FX forecast revision 1 August 2013

Tom Tong01/Αυγ/2013Currency Updates


We tweak our short-term forecasts higher

Recent softness in US macroeconomic data has increased the likelihood that the “tapering” of quantitative easing will start in December rather than September. Consumer demand probably grew at a slightly below 2% pace, and the unemployment rate has remained stable for four consecutive months, as labour force expansion soaks up the new jobs being created. By contrast, the Eurozone PMI business sentiment indices just released indicate that the Eurozone is moving from recession to stagnation.

Our long-term view bearish view on the Euro is still predicated on divergent directions in monetary policy in both sides of the Atlantic. However, we now think the drop will be a gentler one.

Q313 1.24
Q413 1.19
Q114 1.18
Q214 1.15

E2014 1.12


We revise our short and medium term forecasts for Sterling higher against the Euro and the dollar.

The publication of the MPC July meeting minutes last week contained yet another set of surprises, though this time in the hawkish direction. Firstly, forward guidance on rates will now become an established policy for the Bank of England. Second, the prospects for any medium-term increase of the Gilt purchase target have evaporated. Committee members were unanimous on both of these points, a rare development for the notoriously fractious MPC. The net of these two developments is positive for Sterling.

Furthermore, economic news continue to surprise on the upside. Employment and wages are now confirming the very positive news from the PMI business sentiment indicators. We expect Sterling to be well supported by both the absence of further QE and the return to trend growth in the UK economy.

Q313 0.81
Q413 0.80
Q114 0.77
Q214 0.76
E2014 0.75


We tweak our forecasts higher

The ceiling of 1.20 CHF per EUR is being ruthlessly enforced by the Swiss National Bank. The market is increasingly mindful of this binding constraint, and therefore we expect the currency to bounce near but below this ceiling.

Q313 1.22
Q413 1.22
Q114 1.22

Q214 1.22
E2014 1.22


No change to our forecasts or view

Q313 8.40
Q413 8.20
Q114 8.12
Q214 8.08

E2014 8.00


We tweak our forecasts for JPY higher against all major currencies.

The slowdown in the US economy (see above) increases the chances of a delay in Federal Reserve “tapering” from September to December. While we maintain a very bearish view of the Yen, this leads us to rethink the timetable and tweak forecasts for the Yen higher against most major currencies.

Q313 110
Q413 115
Q114 119
Q214 121
E2014 127


No change to our forecasts or view

Q213 0.92
Q313 0.92
Q413 0.92
Q114 0.92
E2014 0.92


No change to our forecasts or view

Q313 10.50
Q413 10.70
Q114 10.80
Q214 10.80
E2014 10.80

Given our growing customer base in both currencies, we are now adding coverage and forecasting of the Indian Rupee (INR) and the Malaysian Ringgit (MYR).


The INR received a serious shock last week when the Reserve Bank of India (RBI) announced that it would defend the weakening currency through sharply higher interest rates. The Marginal Standing Facility was pushed from 100 bp above the policy rate to 300 bp, or 10.25%, and announcing later that the bank’s ability to borrow at a lower rate directly from the RBI at the policy rate would be sharply curtailed. This amounts to a sharp squeeze in the cost and availability of betting against the Rupee.

This measures have brought about stabilization to the INR, which had been the second worst performing major emerging markets currency over the past two months. However, the medium-term fundamentals are mixed.

  1. The current account deficit is high, but is improving. The full year deficit now stands at nearly 5% of GDP, although the latest quarter numbers show an improvement driven by lower commodity prices

  1. INR depreciation actually has a negative impact on Indian economic growth. Indian imports are commodities priced in dollars, so INR devaluation drives up inflation rather than stimulate economic activity. Recent downside surprises in PMI indices and industrial production add downside risks for GDP growth, which will make it harder for the RBI to sustain high rates to defend the currency

  1. The real policy rate is positive. Furthermore, the liquidity squeeze has effectively lifted the rate to double digits, which means that the real rate in India is one of the highest among major world economies.

With different indicators pulling in different directions, we think that the RBI stabilization measures will be successful over the short term. However, we think that their impact of growth raises questions about their sustainability, and expect the depreciating trend in INR to resume over the medium term.

Q313 59
Q413 59
Q114 60
Q214 62
E2014 63


The Malaysian Ringgit (MYR) continues to be just about the most stable currency in the entire ASEAN region. It has weathered the recent turmoil in emerging market currencies very well, experiencing a depreciation of less than 3% since US yields spiked in mid-June.

The Malaysian central bank, Bank Negara, pursues a policy of maintaining FX stability, although there is no official peg or target. We think that Bank Negara will be successful in maintaining the Ringgit near current levels against the USD, in spite of our forecast for general EM currency depreciation.

  1. Although narrowing, the current account balance is strongly positive, set to end up 2013 in the high single digits as a percentage of GDP. Malaysia will continue to be a net creditor to the rest of the world for the foreseeable future.

  1. Malaysian macroeconomic figures are enviable, with solid growth of around 4-5% and low, stable inflation below 2%. In the past, Bank Negara has shown very little appetite for MYR depreciation as a boost to growth; this is unlikely to change any time soon, in spite of the recent weakness in the external sector.

  1. Years of double-digit current account surpluses have allowed Malaysia to accumulate a large war chest of reserves of well over half of GDP. Bank Negara has ample firepower to defend the ringgit against speculative attack.

We think that MYR will be one of the few emerging market currencies to buck the trend towards depreciation vs. the dollar over the medium term.

Q313 3.20
Q413 3.20
Q114 3.20
Q214 3.20
E2014 3.20


Written by Tom Tong

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