Insights.abnamro.nl/en

FX Weekly

23 March 2016

New FX forecasts

The dollar rally is over

The US dollar has seen a strong rally over the last few years. The US dollar index rose by

36% from September 2012 to February 2016. However, it is down by close to 7% since

February of this year. The rally did not come in one straight line. The largest moves were

in the following periods: September 2012 to May 2013 and July 2014 to March 2015. We

have been positive on the US dollar since the end of 2012. We now think that the dollar’s

upswing is over (see our FX Watch – The dollar rally is over). In this FX weekly we provide

more details on the individual pairs.

Calculated effective Exchange rate US

Index

Source: BoE, Bloomberg

More optimistic on commodity currencies…

We think that commodity prices and currencies of commodity exporting countries have

bottomed out. Higher commodity prices will initially improve the sentiment towards

70

80

90

100

110

120

130

00 02 04 06 08 10 12 14 16

Calculated Effective Exchange rate US

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

Group Economics Macro & Financial Markets

Research

The dollar rally is over in our view

We are more optimistic on commodity currencies…

…and positive on currencies of oil exporters

However, we expect some pressure on the yen this year…

…and sterling to weaken ahead of Brexit referendum

We have kept USD/CNY unchanged as it is in a long-term process to

move to a more flexible regime

We are less negative on Asia FX

2 FX Weekly - New FX forecasts - 23 March 2016

commodity exporters and their currencies. Later on, this will be felt in their economies. We

now expect commodity currencies like the Australian dollar (AUD) and New Zealand dollar

(NZD) to be more resilient due to their attractive carry. Our view that the Reserve Bank of

Australia is likely to lower the Official Cash Rate (which is not priced in by financial

markets) and the Fed to keep monetary policy rates unchanged (a lower rate profile than

implied by Fed funds futures) could result in price swings between 0.71 to 0.80 over the

course of this year. Iron ore prices (Australia’s key commodity export) have risen sharply

this year, which has provided strong support to AUD/USD. From current levels we expect

prices to move sideways. We have upgraded our year-end AUD/USD from 0.65 to 0.76.

The NZD is also expected to be more resilient as financial markets have priced in our view

that the Reserve Bank of New Zealand (RBNZ) is likely to cut the OCR by 25bp later this

year. Nevertheless, the RBNZ is expected to remain dovish given the strength in the

NZD, while dairy prices remain weak. Hence that should cap the upside in NZD.

The recovery in emerging market commodity currencies will reduce inflation pressures in

countries such as Brazil, Chile, Mexico, South Africa and Russia. As a result, central

banks in these countries could focus more on supporting growth. This will be a positive

development. Central banks in Russia and Brazil could use a recovery in their currencies

as an opportunity to reduce interventions and/or build up FX reserves. This could dampen

the upside in the ruble and the real.

Calculated effective Exchange rate US

Oil prices USD/Oil FX index (reverse scale)

Source: ABN AMRO Group Economics, Bloomberg

… and positive on oil currencies

Oil prices have already recovered substantially from the below USD 30 per barrel level.

However, our energy analyst expects that there is more upside. His forecast for the end of

2016 for Brent oil prices is USD 55 per barrel and for the end of 2017 USD 60 per barrel.

Currencies of oil exporting countries have moved in tandem with oil prices (see graph

above). We expect this to continue going forward. As a result, we are positive on these

currencies and we have upgraded our forecasts to reflect this. Long Norwegian krone

versus the euro is already one of our high conviction views. The fiscal stimulus that was

announced in Canada on 23 March should also give more flexibility for the Bank of

Canada to keep monetary policy unchanged this year.

400

500

600

700

80020

30

40

50

60

70

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16

Brent oil price (lhs) USD/Oil FX (rhs)

3 FX Weekly - New FX forecasts - 23 March 2016

Yen under some pressure this year

The recent weakness in the Japanese yen (JPY) has been encouraging with prices

moving from below 111 to above 112 as risk sentiment in financial markets improved and

yields in the US edged higher. Nevertheless, we see material resistance towards the 113-

115 region. On the downside verbal intervention from Japanese authorities are likely

around the 110 region. Looking ahead we expect some downward pressure on the yen

during the course of this year, though less than previously given our change in view on the

US dollar. We expect a combination of interest rates cuts and/or expansion of qualitative

and quantitative easing program most likely in April. In addition, domestic investor’s

portfolio rebalancing towards overseas assets in search of higher returns is likely to

continue. Last but not least, speculative long yen futures positions are also overcrowded.

Safe-haven flows into the yen should decline as financial markets stabilise. Our year-end

USD/JPY forecast has been revised lower from 120 to 115. For next year we expect the

yen to strengthen versus the US dollar because of a combination of dollar weakness and

the yen being undervalued.

We remain negative on sterling in the near-term

We expect GBP/USD to weaken in the coming months because of uncertainty

surrounding the Brexit referendum on 23 June. We expect GBP/USD to move towards

1.35 ahead of the referendum. However, GBP/USD should recover sharply afterwards as

our base case is that the British public will vote to remain in the EU.

No change in our USD/CNY forecasts

We have not changed our forecasts of the USD/CNY. We still expect a modest

depreciation of the CNY versus the USD in line with longer-term fundamentals. Last

January, when market bets that the yuan will weaken sharply were extreme, we argued

that it is not the objective and interest of China to devalue the currency sharply. Since

then, financial markets have reduced their year-end yuan depreciation expectations. In our

view, the current environment of a more cautious Fed and weaker US dollar will allow

authorities in China to keep the yuan depreciation versus the USD under control. This also

implies a bit more depreciation against its basket of currencies, which would support

export competitiveness. Local firms are likely to take advantage of current yuan recovery

to reduce their foreign currency liabilities. The PBoC is also expected to replenish their

foreign currency reserves which have fallen by around 20% since mid-2014. Hence we

stick our year-end yuan forecast of 6.70. Since the beginning of this year, the yuan has

depreciated by about 3% against currencies of China’s main trading partners (TWI).

Based on our currency forecasts, this would imply a total of 7% depreciation of the yuan

TWI in 2016.

We are less negative on Asian FX

A more accommodative Fed policy, an improvement in investor sentiment and the

recovery in commodity prices are positive for Asian currencies. Hence we have become

less negative on Asian currencies. On the other hand, we do not expect the recent

recovery in Asian currencies to continue, as Asian central banks are unlikely to tolerate

strong gains in their domestic currencies given subdued inflation and still struggling

exports. We expect further monetary easing in a number of countries, including China,

India and Taiwan. In addition, central banks in Indonesia and Thailand are expected to

replenish their foreign currency reserves given their drawdowns over the past year. A

4 FX Weekly - New FX forecasts - 23 March 2016

further slowdown of the Chinese economy is also a headwind to further gains in Asian

currencies. The Singapore dollar and Taiwan dollar will remain vulnerable due to their

stronger sensitivity to a weaker Chinese yuan. Strong gains in the S$NEER in recent

months have also increased the risk that the Monetary Authority of Singapore will shift to a

neutral exchange rate bias in April.

Despite our view of a recovery in commodity prices which is positive for the Indonesia

rupiah (IDR), we doubt that Bank Indonesia will tolerate further gains in the IDR after its

10% outperformance since the beginning of this year. Indonesia’s external imbalance and

elevated foreign investor’ positioning in local government debt remains a source of

vulnerability to the IDR. A recovery in oil prices will have a larger impact on inflationary

pressures in Indonesia and India. This will dampen the attractiveness of the IDR and

Indian rupee high real interest rates.

The Bank of Korea (BoK) is likely to be tolerant of recent recovery in the South Korean

won (KRW) given the strength in the euro and Japanese yen. However, the risk of a

weaker KRW remains if the BoK cuts interest rates in the coming months (which is not

priced in by financial markets) given the spike in unemployment rate.

5 FX Weekly - New FX forecasts - 23 March 2016

ABN AMRO major currency forecasts

Changes in red/bold

Source: ABN AMRO Group Economics

ABN AMRO Emerging market currency

Changes in red/bold

Source: ABN AMRO Group Economics

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

EUR/USD 1.1195 1.15 1.15 1.15 1.15 1.15 1.15 1.15

USD/JPY 112.59 113 114 115 114 112 110 108

EUR/JPY 126.03 130 131 132 131 129 127 124

GBP/USD 1.4181 1.40 1.42 1.48 1.50 1.52 1.54 1.56

EUR/GBP 0.7895 0.82 0.81 0.78 0.77 0.76 0.75 0.74

USD/CHF 0.9733 0.96 0.96 0.96 0.97 0.97 0.98 0.99

EUR/CHF 1.0896 1.10 1.10 1.10 1.11 1.12 1.13 1.14

AUD/USD 0.7599 0.76 0.76 0.76 0.77 0.78 0.79 0.80

NZD/USD 0.6722 0.68 0.68 0.68 0.69 0.70 0.71 0.72

USD/CAD 1.3055 1.30 1.28 1.26 1.25 1.24 1.23 1.20

EUR/SEK 9.2483 9.25 9.25 9.25 9.25 9.00 9.00 8.75

EUR/NOK 9.4437 9.25 9.00 8.75 8.50 8.50 8.25 8.25

EUR/DKK 7.4534 7.46 7.46 7.46 7.46 7.46 7.46 7.46

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

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

USD/CNH (offshore) 6.50 6.55 6.60 6.70 6.75 6.80 6.80 6.80

USD/INR 66.6 66.5 67.0 67.0 67.0 66.0 65.5 65.0

USD/KRW 1,161 1,165 1,165 1,165 1,150 1,140 1,130 1,120

USD/SGD 1.37 1.36 1.38 1.40 1.38 1.36 1.35 1.35

USD/THB 35.12 35.00 35.00 35.00 34.80 34.60 34.40 34.00

USD/TWD 32.40 32.50 32.80 33.00 32.80 32.50 32.20 32.00

USD/IDR 13,183 13,200 13,400 13,500 13,400 13,300 13,200 13,000

USD/RUB 68 66 64 60 59 58 57 55

USD/TRY 2.87 2.85 2.80 2.75 2.75 2.75 2.75 2.75

USD/ZAR 15.28 15.00 14.75 14.50 14.25 14.00 13.75 13.50

EUR/PLN 4.26 4.30 4.30 4.25 4.20 4.15 4.15 4.10

EUR/CZK 27.03 27.00 27.00 27.00 26.50 26.25 26.00 25.50

EUR/HUF 313 310 310 305 300 300 295 290

USD/BRL 3.58 3.60 3.55 3.50 3.45 3.40 3.35 3.30

USD/MXN 17.35 17.25 17.00 16.75 16.50 15.75 15.50 15.25

USD/CLP 672 670 660 650 640 630 620 600

6 FX Weekly - New FX forecasts - 23 March 2016

Find out more about Group Economics at: https://insights.abnamro.nl/en/

DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. © Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").