consequently, current pressure on EM depreciation. Consequently, the risk of a collapse iscurrencies to appreciate would diminish, further probably limited.reducing the need for central bank interventions toprevent EM currencies from strengthening too far and SCANDIES FACING SOME NEAR-TERM HEADWINDS.therefore reducing rebalancing flows out of the USD. Following market leading performances in Q1 both SEK and NOK now face more formidable obstacles toSuch a shift in US monetary policy is likely to further appreciation. The trade-weighted krona (TCW)generate new market trends not only vs. the USD hit a 14-year low (inverted relationship) last month asbut probably also in more general terms. Ultimately the dollar continued downward. Further, the I44this shift would start to push currencies toward their (import-weighted krone) only recently set a 3-year lowlong-term fair values. Within the G10 we therefore (inverted relationship) just 2% off its bottom.expect this shift to finally slow or even reverse Arguably, further appreciation by Scandinaviancurrent appreciation trends in such commodity currencies vs. the EUR is less likely if the USD remainscurrencies as the AUD and CAD. Moreover the shift weak(er). Although the ECB did not fulfil hawkishwill probably mark the start of a more broad-based JPY expectations, we still believe European interests willdepreciation with the Japanese central bank remaining continue to rise. This trend will also prevent anythe only central bank maintaining a zero interest rate significant SEK and NOK appreciation vs. the EUR inpolicy. coming months. The case is different over the slightly longer term as we expect the respective central banks to continue to raise rates more rapidly than the ECB. In addition the strong fundamental outlook for both countries will continue to attract foreign flows, with the SEK and NOK also slightly undervalued according to our models. We therefore expect a further 3-5% trade-weighted appreciation over the next 12 months. CONCLUSION. It is too early to bet on a swift reversal in the fortune of the Greenback as the Fed is still pursuing QE2 and keeps its current policy stance forUSD COLLAPSE UNLIKELY. Rapid growth in US an “extended period”. However already this summergovernment debt has increased concerns that the USD we expect the US central bank to start trim its balancemay continue to depreciate against G10 and EM sheet and prepare the market for a rate hike in earlycurrencies as one way to reduce the value of US debt, 2012. This should eventually stabilise the USD vs G10fully issued in local currency. However, as the global currencies. The large Current account surplusesreserve currency we are led to ask who would actually together with rising FX reserves and also now risingbenefit from a weak USD. We argue that a USD inflation makes the case for continued and perhapscollapse is in fact in no one’s interest. With the US still even more rapid Asian FX appreciation important market for final demand a weak USD is Hence we expect the theme first explored in Currencymost certainly not in the interests of exporters, nor of Strategy Nov 2009 “Appreciated Asia” to still be valid. 5
  6. 6. Currency StrategyUS dollar TotalThe USD has depreciated by more than 5% in tradeweighted terms since the beginning of this year and is -1 Monetary pol. -1currently below 2008 lows (broad trade-weighted USD). Fundamentals +1USD weakness has been driven by Fed policy holdinginterest rates low for an extended period. In addition the Flows 0USD suffers from the lack of political ability to finallyreduce the huge budget deficits. Still it is difficult to find aclear winner of a significant weaker USD, and hence addi- Technicals -1tional USD weakness is in no one’s interest. Lacking yieldsupport the USD is likely to continue to fall vs. G10. Withthe Fed to signal tighter monetary policy in H2 2011 the USD speculative positionsUSD should retake some lost ground. 82.5 50MONETARY POLICY Fed is one of two G10 central banks 40 Contracts (thousands) 80.0that continues to ease monetary policy purchasing E U R speculative positio ns U S D /C A D 30government debt. The QE2 program will however end in 77.5 12 5 Contracts (thousands) 1.35 0 E U R /U S DJune and thereafter further easing of monetary policy is 10 0 20 75.0 1.30 0 75unlikely. We expect the next step from the Fed to be a 50 10mild tightening as the Fed stop reinvesting maturing 1.25 0 72.5 25bonds after summer, and then finally consider rate hikes 1.20 0 0 0by early next year. The key for future Fed policy will be 70.0 1.15 0 S peculative positions Speculative positions -2 5 -10developments in the labour market, where a persistent USD index 04 05 06 07improvement is a prerequisite for a monetary policy 67.5 -20tightening together with the evolvement in inflation Dec Mar lack of significant upside progress in The Jun Sep Dec Mar EUR/USD makes the current substantial netexpectations. -1 09 10 position a burden. 11 long speculative Should the sub-1.29-area be revisited, speculativeECONOMIC FUNDAMENTALS Despite disappointing Q1 longs will have to be reduced.GDP growth the US economy is on track for a continuedrecovery. Supported by strong export demand mostbusiness sentiment indicators have reached multiyearhighs in the first quarter, historically related to strong USgrowth. Sentiment amongst small companies howeverlags probably reflecting tight credit conditions and weakdomestic demand. Recovery in the housing marketremains slow and prices continue to fall rendering anegative impact on household wealth. Unemploymenthas dropped to 9.0%. Despite a significant slack in labourmarket disposable income has improved significantlysupporting household demand. However, gasoline pricesat almost 4 USD/gallon will be a drag for spending ifsustained. +1FLOWS US trade balance has improved as exports havebeen growing strongly due to a weaker USD and strong Technical view: USD Indexglobal demand. Nevertheless going forward we expect Priceimport growth to pick up causing the trade deficit to de-teriorate. With foreign equity markets continuing to att- 84ract US capital outflows, US bond market is the only sour-ce of net inflows as non-official foreign capital show signs 80of finding its way back into US non-treasury bonds whileofficial capital flows have turned negative early this year 76according to the latest TIC data. 0 100.0% 73.16TECHNICALS & POSITIONING: The dollar is now, despite support zone 72last week’s bounce approaching long term key supportlevels. Our primary view is still that the key support will 2008 2009 2010 2011 2000 2010hold and yield a counter reaction. It is also worth notingthat the speculative short dollar position has beendecreased despite the dollar decline. -1 6
  7. 7. Percent of total labour force Current Account Bal, % of GDP Percent AR Basic Balance, USD bn7 Percent y/y Percent y/y 0 1 2 3 4 5 6 7 00 02 04 06 08 Fed Funds target rate 10 UNITED STATES 0 1 2 3 4 5 6 7 Currency Strategy
  8. 8. Currency StrategyThe euro TotalDespite the ongoing debt problems in some euro areamember countries the euro regained some strength inrecent months. Markets seem convinced that the +3 Monetary pol. +1monetary union is strong enough to solve the debt Fundamentals 0problems. The ECB’s strategy to fight upside risk toinflation with rising policy interest rates remains the main Flows +1driver of the currency going forward.MONETARY POLICY After having raised the main policy Technicals +1interest rate to 1.25% in April the ECB put rates on hold inMay. It signalled no hurry in hiking rates further. The ECBis still worried that recent price rises could lead to second EUR speculative positionsround effects in price and wage settings. To preventthose effects we think the ECB has to hike rates steadily 1.50 100in coming months. The next rate hike now seems due in 1.45 E U R speculative positio ns 75 U S D /C A D 12 5 50July. At year end, the interest rate of the main refinancing Contracts (thousands) 1.35 0 E U R /U S D 1.40 10 0operation should stand at 1.75%. That’s already priced in 25 1.30 0 75money market rates. Therefore, there is not much room 1.35 0 50 1.25 0to surprise markets on the upside. +1 1.30 25 -25 1.20 0 0 -50 1.25ECONOMIC FUNDAMENTALS Leading indicators as well 1.15 0 S peculative positions -2 5 -75 1.20 Speculative positions 04 05 06 07as economic data point to a continuation of the moderate EUR/USD -100recovery in the euro area. But the expansion remains 1.15 The lack of significant upside progress -125 inuneven with the core EMU member states in the lead Feb May Aug Nov Feb May EUR/USD makes the current substantial netwhile some smaller countries are facing severe long speculative position a burden. Should 10 11 the sub-1.29-area be revisited, speculativeheadwinds from their fiscal crises. The cut back of the longs will have to be reduced.excessive budget deficits will continue to hamper growth Effective exchange ratein those countries in coming quarters while the 120 120introduction of structural reforms must speed up. So,despite the introduction of a financial stability 115 115mechanism, markets remain concerned that a debt 110 110 EUR index (BoE) EUR index (BoE)restructuring at least in Greece is unavoidable. Such a 105 105step would increase uncertainties about the health of the 100 100financial system. So far, we see no immediate need for 95 95such a measure. On an aggregate level, the budget deficitdeclined to 6.0% in 2010 and EMU has cut the budget 90 90deficit slightly by 0.3 percentage points to 6.0% of GDP 85 85in 2010. For 2011 a further cut below 4% of GDP looks 80 80possible, increasing the flexibility of the euro zone to 75 75respond to new fiscal problems. 0 00 02 04 06 08 10FLOWS In the 12 months ending February 2011, the euroarea reported combined foreign direct and portfolio Technical view: ECB EUR Indexinvestments of EUR 108bn compared with net inflows ofEUR 191bn a year earlier. In the same period, the compo- Pricesition of portfolio flows has improved significantly with 116flows into equities up to EUR 113bn while flows into debt 112instruments were scaled back to EUR 73.8bn. +1 61.8% 111.59 50.0% 109.35TECHNICALS & POSITIONING As the index during its 38.2% 107.1 108latest attempt lower couldn’t break the pattern of risinglows the move higher remains intact. We thus foresee a 104test of the 50% correction point (of the 2009/2010decline), 109.35, before turning lower. The €/$ 100speculative position is at elevated levels and is an Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3additional supply risk should the pair turn down. +1 2009 2010 2011 8
  9. 9. Percent of total labour force Current Account Bal, % of GDP Percent y/y Basic Balance, EUR bn9 Percent y/y Percent y/y EURO-ZONE Currency Strategy
  10. 10. Currency StrategyJapanese yen TotalThe tragic events in Japan in March has added to thealready vulnerable situation that Japan’s economy is in. -3 Monetary pol. -2Although the bond market shows no signs of stress the Fundamentals -1debt/GDP ratio at +200% is a clear long-term problem.With no room at all for a change in the current super- Flows +1loose monetary policy JPY will be a funding currency ofchoice going forward, hence we continue to see the JPYas a major underperformer. The speculative market is Technicals -1very short JPY hence we don’t expect a fast JPYdepreciation near-term. JPY speculative positionsMONETARY POLICY BOJ responded swiftly following thetsunami by adding record-large amounts of liquidity 77.5 50(close to USD 500bn). The joint FX intervention by G7 was 80.0also an exceptional event as immediate risk aversion E U R speculative positio ns 30 82.5 U S D /C A D 12 5made the JPY gain 9% (trade-weighted) in matter of days. Contracts (thousands) 1.35 0 E U R /U S D 10 85.0 10 0Almost flat GDP growth 2011 and continued deflation 1.30 0 75make increasing rates this and next year a virtually 87.5 -10 50 1.25 0impossible proposition. Monetary policy will continue to 90.0 25 -30 1.20 0be a (very) negative factor for the currency for the 0 92.5 1.15 0 S peculative positions Speculative positions -50foreseeable future. -2 USD/JPY 0 4 -2 5 05 06 07 95.0 -70ECONOMIC FUNDAMENTALS The earth quake and Feb Apr Jun Aug Oct Dec Feb Apr in The lack of significant upside progresstsunami and their effects on the Japanese economy are 10 11 EUR/USD makes the current substantial netstill very uncertain. SEB has revised lower its GDP forecast long speculative position a burden. Should the sub-1.29-area be revisited, speculativefor 2011 to a mere 0.5%, 2012 will see rebuilding lifting longs will have to be reduced.GDP by 2.4%. The Japanese government has signed offan emergency extra budget adding USD 50bn used forcatastrophic aid. We expect more measures needed tosupplement the rebuilding efforts -> this will obviouslyadd to the fiscal vulnerability and unsustainable debtprofile that Japan already has. The large positive netinternational investment position will however continueto be supportive for the JPY in times of stress. -1FLOWS Japan’s flow position has improved significantlywith both the basic balance and the current accountrecovering from the sharp drops seen on back of thefinancial crisis. The developments following the earthquake is still very uncertain. Households are reported notto hold a large proportion of foreign assets according toBOJ and these funds are probably FX hedged as the cost Technical view: BOE JPY Indexof doing so is currently small -> repatriation of foreignfunds is not going to be that significant. Net purchases of PriceJapanese bonds and equities however have been verypositive lately and overall flows are likely to be JPY 170positive still. +1 165TECHNICALS & POSITIONING The “up-thrust” peak inMarch (and downside key month reversal) most likely 160ended the multiyear uptrend. The return into the “box” ishowever a bit annoying and a return below it is needed to 155increase credibility to a bearish case. Speculators havealso begun building a short JPY position. -1 J J A S O N D J F M A M J Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 10
  11. 11. Percent of total labour force Current Account Bal, % of GDP Percent y/y Basic Balance, JPY trn11 Percent y/y Percent y/y JAPAN Currency Strategy
  12. 12. Currency StrategyBritish pound sterling TotalThe pound is currently undervalued against most G10currencies, but for good reasons, and it will remain so for -2 Monetary pol. 0the next 3-6 months. The economy struggles as Fundamentals -1household demand remains under pressure and thewelcomed restructuring of the economy towards external Flows +1demand has been slower than desired. Currently thereare signs that external trade has started to improve butthe economy is in need for this process to continue and a Technicals -2weak currency may pave the way.MONETARY POLICY With inflation persistently above the GBP speculative positionsBOE’s target the bank is facing an undesirable policyproblem with weak growth and high inflation. After 1.675 75 1.650peaking at 4.4% in February, headline inflation however 50 1.625 E U R speculative positio nsfell back slightly to 4.0% in March which released some U S D /C A D 25 1.600 12 5pressure on BOE. Among MPC members a few have Contracts (thousands) 1.35 0 E U R /U S D 1.575 10 0 0argued for hiking the key rate to prevent rising inflation 1.550 1.30 0 75expectations, while the majority has favoured an 1.525 50 -25 1.25 0unchanged monetary policy as the economy is weak. 1.500 25 -50 1.20 0Currently we expect the BOE to cautiously increase rates 1.475 0 Speculative positions -75in H2 2011 but these hikes may be postponed if last 1.450 1.15 0 S peculative positions -2 5 GBP/USD 04 05 06 07months’ easing in inflationary pressure continues. 0 1.425 -100 Feb May Aug Nov upside progress in The lack of significant Feb MayECONOMIC FUNDAMENTALS From negative growth in EUR/USD10 11 makes the current substantial netthe fourth quarter last year (-0.5% q/q), partly related to long speculative position a burden. Should the sub-1.29-area be revisited, speculativebad weather conditions, the UK economy preliminary longs will have to be reduced.rate Effective exchangegrew by 0.5% q/q in Q1 2011. Amid falling real wages, 110 110weak outlook for the labour market and falling houseprices the confidence among UK households is back at 105 105the low levels from the financial crisis, indicating quite 100 100weak private demand for the next couple of quarters. Index (BoE) Index (BoE) 95 95Business sentiment indicators have been surprisinglystrong probably supported by growing export demand 90 90but recently we have seen those moving lower as well. In 85 85addition measures to improve government budget will 80 80further dampen the growth prospects: we expect alacklustre GDP expansion of 1.4% 2011. -1 75 75 70 70FLOWS Short-term observations are difficult given the 90 92 94 96 98 00 02 04 06 08 10volatile components in the basic balance, mainlyincluding financial industry related portfolio flows. In thefourth quarter 2010 the current account deficit Technical view: BOE GBP Indexdeteriorated to almost 3% of GDP related to weak trade Valuebalance. The weak currency and weaker domestic 92demand have however improved trade balancedramatically in the beginning of 2011 as imports dropped 88while exports continued to show some growth. Thisdevelopment was expected and should continue; hence 84the flow outlook has the potential for further 80improvements. +1 76TECHNICALS & POSITIONING The market is breakingdown from the bear triangle reasserting the long term 2009 2010 2011bear trend. Next will be a test of the Q4 2010 low point of 2000 201078.3. Trimmed long £/$ positions despite the rising priceduring April is a bearish behaviour. -2 12
  13. 13. Percent of total labour force Current Account Bal, % of GDP Percent y/y Basic Balance, GBP bn13 Percent y/y Percent y/y UNITED KINGDOM Currency Strategy
  14. 14. Currency StrategyCanadian dollar TotalWe have persistently argued that the CAD shouldcontinue its slow grind higher against the USD, but latelythe loonie has appreciated more rapidly amid general +3 Monetary pol. +1USD weakness and higher commodity prices. A rapid Fundamentals +1strengthening of the currency is not welcomed ascompetitiveness among Canadian exporters is weak due Flows 0to poor productivity growth. Still the CAD will besupported by high commodity prices, a gradualtightening of monetary policy and US economic recovery; Technicals +1however additional appreciation will be gradual.MONETARY POLICY With the policy rate at 1% monetarypolicy is very accommodative. Markets price two hikes bythe BOC in 2011, which is in line with our projection. Untilrecently inflation has been very soft with core inflation far E U R speculative positio ns U S D /C A D 12 5 Contracts (thousands)below BOC forecasts. Inflation however accelerated in Contracts (thousands) 1.35 0 E U R /U S D 10 0March to 3.2% and core inflation to 1.6% due to rising 1.30 0 75energy prices and higher provincial sales taxes. From 50 1.25 0previously undershooting the BOC forecast, inflation 25 1.20 0currently exceeds the BOC April forecast significantly. 0 S peculative positionsHowever BOC will remain cautious with respect to the 1.15 0 -2 5 04 05 06 07strong currency and is likely to stick to a very slowtightening of monetary policy. +1 The lack of significant upside progress in EUR/USD makes the current substantial netECONOMIC FUNDAMENTALS In the fourth quarter GDP long speculative position a burden. Should the sub-1.29-area be revisited, speculativeexpanded by 3.2% from the previous year. Business longs will have to be reduced.outlook remains firm and business confidence reflectsoptimism about sales outlook and increased investments.Especially within the commodity related sectors, as highercommodity prices have bolstered national income.Helped by a healthy growth in disposable incomehousehold spending grew at average pace in 2010.Although unemployment has stayed above 7.5%consumer confidence improved in Q1 as terms of tradegains continue to boost household income whichsupports spending. In its latest report BOC projects theoutput gap will be closed by mid-2012, two quartersearlier than the previous forecast.= +1FLOWS Although the current account improvedsomewhat in the fourth quarter last year the deficitremains historically high. The current account deficit isrelated to deteriorating competitiveness due to a strongercurrency and weak productivity growth. The trade Technical view: BOE CAD INDEXsituation should however improve with higher commodity Priceprices. On the other hand Canada continues to attractforeign capital inflows that currently more than fully 110compensate for the trade deficits. These inflows shouldcontinue to rise as long as commodity prices are 105supported. 0 100TECHNICALS & POSITIONING The trend is expected to 95be in its latter stages shown by the rising wedgeformation (a trend-ending pattern), though we can’t call 90for a top in place with less than a downside exit from the Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3wedge. Speculators’ positioning is not at record levels 2009 2010 2011despite fresh highs which show that there is lessconfidence in the recent move higher. +1 14
  15. 15. Percent of total labour force Current Account Bal, % of GDP Percent y/y Basic Balance, CAD bn15 Percent y/y Percent y/y CANADA Currency Strategy
  16. 16. Currency Strategy Australian dollar Total The AUD is expensive relative its long term fair value as well as in REER terms. So far this deviation has seemed +4 Monetary pol. +1 reasonable amid strong fundamentals and rising Fundamentals +1 commodity prices. From being supported by a widening interest rate gap to the rest of the world the Flows +1 AUD currently is favoured by a significant carry pick-up. Going forward the economy will continue to generate good growth supported by strong external demand and Technicals +1 high commodity prices, which will continue to attract capital inflows. Despite the high valuation there are few reasons to expect the AUD to weaken as long as global risk appetite remains firm. MONETARY POLICY Since the latest rate hike in Contracts (thousands) November the Australian central bank has left its key E U R speculative positio ns U S D /C A D 12 5 interest rate unchanged at 4.75%. Currently markets Contracts (thousands) 1.35 0 E U R /U S D 10 0 price one hike this year, which we judge to be cautious. 1.30 0 75 RBA is one of few central banks accepting an 50 1.25 0 appreciating currency. In fact in a previous statement 25 RBA explicitly said that the exchange rate “is playing a 1.20 0 0 S peculative positions stabilising role for the economy as a whole” as long as 1.15 0 -2 5 04 05 06 07 the currency appreciates in line with rising commodity prices. Higher inflation in the first quarter was partly The lack of significant upside progress in related to a temporary spike in food prices due to the EUR/USD makes the current substantial net flooding earlier this year and shouldn’t affect current long speculative position a burden. Should the sub-1.29-area be revisited, speculative monetary policy. +1 longs will have to be reduced. ECONOMIC FUNDAMENTALS Australia continues to benefit from strong growth in Asia with a persistent demand for commodities supporting exports and generating the largest surpluses on record. Higher commodity prices have also improved Australia’s terms of trade (ToT) additionally from record levels adding to national income. RBA expects the economy to grow by 4.25% in 2011. Despite falling unemployment currently below 5% and growing household income, household confidence has fallen back though still above its long term average. Households are more cautious with higher savings rate than normal and modest growth in retail sales as a result. As household income continues to improve spending should pick up and could potentially get another boost as households normalize Technical view: BOE AUD INDEX their savings. +1 Price FLOWS The flow outlook continues to be AUD supportive. Higher commodity prices boost ToT and 100 the external trade is generating the largest surpluses on record. Furthermore high commodity prices attract 90 portfolio investment inflows and direct investment inflows into Australia. All in all, the persistent deficit in Australia’s current account is historically small and 80 more than fully compensated for by portfolio inflows. +1 70 2008 2009 2010 2011 TECHNICALS & POSITIONING: The bull market is 2000 2010 running overtime. No strong and confirmed signs yet of a reversal however hold a still positive bias. Watch out if falling down below the wedge floor. A decreasing huge long position is a warning sign. +1 16
  17. 17. Percent of total labour force Current Account Bal, % of GDP Percent y/y Basic Balance, AUD bn, AR17 Percent y/y Percent y/y AUSTRALIA Currency Strategy
  18. 18. Currency StrategyNew Zealand dollar TotalAn already weaker than expected NZ economy (H2 2010)together with the Christchurch earthquake made theRBNZ to reduce the Official Cash Rate (OCR) 50 basis +3 Monetary pol. +1points at its March 10 meeting. The earthquake has Fundamentals 0further divided the NZ economy that was already dividedbetween a somewhat struggling domestic economy and Flows +1strong export growth benefiting from trading partnersgrowth. Projections are for relatively weak growth duringH1 2011 and with inflation contained by low domestic Technicals +1demand and a strong currency the bank is expected toremain on hold well into the autumn, we think.MONETARY POLICY RBNZ reduced its OCR to 2.5% inthe aftermath of the earthquake as an attempt to offsetsome of its negative effects. The bank says “that current E U R speculative positio ns U S D /C A D 12 5policy accommodation will be removed once entering the Contracts (thousands) 1.35 0 E U R /U S D 10 0rebuilding phase” and “the current level of the OCR is 1.30 0 75likely to be appropriate for some time”. Together with the 50 1.25 0expectation of the annual inflation to settle within the 25 1.20 0bank’s target band once the October VAT hike drops out 0 S peculative positionsof the statistics, we forecast the bank to remain on hold 1.15 0 -2 5 04 05 06 07until its December meeting. +1 The lack of significant upside progress inECONOMIC FUNDAMENTALS Business confidence (50.1 EUR/USD makes the current substantial netin March down from 52.6 in February), consumer long speculative position a burden. Should the sub-1.29-area be revisited, speculativespending and tourism has all declined following the longs will have to be reduced.earthquake but has since shown signs of recovery withthe greater part of the country being relatively unaffect- Effective exchange rateed. Continued strength in trading partner growth, 120resulting in higher export commodity prices is supporting 115whereas higher oil price and the strong currency have a 110dampening effect. GDP is expected to grow 0.9% y/y. 105 0 100FLOWS The C/A for the full year 2010 was -2.3%, the 95lowest level for more than 20 years. Post earthquake 90insurance inflows will continue to have a positive impact 85on the C/A balance during 2011 and only thereafter it is, 80given a pickup in domestic demand, expected to widen 75some. The improving terms of trade continues to be a 70positive factor for NZ. +1 98 00 02 04 06 08 10TECHNICALS & POSITIONING It seems that thespeculative community disagrees with the recentstrengthening of the NZD, given the limited long Technical view: BOE NZD INDEXspeculative positioning. The BOE NZD index remains Pricecontained within its boundaries of late which together 105with the flat, non-trending average suggests continued 100sideways action. +1 95 90 85 80 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2009 2010 2011 18
  19. 19. Percent of total labour force Current Account Bal, % of GDP Percent y/y Basic Balance, NZD bn, AR19 Percent y/y Percent y/y NEW ZEALAND Currency Strategy
  20. 20. Currency StrategySwiss franc TotalIn recent months, upward pressure on the Swiss franc haseased and the currency held stable at elevated levels. Thefranc remains based on sound economic fundamentals. +1 Monetary pol. -1In addition, the continuing debt problems in the euro area Fundamentals 0as well as geopolitical tensions will support capital flowsinto save havens, keeping the Swiss franc stable in Flows +1coming months.MONETARY POLICY In its March meeting the SNB kept Technicals +1its expansionary policy unchanged in place. Itsconditional inflation forecast gives no indication of majorupside risks to inflation until the end of 2012. Since theninflation figures were in line with expectations and theongoing strong currency will continue to keep upsiderisks to inflation in check. Therefore the SNB is in no hurry E U R speculative positio ns Contracts (thousands) U S D /C A D 12 5to raise rates in June. Short term money market rates are Contracts (thousands) 1.35 0 E U R /U S D 10 0still below the SNB’s target indicating ongoing excess 1.30 0 75liquidity in the market. The SNB will continue to absorb 50 1.25 0this liquidity with the issuance of SNB bills. Regarding the 25 1.20 0economy the SNB has raised its GDP growth projection by 0 S peculative positions0.5 percentage points to 2%, indicating no risk of 1.15 0 -2 5 04 05 06 07deflation. Hence there is no need for additionalinterventions in the foreign exchange market, should the The lack of significant upside progress inCHF start to strengthen again. -1 EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculativeECONOMIC FUNDAMENTALS The KOF leading indicator longs will have to be reduced.rose to 2.29 points in April, the highest level since August2006. It suggests that the strong expansion in the Swisseconomy will continue in coming months. More importantthe KOF gives no hint that the strong Swiss franc ishurting the outlook for growth. But growth in exports isalready slowing, suggesting that growth could bedampened in the later part of the year. The Secoconsumer climate improved in January suggesting thatprivate consumption will remain robust in comingmonths. Overall, a solid expansion of the Swiss economyin 2011 is the most likely scenario. 0FLOWS In 2010 Switzerland posted a surplus in thecurrent account of CHF 79.6bn, up from CHF 61.5bn in2009. Portfolio flows showed a huge swing. Afteroutflows of CHF 32bn in 2009, Switzerland faced inflowsof CHF 31.2bn in 2010. Due to an ongoing search for safe Technical view: BOE CHF Indexhavens we suppose that inflows into Switzerland willcontinue. +1 ValueTECHNICALS & POSITIONING The market continues to 135move higher, currently exiting a bull triangle to thetopside. The next likely target will be the top line currently 130running at 144.40. Positioning in USD/CHF is howevershowing that there is some hesitation to expand CHF 125longs despite the surge in the index. +1 120 115 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2009 2010 2011 20
  21. 21. Percent of total labour force Current account Bal, % of GDP Percent y/y Basic Balance, CHF bn, AR21 Percent y/y Percent y/y SWITZERLAND Currency Strategy